(Edited) Raymond A Noe - Human Resource Management

Human Resource
Management
G A I N I N G A C O M P E T I T I V E A DVA N TAG E 10e
RAYMOND A. NOE
The Ohio State University
JOHN R. HOLLENBECK
Michigan State University
BARRY GERHART
University of Wisconsin–Madison
PATRICK M. WRIGHT
University of South Carolina
HUMAN RESOURCE MANAGEMENT: GAINING A COMPETITIVE ADVANTAGE, TENTH EDITION
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Library of Congress Cataloging-in-Publication Data

Noe, Raymond A.
Human resource management : gaining a competitive advantage / Raymond A. Noe, The Ohio State University, John R.
Hollenbeck, Michigan State University , Barry Gerhart, University of Wisconsin-Madison, Patrick M. Wright, University of
South Carolina. —10 Edition.
pages cm
Revised edition of Human resource management, 2015.
ISBN 978-1-259-57812-0 (alk. paper)
1. Personnel management—United States. I. Title.
HF5549.2.U5N64 2016
658.3—dc23 2015035070
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To my wife, Caroline, and my children, Ray, Tim,
and Melissa
—R. A. N.
To my parents, Harold and Elizabeth, my wife,

Patty, and my children, Jennifer, Marie, Timothy,
and Jeffrey
—J. R. H.
To my parents, Robert and Shirley, my wife,

Heather, and my children, Chris and Annie
—B. G.
To my parents, Patricia and Paul, my wife, Mary,

and my sons, Michael and Matthew
—P. M. W.
ABOUT THE AUTHORS
RAYMOND A. NOE is the Robert and Anne Hoyt JOHN R. HOLLENBECK holds the positions of Uni-
Designated Professor of Management at The Ohio versity Distinguished Professor at Michigan State
State University. He was previously a professor in University and Eli Broad Professor of Management at
the Department of Management at Michigan State the Eli Broad Graduate School of Business Adminis-
University and the Industrial Relations Center of the tration. Dr. Hollenbeck received his PhD in Manage-
Carlson School of Management, University of Min- ment from New York University in 1984. He served
nesota. He received his BS in psychology from The as the acting editor at Organizational Behavior and
Ohio State University and his MA and PhD in psy- Human Decision Processes in 1995, the associate edi-
chology from Michigan State University. Professor tor of Decision Sciences from 1999 to 2004, and the
Noe conducts research and teaches undergraduate as editor of Personnel Psychology from 1996 to 2002.
well as MBA and PhD students in human resource He has published over 90 articles and book chapters
management, managerial skills, quantitative meth- on the topics of team decision making and work moti-
ods, human resource information systems, training, vation. According to the Institute for Scientific Infor-
employee development, and organizational behavior. mation, this body of work has been cited over 4,000
He has published articles in the Academy of Man- times by other researchers. Dr. Hollenbeck has been
agement Annals, Academy of Management Journal, awarded fellowship status in both the Academy of
Academy of Management Review, Journal of Applied Management and the American Psychological Asso-
Psychology, Journal of Vocational Behavior, and Per- ciation, and was recognized with the Career Achieve-
sonnel Psychology. Professor Noe is currently on the ment Award by the HR Division of the Academy of
editorial boards of several journals including Person- Management (2011), the Distinguished Service Con-
nel Psychology, Journal of Applied Psychology, and tributions Award (2014), and the Early Career Award
Journal of Management. Professor Noe has received by the Society of Industrial and Organizational Psy-
awards for his teaching and research excellence, chology (1992). At Michigan State, Dr. Hollenbeck
including the Ernest J. McCormick Award for Distin- has won several teaching awards including the Michi-
guished Early Career Contribution from the Society gan State Distinguished Faculty Award, the Michigan
for Industrial and Organizational Psychology. He is State Teacher-Scholar Award, and the Broad MBA
also a fellow of the Society of Industrial and Organi- Most Outstanding Faculty Member.
zational Psychology.
iv
BARRY GERHART is Professor of Management and PATRICK M. WRIGHT is Thomas C. Vandiver Bicen-
Human Resources and the Bruce R. Ellig Distin- tennial Chair and the Director of the Center for
guished Chair in Pay and Organizational Effective- Executive Succession in the Darla Moore School of
ness, Wisconsin School of Business, University of Business at the University of South Carolina. Prior
Wisconsin-Madison. He has also served as depart- to joining USC, he served on the faculties at Cornell
ment chair or area coordinator at Cornell, Vander- University, Texas A&M University, and the Univer-
bilt, and Wisconsin. His research interests include sity of Notre Dame.
compensation, human resource strategy, international Professor Wright teaches, conducts research, and
human resources, and employee retention. Professor consults in the area of Strategic Human Resource
Gerhart received his BS in psychology from Bowl- Management (SHRM), particularly focusing on how
ing Green State University and his PhD in industrial firms use people as a source of competitive advantage
relations from the University of Wisconsin-Madison. and the changing nature of the Chief HR Officer role.
He has co-authored two books in the area of compen- He is the faculty leader for the Cornell ILR Executive
sation. He serves on the editorial boards of and has Education/NAHR program, “The Chief HR Officer:
published in the Academy of Management Journal, Strategies for Success,” aimed at developing potential
Industrial and Labor Relations Review, International successors to the CHRO role. He served as the lead
Journal of Human Resource Management, Journal of editor on the recently released book, The Chief HR
Applied Psychology, Management and Organization Officer: Defining the New Role of Human Resource
Review, and Personnel Psychology. Professor Gerhart Leaders, published by John Wiley and Sons.
is a past recipient of the Heneman Career Achieve- He has published more than 60 research articles in
ment Award, the Scholarly Achievement Award, and journals as well as more than 20 chapters in books
(twice) the International Human Resource Manage- and edited volumes. He is the Editor at the Journal
ment Scholarly Research Award, all from the Human of Management. He has co-edited a special issue of
Resources Division, Academy of Management. He is Research in Personnel and Human Resources Man-
a Fellow of the Academy of Management, the Ameri- agement titled “Strategic Human Resource Manage-
can Psychological Association, and the Society for ment in the 21st Century” and guest edited a special
Industrial and Organizational Psychology. issue of Human Resource Management Review titled
“Research in Strategic HRM for the 21st Century.”
He currently serves as a member on the Board
of Directors for the Society for Human Resource
Management and the National Academy of Human
Resources (NAHR). He is a former board member of
HRPS, SHRM Foundation, and World at Work (for-
merly American Compensation Association). From
2011 to 2015 he was named by HRM Magazine as one
of the 20 “Most Influential Thought Leaders in HR.”
v
PREFACE
The steady but slow recovery of the U.S. economy means that both consumers and
businesses are carefully considering their spending patterns and investments. Both
private-and public-sector employers are cautiously adding new employees if they see
an increased demand for their products or services. Some companies are struggling to
find qualified, talented, and skilled employees despite the many workers available. Also,
they are continuing to examine how they can improve their “bottom line” while reducing
costs. This has resulted in not only considering purchasing new technology and upgrad-
ing equipment, but putting a greater emphasis on ensuring that management practices
and working conditions help employees work harder and smarter, and enhance their
motivation, satisfaction, and commitment.
At the same time companies are taking steps to deal with the current economic condi-
tions, they are also paying closer attention to how to engage in business practices that are
economically sound but sustainable. That is, business practices that are ethical, protect
the environment, and contribute to the communities from which the business draws the
financial, physical, and human resources needed to provide its product and services.
Consumers are demanding accountability in business practices: making money for
shareholders should not involve abandoning ethics, ruining the environment, or taking
advantage of employees from developing countries!
Regardless of whether a company’s strategic direction involves downsizing, restructur-
ing, growth, or a merger or acquisition, how human resources are managed is crucial for
providing “value” to customers, shareholders, employees, and the community in which
they are located. Our definition of “value” includes not only profits but also employee
growth and satisfaction, additional employment opportunities, stewardship of the envi-
ronment, and contributions to community programs. If a company fails to effectively use
its financial capital, physical capital, and human capital to create “value,” it will not sur-
vive. The way a company treats its employees (including those who are forced to leave
their jobs) will influence the company’s public reputation and brand as a responsible
business, and its ability to attract talented employees. For example, the human resource
practices at companies such as Google, SAS Institute, Quicken Loans, REI, and Weg-
mans Food Markets helped them earn recognition on Fortune magazine’s recent list of the
“The Top 100 Companies to Work For.” This kind of publicity creates a positive image
for these companies, helping them attract new employees, motivate and retain their cur-
rent employees, and make their products and services more desirable to consumers.
We believe that all aspects of human resource management—including how com-
panies interact with the environment; acquire, prepare, develop, and compensate
employees; and design and evaluate work—can help companies meet their competitive
challenges and create value. Meeting challenges is necessary to create value and to gain
a competitive advantage.
The Competitive Challenges

The challenges that organizations face today can be grouped into three categories:
∙ The sustainability challenge. Sustainability refers to the ability of a company to sur-
vive and succeed in a dynamic competitive environment. Sustainability depends on how
vi
Preface vii
well a company meets the needs of those who have an interest in seeing that the com-
pany succeeds. Challenges to sustainability include the ability to deal with economic
and social changes, engage in responsible and ethical business practices, efficiently use
natural resources and protect the environment, provide high-quality products and ser-
vices, and develop methods and measures (also known as metrics) to determine if the
company is meeting stakeholder needs. To compete in today’s economy companies use
mergers and acquisitions, growth, and downsizing. Companies rely on skilled workers
to be productive, creative, and innovative and to provide high-quality customer service;
their work is demanding and companies cannot guarantee job security. One issue is
how to attract and retain a committed, productive workforce in turbulent economic
conditions that offer opportunity for financial success but can also turn sour, mak-
ing every employee expendable. Forward-looking businesses are capitalizing on the
strengths of a diverse multigenerational workforce. The experiences of Enron, News of
the World, and Lehman Brothers provide vivid examples of how sustainability depends
on ethical and responsible business practices, including the management of human
resources. Another important issue is how to accomplish financial objectives through
meeting both customer and employee needs. To meet the sustainability challenge com-
panies must engage in human resource management practices that address short-term
needs but help ensure the long-term success of the firm. The development and choice
of human resource management practices should support business goals and strategy.
The role of ethical behavior in a company’s sustainability has led us to include
more discussion and examples of “integrity in action” in this edition. The actions
of top executives and managers show employees how serious they are about human
resource management practices. Also, employees look at their behaviors to determine
if they are merely giving “lip service” to ethical behavior or if they genuinely care
about creating an ethical workplace. As a result, in this edition of the book we include
Integrity in Action boxes that highlight good (and bad) decisions about HR prac-
tices made by top executives, company leaders, and managers that either reinforce (or
undermine) the importance of ethical behavior in the company.
∙ The global challenge. Companies must be prepared to compete with companies from
around the world either in the United States or abroad. Companies must both defend
their domestic markets from foreign competitors and broaden their scope to encom-
pass global markets. Globalization is a continuing challenge as companies look to
enter emerging markets in countries such as Brazil and China to provide their prod-
ucts and services.
∙ The technology challenge. Using new technologies such as computer-aided manu-
facturing, virtual reality, and social media can give companies an edge. New tech-
nologies can result in employees “working smarter” as well as provide higher-quality
products and more efficient services to customers. Companies that have realized the
greatest gains from new technology have human resource management practices that
support the use of technology to create what is known as high-performance work
systems. Work, training programs, and reward systems often need to be reconfigured
to support employees’ use of new technology. The three important aspects of high-
performance work systems are (1) human resources and their capabilities, (2) new
technology and its opportunities, and (3) efficient work structures and policies that
allow employees and technology to interact. Companies are also using social media
and e-HRM (electronic HRM) applications to give employees more ownership of the
employment relationship through the ability to enroll in and participate in training
programs, change benefits, communicate with co-workers and customers online, and
work “virtually” with peers in geographically different locations.
viii Preface
We believe that organizations must successfully deal with these challenges to create and
maintain value, and the key to facing these challenges is a motivated, well-trained, and
committed workforce.
The Changing Role of the Human Resource

Management Function
The human resource management (HRM) profession and practices have undergone sub-
stantial change and redefinition. Many articles written in both the academic and practitioner
literature have been critical of the traditional HRM function. Unfortunately, in many orga-
nizations HRM services are not providing value but instead are mired down in managing
trivial administrative tasks. Where this is true, HRM departments can be replaced with new
technology or outsourced to a vendor who can provide higher-quality services at a lower
cost. Although this recommendation is indeed somewhat extreme (and threatening to both
HRM practitioners and those who teach human resource management!), it does demonstrate
that companies need to ensure that their HRM functions are creating value for the firm.
Technology should be used where appropriate to automate routine activities, and
managers should concentrate on HRM activities that can add substantial value to the
company. Consider employee benefits: Technology is available to automate the process
by which employees enroll in benefits programs and to keep detailed records of benefits
usage. This use of technology frees up time for the manager to focus on activities that
can create value for the firm (such as how to control health care costs and reduce work-
ers’ compensation claims).
Although the importance of some HRM departments is being debated, everyone
agrees on the need to successfully manage human resources for a company to maxi-
mize its competitiveness. Several themes emerge from our conversations with managers
and our review of research on HRM practices. First, in today’s organizations, managers
themselves are becoming more responsible for HRM practices and most believe that
people issues are critical to business success. Second, most managers believe that their
HRM departments are not well respected because of a perceived lack of competence,
business sense, and contact with operations. A study by Deloitte consulting and The
Economist Intelligence Unit found that only 23% of business executives believe that HR
currently plays a significant role in strategy and operational results. Third, many manag-
ers believe that for HRM practices to be effective they need to be related to the strategic
direction of the business. This text emphasizes how HRM practices can and should con-
tribute to business goals and help to improve product and service quality and effective-
ness. An important way, which we highlight throughout the text, is through using “Big
Data” and evidence-based HR to demonstrate the value of HRM practices.
Our intent is to provide students with the background to be successful HRM profes-
sionals, to manage human resources effectively, and to be knowledgeable consumers of
HRM products. Managers must be able to identify effective HRM practices to purchase
these services from a consultant, to work with the HRM department, or to design and
implement them personally. The text emphasizes how a manager can more effectively
manage human resources and highlights important issues in current HRM practice.
This book represents a valuable approach to teaching human resource management
for several reasons:
∙ The text draws from the diverse research, teaching, and consulting experiences of four
authors who have taught human resource management to undergraduates, traditional
day MBA students as a required and elective course, and more experienced managers
Preface ix
and professional employees in weekend and evening MBA programs. The teamwork
approach gives a depth and breadth to the coverage that is not found in other texts.
∙ Human resource management is viewed as critical to the success of a business.
The text emphasizes how the HRM function, as well as the management of human
resources, can help companies gain a competitive advantage.
∙ The book discusses current issues such as social networking, talent management,
diversity, and employee engagement, all of which have a major impact on business
and HRM practice.
∙ Strategic human resource management is introduced early in the book and integrated
throughout the text.
∙ Examples of how new technologies are being used to improve the efficiency and
effectiveness of HRM practices are provided throughout the text.
∙ We provide examples of how companies are evaluating HRM practices to determine
their value.
∙ The Chapter openers, in-text boxes, and end-of-chapter materials provide questions
that provide students the opportunity to discuss and apply HR concepts to a broad
range of issues including strategic human resource management, HR in small busi-
nesses, ethics and HR’s role in helping companies achieve sustainability, adopt and
use technology, adapt to globalization, and practice integrity. This should make the
HR classroom more interactive and increase students’ understanding of the concepts
and their application.
Organization
Human Resource Management: Gaining a Competitive Advantage includes an introduc-
tory chapter (Chapter 1) and five parts.
Chapter 1 provides a detailed discussion of the global, new economy, stakeholder,
and work system challenges that influence companies’ abilities to successfully meet
the needs of shareholders, customers, employees, and other stakeholders. We discuss
how the management of human resources can help companies meet the competitive
challenges.
Part 1 includes a discussion of the environmental forces that companies face in
attempting to capitalize on their human resources as a means to gain competitive advan-
tage. The environmental forces include the strategic direction of the business, the legal
environment, and the type of work performed and physical arrangement of the work.
A key focus of the strategic human resource management chapter is highlighting the
role that staffing, performance management, training and development, and compensation
play in different types of business strategies. A key focus of the legal chapter is enhanc-
ing managers’ understanding of laws related to sexual harassment, affirmative action, and
accommodations for disabled employees. The various types of discrimination and ways
they have been interpreted by the courts are discussed. The chapter on analysis and design
of work emphasizes how work systems can improve company competitiveness by alleviat-
ing job stress and by improving employees’ motivation and satisfaction with their jobs.
Part 2 deals with the acquisition and preparation of human resources, including
human resource planning and recruitment, selection, and training. The human resource
planning chapter illustrates the process of developing a human resource plan. Also, the
strengths and weaknesses of staffing options such as outsourcing, use of contingent
workers, and downsizing are discussed. Strategies for recruiting talented employees are
emphasized. The selection chapter emphasizes ways to minimize errors in employee
selection and placement to improve the company’s competitive position. Selection
x Preface
method standards such as validity and reliability are discussed in easily understand-
able terms without compromising the technical complexity of these issues. The chapter
discusses selection methods such as interviews and various types of tests (including per-
sonality, honesty, and drug tests) and compares them on measures of validity, reliability,
utility, and legality.
We discuss the components of effective training systems and the manager’s role in
determining employees’ readiness for training, creating a positive learning environment,
and ensuring that training is used on the job. The advantages and disadvantages of differ-
ent training methods are described, such as e-learning and mobile training.
Part 3 explores how companies can determine the value of employees and capitalize
on their talents through retention and development strategies. The performance man-
agement chapter examines the strengths and weaknesses of performance management
methods that use ratings, objectives, or behaviors. The employee development chapter
introduces the student to how assessment, job experiences, formal courses, and mentor-
ing relationships are used to develop employees. The chapter on retention and separation
discusses how managers can maximize employee productivity and satisfaction to avoid
absenteeism and turnover. The use of employee surveys to monitor job and organiza-
tional characteristics that affect satisfaction and subsequently retention is emphasized.
Part 4 covers rewarding and compensating human resources, including designing pay
structures, recognizing individual contributions, and providing benefits. Here we explore
how managers should decide the pay rate for different jobs, given the company’s com-
pensation strategy and the worth of jobs. The advantages and disadvantages of merit pay,
gainsharing, and skill-based pay are discussed. The benefits chapter highlights the dif-
ferent types of employer-provided benefits and discusses how benefit costs can be con-
tained. International comparisons of compensation and benefit practices are provided.
Part 5 covers special topics in human resource management, including labor–management
relations, international HRM, and managing the HRM function. The collective bargaining
and labor relations chapter focuses on traditional issues in labor–management relations,
such as union structure and membership, the organizing process, and contract negotiations;
it also discusses new union agendas and less adversarial approaches to labor–management
relations. Social and political changes, such as introduction of the euro currency in the
European Community, are discussed in the chapter on global human resource manage-
ment. Selecting, preparing, and rewarding employees for foreign assignments is also dis-
cussed. The text concludes with a chapter that emphasizes how HRM practices should be
aligned to help the company meet its business objectives. The chapter emphasizes that the
HRM function needs to have a customer focus to be effective.
New Feature and Content Changes in This Edition

All examples, figures, and statistics have been updated to incorporate the most recently
published human resource data. Each chapter was revised to include current examples,
research results, and relevant topical coverage. All of the Exercising Strategy, Managing
People, and HR in Small Business end of chapter cases are either new or updated. Fol-
lowing are the highlights for each chapter.
Chapter 1
New Opening Vignette: How Marriott is using human resource practices to support
expansion of its properties around the world and reinventing itself to appeal to millennial
generation travelers’ tastes and preferences.
Preface xi
New Boxes:
∙ Dow Chemical, Merck, and Novartis socially responsible programs help improve liv-
ing conditions around the world.
∙ How the CEO of Gravity Payments introduced a new pay policy to help employees
meet their expenses.
∙ Iberdrola USA, SAP, and Boeing efforts to prepare employees for global assignments.
∙ How General Cable used data to show the value of its high performance work
practices.
New Text Material:

∙ HR in organizations: budgets, example of the role of HR in companies (Walgreens,
Tesla Motors, Coeur Mining, and MGM International Resorts), managers expecta-
tions for the HR function, and the skills needed by HR professionals to contribute to
the businesss.
∙ How companies are using big data and workforce analytics to understand turn-
over, talent, and sales performance (Intermountain Healthcare, Johnson Controls,
SuccessFactors).
∙ Economy data, labor force statistics, occupational and job growth projections, skill
shortages, working at home and flexible schedules.
∙ HR’s role in insuring product quality and customer service including examples of
HR practices of the 2014 Baldrige Award Winners (Asana, Unilever, Delaware North
Companies, PricewaterhouseCoopers Public Sector Practice, Baylor Health Care
System).
∙ Innotrac’s and Dell’s efforts to manage a multigenerational workforce and the value
of hiring employees with disabilities.
∙ Ethics training used by Dimension Data and Xerox.
∙ Growth of world economy and global business for companies such as Gap, McDon-
ald’s, and Coca-Cola.
∙ Reshoring jobs in the United States (Hanesbrands, Peds Legware).
∙ Use of apps, robots, wearables, and mobile devices in the workplace.
∙ HindlePower’s use of HR practices to support high performance work systems.
Chapter 2
New Opening Vignette: Changes in Southwest Airlines strategy as the company moves
to “middle age.”
New Boxes:
∙ Facebook’s European privacy problem.
∙ Use of robots in China to lower labor costs.
∙ Practices that make 3M an admired, ethical company.
∙ Starbucks’ college tuition program.
Chapter 3
New Opening Vignette: Sex discrimination at Kleiner Perkins.
New Boxes:
∙ Legal challenges Uber faces in the European Union.
∙ Satyam founder convicted of accounting scandal.
∙ Korn/Ferry executive inappropriate use of e-mail.
∙ Heineken’s focus on sustainability through reducing water usage, carbon emissions,
and promoting responsible drinking.
xii Preface
New Text Material:

∙ Frequency of discrimination cases.
Chapter 4
New Opening Vignette: The role of organizational and work design in the GM ignition
switch debacle.
New Boxes:
∙ UPS’s new technology for designing the safest and most efficient driving routes.
∙ How ISIS and other terrorist organizations structure themselves and why.
∙ Recent crackdowns in the manicure sweatshops in New York City.
∙ The new and controversial OSHA “name and shame” is working.
∙ Hospitals are using evidence-based management to improve cardiac care.
New Text Material:

∙ Poorly controlled menu design created work design problems at McDonald’s.
∙ How to calculate “capital spending per worker,” and what this metric means.
∙ The failed launch of the HealthCare.gov website was due to structural faults.
∙ Social network analysis is revolutionizing the use of informal structures.
∙ Ergonomic design related to sitting is being used to prevent inuries.
Chapter 5
New Opening Vignette: How Uber’s business model that is centered around treating
drivers as independent contractors is being challenged.
New Boxes:
∙ How companies that provide workers’ smartphones balance work and privacy.
∙ The opening up of Cuba will lead to an increased supply of high-skill labor.
∙ The new nature of work is affecting the demand for a 4-year college degree.
∙ The failure to manage diversity at the CIA harms counterterrorism efforts.
∙ Increases in unemployment benefits result in higher unemployment.
New Text Material:

∙ Demand for workers in some industries is skyrocketing (elder care, welding).
∙ Labor shortages in the construction industry affecting the overall economy.
∙ Why companies often downsize their workforces even when business is good.
∙ Cuts to public health funding led to the Ebola breakouts in the United States.
∙ U.S. visa limits harm America’s ability to compete in some high-tech fields.
Chapter 6
New Opening Vignette: How Abercrombie and Fitch was sued for religious discrimina-
tion when it failed to hire a young Muslim woman who wore a hijab.
New Boxes:
∙ Employers are collecting information on Facebook that would be illegal to ask in an
interview.
∙ The crash of Germanwing’s Flight 9525 could be traced to poor personnel selection
processes.
∙ The use of criminal background checks is causing labor shortages in some industries.
∙ The fallout when a leader within the NAACP falsely claimed she was African American.
∙ The percentage of Hispanic Americans is changing due simply to reporting biases.
Preface xiii
New Text Material:

∙ How “Big Data” applications are changing how personnel are selected.
∙ Game developers are building applications that can be used to simulate real jobs.
∙ The traditional belief that job performance is normally distributed may be false.
∙ Recent Supreme Court rulings make it more difficult to diversify the workforce.
∙ Scandals in the reporting of test scores from some foreign countries held up college
selection decisions in 2014.
Chapter 7
New Opening Vignette: Highlighting how Keller Williams’ commitment to training pro-
grams and training evaluation has contributed to the success of the business and its real
estate agents.
New Boxes:
∙ STIHL’s use training to help all of the company’s stakeholders including consumers,
distributors, and retailers work safely and productively.
∙ How Year Up trains low income youth for high demand jobs.
∙ Phillips, Accenture, and Etihad Airways are adapting their training practices to reach
a global and cross-cultural workforce.
∙ Evans Analytical Group and Coca-Cola Bottling Company Consolidated use social
media and apps to foster continuous learning.
∙ How Mountain American Credit demonstrated the effectiveness of its sales training
for new employees.
New Text Material:

∙ Showing how KLA-Tencor conducted needs assessment for its service engineers.
∙ Highlighting how Mindtree Limited and Nemours create a positive learning environ-
ment using different training methods.
∙ Spectrum Health’s use of a coaching guide to insure trained skills are reinforced by a
manager.
∙ Companies such as Coca-Cola Sabo , SNI, and ADP are providing performance sup-
port using on-demand training materials such as YouTube videos.
∙ Examples of how companies including Greyhound Lines, CMS Energy, PPD, KLA-
Tencor, Coca-Cola Bottling Company Consolidated, Farmers Insurance, and Sonic
use different training methods including simulations, games, online learning, social
media, blended learning, and action learning.
∙ Discussion of Massive Open Online Courses (MOOCs) for education and training
including their advantages and disadvantages.
∙ How MasTec Utility Service Group uses a learning management system.
Chapter 8
New Opening Vignette: Adobe’s performance management system that emphasizes
ongoing feedback and eliminates annual ratings.
New Boxes:
∙ How Kaiser Permanente creates a culture of continuous improvement.
∙ The support Expedia provided its managers to use a new performance management
system.
∙ How Connecticut Health uses business and employee goals to meet its mission of
helping people gain access to affordable and high quality health care.
∙ Persistent Systems use of gamification for performance management.
xiv Preface
New Text Material:

∙ How Texas Roadhouse revised its performance management system to focus on more
frequent feedback and employee development.
∙ Key Performance Indicators (KPIs) and how Brinker International uses them.
∙ How Deloitte’s performance management system for project teams meets the criteria
for a good performance management system.
∙ Why Microsoft abandoned a forced ranking system.
∙ How to best use objectives or goals in performance management.
∙ Discussion of social performance management including peer-to-peer recognition,
social media, and gamification.
∙ Examples of electronic monitoring in trucking industry, landscaping services, and
health care.
∙ Examples of age discrimination lawsuits involving performance management.
Chapter 9
Revised Opening Vignette: ESPNs efforts in employee development.
New Boxes:
∙ How Genentech facilitates employee development career management through use of
a virtual and physical development system.
∙ Sidley Austin’s use of pro bono work to help less experienced lawyers develop their
skills and benefit the community.
∙ SAP is demonstrating the value of its new employee mentoring program.
∙ How Dow Chemical develops global leaders and develops communities through local
projects.
New Text Material:

∙ Job hopping and number of jobs employees have held in their careers.
∙ How companies (e.g., PEMCO Mutual Insurance Company, AT&T, Cartus, SAP,
Mondelez, Airbnb, General Motors, Thomas Reuters, PwC, Valvoline, Paychex) use
self-assessment, job rotation, customized courses and programs, 360-degree feed-
back, temporary assignments, mentoring, coaching, and succession planning.
∙ Stretch assignments and reverse mentoring.
∙ AstraZeneca and Johnson & Johnson’s efforts to melt the glass ceiling women face in
moving to top-level management positions.
Chapter 10
New Opening Vignette: The many reasons why working at the IRS is such a difficult job
and what the agency is trying to do to shore up morale.
New Boxes:
∙ The use of wearable sensors creates opportunties and challenges for employers.
∙ How Chinese taxi drivers used wildcat strikes to drive Uber out of the country.
∙ The use of cell phones to do work at night is counterproductive.
∙ The lack of political correctness can get someone fired in the age of social media.
∙ New evidence supports the use of outplacement activities for promoting culture.
New Text Material:

∙ Failures within the Secret Service led to a wave of terminations.
∙ Social networking sites are being used to measure employee performance.
∙ No compete clauses are being increasingly used—even for low-skilled jobs.
Preface xv
∙ The use of alternative dispute resolution techniques can help or harm employee relations.
∙ Employers are using both rewards and punishments to improve employee health.
Chapter 11
New Opening Vignette: The role of labor market competition and business strategy in
increasing wages and salary.
New Boxes:
∙ Zappos’s and Amazon’s pay to quit policy.
∙ Wage and overtime implications for independent contractors or full-time employees.
∙ Evidence that high wages reduce turnover costs for Walmart and Container Store.
∙ Where to manufacture products depends on labor costs.
∙ Providing higher wages for garment workers in Cambodia.
New Text Material:
∙ New salary test under the Fair Labor Standards Act (and the expected increase in the
number of employees eligible for overtime premiums).
∙ How labor costs and other factors affect where new North American manufacturing plants
are built.
∙ The distinction between equality and equity.
Chapter 12
New Opening Vignette: Employers raising pay but controlling fixed costs through profit
sharing and reduced hiring of new employees.
New Boxes:
∙ Recruiting and retaining engineering talent in China.
∙ European banks use of bonus caps.
∙ Barclay’s pay system holds employees accountable for ethical behavior.
∙ Tasty Catering open book management practices reduce costs and increase profit.
New Text Material:
∙ Effect pay plan has on workforce composition (sorting effect).
∙ Use of pay to differentiate between employees.
∙ Distribution of performance ratings and base pay increases in the United States.
Chapter 13
New Opening Vignette: Balancing work and family in Silicon Valley Companies.
New Boxes:
∙ Patagonia’s use of benefits to sustain its business strategy.
∙ Microsoft requiring vendors to provide paid time off for their employees.
∙ Egg freezing: as a family-friendly benefit?
∙ The challenges of recruiting expatriates to Beijing because of its air quality.
∙ Evidence of outcomes of Sloan Valve’s wellness program.
New Text Material:
∙ Number and percentage of people without health insurance in the United States.
∙ Use of big data to understand usage of health care coverage.
∙ Incentives and penalties employers can use under the Affordable Care Act to encour-
age healthy behavior.
∙ Employee preferences for how benefits are communicated.
∙ Decline in use of defined benefit plans.
xvi Preface
Chapter 14
New Opening Vignette: Collective action by nonunion workers and supporters.
New Boxes:
∙ Alliance for Bangladesh Worker Safety.
∙ Using social media for union-related communications.
∙ Give and take of Boeing’s contract negotiations.
∙ Evidence for high-performance work practice effectiveness across different countries.
∙ How differences in U.S. and German union strength influenced Amazon’s strategy
for dealing with unions.
New Text Material:

∙ Discussion of garment workers disaster in Bangladesh, employers responses, and
potential role of labor unions in avoiding it.
∙ NLRB rules to streamline and speed up union representation elections.
∙ Companies use of managers to replace striking workers.
∙ Compensation rates for union and nonunion employees.
Chapter 15
New Opening Vignette: Walmart’s global growth strategy.
New Boxes:
∙ How technology is changing the nature of work and blurring work and nonwork time.
∙ Risks and rewards of doing business in Africa.
∙ Airlines making money by charging fees which should not have been collected during
the government shutdown.
∙ How changes in Vietnam’s, China’s, and India’s economic systems have helped
reduce poverty.
New Text Material:

∙ Fortune global companies and cost of living figures.
∙ Questions for assessing employees’ suitability for overseas assignments.
Chapter 16
New Opening Vignette: The need for HR at tech start-ups.
New Boxes:
∙ How U.S. companies such as Otis are reshoring, i.e., bringing jobs back to the United
States.
∙ IKEA’s focus on efficient packaging and lower material costs contributes to
sustainability.
∙ Humana’s use of an app that helps improve customer health.
∙ AT&T misleads customers about their unlimited wireless data plan.
Acknowledgments
As this book enters its tenth edition, it is important to acknowledge those who started
it all. The first edition of this book would not have been possible if not for the entre-
preneurial spirit of two individuals. Bill Schoof, president of Austen Press, gave us the
resources and had the confidence that four unproven textbook writers could provide a
new perspective for teaching human resource management. John Weimeister, our former
Preface xvii
editor, provided us with valuable marketing information, helped us in making major

decisions regarding the book, and made writing this book an enjoyable process. Anke
Weekes, our current brand manager, continues to provide the same high-quality guid-
ance and support we received from John. We also worked with an all-star development
and project management team, including Heather Darr and Mary Powers. Their sugges-
tions, patience, gentle prodding, and careful oversight kept the author team focused on
providing a high-quality revision while meeting publication deadline. We would also
like to thank Michael Gedatus for his marketing efforts for this new edition.
We would also like to thank the professors who gave of their time to review the text
and attend focus groups. Their helpful comments and suggestions have greatly helped to
enhance this learning program:
Vondra Armstrong Nancy Bereman Georgia Chao

Pulaski Technical College Wichita State University Michigan State University
Richard Arvey Chris Berger Fay Cocchiara
National University of Purdue University Arkansas State University
Singapore
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Pennsylvania–Bloomsburg
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New Mexico State University
xviii Preface
Fred Dorn Bob Graham Frank Jeffries

The University of Sacred Heart University University of
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College Nancy Boyd Lillie
University, Chico
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Michigan Technological
University of California, Beth A. Livingston
University Cornell University
Los Angeles
Preface xix
Karen Locke Gary Murray Mike Ritchie

William & Mary Rose State College University of South
Carolina
Michael Dane Loflin David M. Nemi
York Technical College Niagara County Gwen Rivkin
Community College Cardinal Stritch University
Susan Madsen
Utah Valley University Nhung Nguyen Mark Roehling
Towson University Michigan State University
Larry Mainstone
Valparaiso University Thomas J. Norman Mary Ellen Rosetti
California State University– Hudson Valley Community
Ann-Marie Majeskey
Dominguez Hills College
Mount Olive College
Millicent Nelson Craig J. Russell
Liz Malatestinic
Middle Tennessee State University of Oklahoma
Indiana University
University Sarah Sanders-Smith
Patricia Martina Purdue University–North
University of Texas–San Lam Nguyen
Palm Beach State College Central
Antonio
Cheri Ostroff Miyako Schanely
Nicholas Mathys Jefferson Community
DePaul University Teachers College
Columbia College
Lisa McConnell Robert Schappe
Oklahoma State University Teresa Palmer
Illinois State University University of
Liliana Meneses Michigan–Dearborn
University of Maryland Robert Paul
Kansas State University Jack Schoenfelder
University College Ivy Tech Community
Tracy Porter College
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Cleveland State
Rutgers University Machelle K. Schroeder,
University
Angela Miles PhD, SPHR
Gregory Quinet University of Wisconsin–
North Carolina A&T State
Southern Polytechnic State Platteville
University
University
Stuart Milne Joshua Schwarz
Sam Rabinowitz Miami University–Ohio
Georgia Institute of
Rutgers University
Technology Pat Setlik
David Rahn Harper College
Barbara Minsky
California State
Troy University
University–Chico Christina Shalley
Georgia Tech
Kelly Mollica Jude Rathburn
University of Memphis University of Richard Shuey
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California State Katherine Ready Richard Simpson
University–Chico University of Wisconsin University of Utah
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Olney Central College Indian River State University of
Lake Land College College Wisconsin–Milwaukee
Confirming Pages
xx Preface
Erika Engel Small Steven L. Thomas Charles Vance

Coastal Carolina Missouri State University Loyola Marymount
University University
Tom Timmerman
Mark Smith Tennessee Technology Kim Wade
Mississippi Gulf University Washington State
Coast Community University
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College–Gulfport
University of Tampa Sheng Wang
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University of Virginia Vegas
Cornell University
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Chippewa Valley Technical University of Central
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College Oklahoma
Oklahoma
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University of
Carol S. Steinhaus, PhD Missouri–Columbia Jenell Wittmer, PhD
Northern Michigan University of Toledo
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Franklin University University of Toledo Steve Woods
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University–Billings
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Pennsylvania State Alliant International Ryan D. Zimmerman
University–Behrend University Texas A&M University
Raymond A. Noe
John R. Hollenbeck
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Patrick M. Wright
noe78127_fm_i-1.indd xx 10/13/16 01:35 PM

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xxiii
BRIEF CONTENTS
1 Human Resource Management: PART 4

Gaining a Competitive Advantage 2 Compensation of Human
Resources 456
PART 1
The Human Resource 11 Pay Structure Decisions 456
Environment 66 12 Recognizing Employee Contributions
2 Strategic Human Resource with Pay 496
Management 66 13 Employee Benefits 534
3 The Legal Environment: Equal Employment
Opportunity and Safety 100 PART 5
Special Topics in Human Resource
4 The Analysis and Design
Management 576
of Work 144
14 Collective Bargaining and Labor
PART 2 Relations 576
Acquisition and Preparation of 15 Managing Human Resources
Human Resources 182 Globally 628
5 Human Resource Planning 16 Strategically Managing the HRM
and Recruitment 182 Function 662
6 Selection and Placement 222
Glossary 700
7 Training 262 Name and Company Index 711
Subject Index 721
PART 3
Assessment and
Development of HRM 318
8 Performance Management 318
9 Employee Development 376
10 Employee Separation and
Retention 420
xxiv
CONTENTS
1 Human Resource Management: Gaining a Key Terms 56

Competitive Advantage 2 Discussion Questions 56
Enter the World of Business: Marriott: HR Self-Assessment Exercise 57
Practices Result in Engaged Employees and Exercising Strategy 57
Satisfied Customers 3 Managing People: Mars Incorporated: HR
Introduction 4 Practices Help Create Sweet Success 59
What Responsibilities and Roles Do HR HR in Small Business 60
Departments Perform? 5
Notes 61
Strategic Role of the HRM Function 7
Demonstrating the Strategic Value
of HR: HR Analytics and Evidence-Based HR 11 PART 1
The HRM Profession: Positions and Jobs 12 The Human Resource
Education and Experience 13 Environment 66
Competencies and Behaviors 13
Competitive Challenges Influencing Human 2 Strategic Human Resource
Resource Management 15 Management 66
The Sustainability Challenge 16 Enter the World of Business: Southwest Airlines
Hits Middle Age 67
Competing Through Sustainability
Socially Responsible Programs Help Improve Introduction 67
the World 29 What Is a Business Model? 68
Integrity in Action Gm’s Attempt to Survive 69
CEO Cuts Pay to Reduce Income Inequality 42
What Is Strategic Management? 70
The Global Challenge 43
Competing Through Globalization
Competing Through Globalization Facebook’s European Privacy Policy
Effectiveness in Global Business Requires More Problems 71
Than Just a First-Class Ticket 45
Components of the Strategic Management
The Technology Challenge 45 Process 72
Competing Through Technology Linkage Between HRM and the Strategic
Connectiveness and Mobility Enhance HR Management Process 72
Practices 48
Role of HRM in Strategy Formulation 74
EVIDENCE-BASED HR 51
Competing Through Technology
Meeting Competitive Challenges through HRM The Rise of the Robot in China 75
Practices 51
Strategy Formulation 76
Organization of This Book 54
Integrity in Action
A Look Back 55 3M Named One of World’s Most Ethical
Summary 55 Companies 79
xxv
xxvi Contents
Strategy Implementation 80 Types of Discrimination 113

HRM Practices 82 Disparate Treatment 114
Strategic Types 86 Disparate Impact 117
HRM Needs In Strategic Types 87 Pattern and Practice 120
EVIDENCE-BASED HR 87 Reasonable Accommodation 121
Directional Strategies 88 EVIDENCE-BASED HR 124
Competing Through Sustainability Retaliation for Participation and
Starbucks Employees Go to School 90 Opposition 124
Strategy Evaluation and Control 92 Integrity in Action
The Role of Human Resources in Providing Satyam Founder Convicted of Fraud 125
Strategic Competitive Advantage 92 Current Issues Regarding Diversity and Equal
Emergent Strategies 92 Employment Opportunity 125
Enhancing Firm Competitiveness 93 Sexual Harassment 126
A Look Back 94 Affirmative Action and Reverse
Discrimination 128
Summary 94
Key Terms 94
Better Watch What You E-mail at Work 129
Discussion Questions 95
Outcomes of the Americans with
Self-Assessment Exercise 95 Disabilities Act 130
Exercising Strategy 95 Employee Safety 130
Managing People: Is Dell Too Big for Competing Through Sustainability
Michael Dell? 96 Global Beverage Giant Focuses on Safety and
HR in Small Business 97 Sustainability 132
Notes 98 The Occupational Safety and Health
Act (OSHA) 132
3 The Legal Environment: Equal Safety Awareness Programs 134
Employment Opportunity and Safety 100
A Look Back 137
Enter the World of Business: Sexism at Kleiner
Summary 137
Perkins? 101
Key Terms 138
Introduction 101
The Legal System in the United States 102
Self-Assessment Exercise 138
Legislative Branch 102
Exercising Strategy 139
Executive Branch 102
Managing People: Brown v. Board of Education: A
Judicial Branch 103
Bittersweet Birthday 140
Equal Employment Opportunity 103
HR in Small Business 142
Notes 142
Uber Faces Challenges in the EU 104
Constitutional Amendments 104 4 The Analysis and Design of
Congressional Legislation 106 Work 144
Executive Orders 110 Enter The World of Business: Organizational
Enforcement of Equal Employment Structure Contributes to GM’s Major
Opportunity 111 Recall 145
Equal Employment Opportunity Commission Introduction 146

(EEOC) 111 Work-Flow Analysis and Organization
Office of Federal Contract Compliance Structure 147
Programs (OFCCP) 112 Work-Flow Analysis 147
Contents xxvii
Competing Through Technology Introduction 184

Orion and UPS: Plotting the Path to Efficiency The Human Resource Planning Process 185
and Savings 151
Forecasting 185
Goal Setting and Strategic Planning 189
Organization Structure 153
Structuring a Global Terrorist Organization 155
You and Your Smartphone Are Both Fired! 194
Job Analysis 161
The Importance of Job Analysis 161 Underemployment: Is the Need for a Four-Year
The Importance of Job Analysis to Line Degree Sustainable? 195
Managers 162 Competing Through Globalization
Job Analysis Information 163 A Revolutionary Supply of High-Skilled
Labor 199
Job Analysis Methods 165
Program Implementation and Evaluation 202
Dynamic Elements of Job Analysis 167
The Special Case of Affirmative Action
Job Design 167
Planning 202
Mechanistic Approach 168
Integrity in Action
Motivational Approach 169 Beyond the Ethics of Representation: The
Biological Approach 170 Business Case for Diversity at the CIA 203
Competing Through Sustainability The Human Resource Recruitment Process 203
Business Practices at Nail Salons May Be Cause Personnel Policies 204
for Concern 172
Recruitment Sources 206
Perceptual–Motor Approach 172
Recruiters 212
Integrity in Action
A Look Back 214
Policy Shift by OSHA May Help Pinpoint
Unethical Business Activities 173 Summary 214
Trade-Offs Among Different Approaches Key Terms 214
to Job Design 175 Discussion Questions 215
A Look Back 175 Self-Assessment Exercise 215
Summary 176 Exercising Strategy 215
Key Terms 176 Managing People: Few Line Up for Jobs
Discussion Questions 176 Abandoned By Immigrants 216
Self-Assessment Exercise 176 HR In Small Business 217
Exercising Strategy 177 Notes 218
Managing People: Robots Attack Okun’s Law 177
HR In Small Business 178 6 Selection and Placement 222
Notes 179 Enter the World of Business: U.S. Supreme
Court Makes a Fashion Statement 223
Introduction 224
PART 2 Selection Method Standards 224
Acquisition and Preparation of Reliability 224
Human Resources 182 Validity 228
Generalizability 232
5 Human Resource Planning and
Utility 233
Recruitment 182
Legality 235
Enter the World of Business: Is the Demand for
On-Demand Labor about to Shift? 183 EVIDENCE-BASED HR 237
xxviii Contents
Types of Selection Methods 239 Ensuring Employees’ Readiness For

Interviews 239 Training 275
Competing Through Sustainability Creating a Learning Environment 275

Ban-the-Box Policies Attempt to Open Up Competing Through Sustainability
Opportunities 240 Youth Training Programs Provide Talent 277
Competing Through Technology Ensuring Transfer of Training 277
Facebook: Where Do Employers Go to Collect Selecting Training Methods 282
Illegal Information? 243
References, Application Blanks, and
Adopting Training Practices for Global
Background Checks 243 Businesses 283
Integrity In Action On-The-Job Training (OJT) 285
Race and Racial Identity: One and the
Same? 245 Competing Through Technology
Using Social Media and Apps for Learning 292
Privacy and Public Safety Collide on Advice for Choosing a Training Method 296
Germanwings Flight 9525 246 Evaluating Training Programs 297
Physical Ability Tests 247 EVIDENCE-BASED HR 299
Cognitive Ability Tests 247 Special Training Issues 300
Personality Inventories 248 Cross-Cultural Preparation 300
Work Samples 251 Managing Workforce Diversity and
Honesty Tests and Drug Tests 252 Inclusion 303
A Look Back 253 Onboarding and Socialization 307
Summary 253 A Look Back 309
Key Terms 255 Summary 309
Discussion Questions 255 Key Terms 309
Self-Assessment Exercise 255 Discussion Questions 310
Exercising Strategy 256 Self-Assessment Exercise 311
Managing People: When Do the Unemployed Exercising Strategy 311
Become Unemployable? 256 Managing People: Learning Opportunities for
HR in Small Business 257 Employees Are No Accident at Farmers Insurance
Group of Companies 312
Notes 258
7 Training 262 Notes 313
Enter the World of Business: Learning Helps
Make the Sale at Keller Williams 263
PART 3
Introduction 264 Assessment and
Training: Its Role in Continuous Learning and Development of HRM 318
Competitive Advantage 265
Designing Effective Formal Training 8 Performance Management 318
Activities 267 Enter the World of Business: Reformatting
Needs Assessment 269 Performance Evaluations 319
Organizational Analysis 270 Introduction 320
Integrity In Action The Practice of Performance Management 321
Connecting Learning to Business Success 272 The Process of Performance Management 322
Person Analysis 273 Purposes of Performance Management 324
Task Analysis 274 Strategic Purpose 324
Contents xxix
Administrative Purpose 324 Diagnosing The Causes of Poor

Integrity in Action Performance 363
Creating a Culture of Continuous Performance Actions for Managing Employees’ Performance 365
Improvement 325 Developing and Implementing a System That
Developmental Purpose 325 Follows Legal Guidelines 366
Performance Measures Criteria 326 A Look Back 368
Strategic Congruence 326 Summary 368
Competing Through Globalization Key Terms 368
Timely and Future-Focused Feedback Helps Discussion Questions 368
Ensure Travel Customers Are Satisfied Around
the World 328 Self-Assessment Exercise 369
Validity 328 Exercising Strategy 369
Reliability 329 Managing People: Performance Management is
About Work and How Work Gets Done 370
Acceptability 329
Specificity 330
Notes 372
Approaches to Measuring Performance 331
The Comparative Approach 333 9 Employee Development 376
The Attribute Approach 336 Enter the World of Business: Development Helps
The Behavioral Approach 339 ESPN Remain a Sports Dynasty 377
The Results Approach 343 Introduction 378
The Quality Approach 347 The Relationship among Development, Training,
Choosing a Source for Performance and Careers 379
Information 350 Development and Training 379
Managers 350 Development and Careers 379
Competing Through Sustainability Development Planning Systems 381
Connecticut Health Foundation Uses Approaches to Employee Development 385
Goals to Ensure It Meets Mission and
Objectives 352
CareerLab Is the Nucleus of Employee
Peers 353 Development at Genentech 386
Subordinates 353 Formal Education 386
Self 354 Assessment 389
Customers 354 Job Experiences 394
Use of Technology in Performance Competing Through Sustainability
Management 355 Legal Representation Benefits the Community
Competing Through Technology and Associates’ Skills 397
Gamification Improves Performance Interpersonal Relationships 400
Management 357
Reducing Rater Errors, Politics, and Increasing
Special Issues in Employee Development 405
Reliability and Validity of Ratings 358
Melting the Glass Ceiling 405
Performance Feedback 360
Succession Planning 406
The Manager’s Role in an Effective
Performance Feedback Process 360 Competing Through Globalization
Dow Chemical Develops Leaders by Sending
Them to Work in Unfamiliar Surroundings 410
What Managers Can Do to Diagnose
A Look Back 411
Performance Problems and Manage Employees’
Performance 363 Summary 412
xxx Contents
Key Terms 412 Managing People: Flextime: Has its Time Come
Discussion Questions 412 and Gone? 451
Self-Assessment Exercise 413 HR in Small Business 452
Exercising Strategy 413 Notes 453
Managing People: Employee Development
Contributes to Winning the Battle Against Cancer 413
HR in Small Business 414 PART 4
Notes 415 Compensation of Human
Resources 456
10 Employee Separation and Retention 420
Enter the World of Business: Working at 11 Pay Structure Decisions 456
the Internal Revenues Service: A Taxing Enter the World of Business: Increasing
Experience 421 Wages and Salaries: The Role of Labor Market
Introduction 422 Competition and Business Strategy 457
Managing Involuntary Turnover 423 Introduction 457
Principles of Justice 425 Equity Theory and Fairness 459
Progressive Discipline and Alternative Dispute Developing Pay Levels 461
Resolution 427 Market Pressures 461
Integrity in Action Employees as A Resource 462
Donald Trump Told: “You’re Fired!” 428
Deciding What to Pay 463
Employee Assistance and Wellness
Programs 429 Market Pay Surveys 463
Competing Through Technology Competing Through Sustainability
Wearable Sensors Make Employers’ Hearts Pay to Quit 464
Race 430 Developing a Job Structure 465
Outplacement Counseling 432 Developing a Pay Structure 466
EVIDENCE-BASED HR 433 Market Survey Data 467
Managing Voluntary Turnover 433 Conflicts Between Market Pay Surveys and
Process of Job Withdrawal 434 Job Evaluation 470
Job Satisfaction and Job Withdrawal 437 Monitoring Compensation Costs 471
Sources of Job Dissatisfaction 437 Globalization, Geographic Region, and
Pay Structures 472
Driven to Distraction: Chinese Taxi Drivers EVIDENCE-BASED HR 473
Protest Working Conditions 440 The Importance of Process: Participation and
Competing Through Sustainability Communication 474
Lights Out for Late Night Workers 442 Participation 474
Measuring and Monitoring Job Communication 474
Satisfaction 444 Challenges 475
Survey-Feedback Interventions 445 Problems With Job-Based Pay
A Look Back 449 Structures 475
Summary 449 Responses to Problems with Job-Based Pay
Key Terms 449 Structures 476
Discussion Questions 450 Can The U.S. Labor Force Compete? 477
Self-Assessment Exercise 450 Competing Through Globalization
Manufacturing and Labor Costs 479
Contents xxxi
Integrity in Action Competing Through Sustainability

European Retailers Propose Higher Wages for GM’s Payout Strengthens Relationship with
Workers in Cambodia 481 Workers 511
Executive Pay 482 EVIDENCE-BASED HR 513
Government Regulation of Employee Managerial and Executive Pay 518
Compensation 483 Integrity in Action
Equal Employment Opportunity 483 Barclays Tells Employees: Behave Ethically or
Minimum Wage, Overtime, and Prevailing Leave 521
Wage Laws 486 Process and Context Issues 521
Competing Through Technology Employee Participation in Decision Making 522
Sharing Economy Exposes Gaps in Competing Through Globalization
Employment Law 487 European Banks Cope with Bonus Caps 522
A Look Back 488 Communication 523
Summary 488 Pay and Process: Intertwined Effects 524
Key Terms 489 Organization Strategy and Compensation
Discussion Questions 489 Strategy: A Question of Fit 524
Self-Assessment Exercise 489 A Look Back 525
Exercising Strategy 490 Summary 526
Managing People: Reporting the Ratio of Key Terms 526
Executive Pay to Worker Pay: is it Worth the Discussion Questions 526
Trouble? 490 Self-Assessment Exercise 527
HR in Small Business 491 Exercising Strategy 527
Notes 492 Managing People: ESOPs: Who Benefits? 528
12 Recognizing Employee Contributions HR in Small Business 529
with Pay 496 Notes 529
Enter the World of Business: Employers 13 Employee Benefits 534
Raise Pay, But Keep an Eye on Fixed Enter the World of Business: Work (and Family?)
Costs 497 in Silicon Valley 535
Introduction 497 Introduction 536
How Does Pay Influence Individual Reasons for Benefits Growth 536
Employees? 498
Benefits Programs 539
Reinforcement Theory 498
Expectancy Theory 498 Company Benefits Help Sustain Patagonia’s
Agency Theory 499 Business Strategy 540
Competing Through Technology Social Insurance (Legally Required) 540
Recruiting and Retaining Engineering Talent in Private Group Insurance 544
China 500
Retirement 545
How Do Pay Sorting Effects Influence Labor
Pay for Time Not Worked 549
Force Composition? 502
Integrity In Action
Pay for Performance Programs 502
Microsoft Requires Vendors to Provide Paid
Differentiation in Performance and Pay 502 Time Off for Employees 550
Differentiation Strength/Incentive Intensity: Family-Friendly Policies 550
Promise and Peril 502 Competing Through Technology
Types of Pay for Performance: an “Family Friendly” Takes On a Whole New
Overview 503 Meaning at Some Companies 552
xxxii Contents
Managing Benefits: Employer Objectives and Union Structure, Administration, and

Strategies 553 Membership 583
Surveys and Benchmarking 553 National and International Unions 583
Cost Control 553 Local Unions 584
EVIDENCE-BASED HR 557 American Federation of Labor and Congress of
Competing Through Globalization Industrial Organizations (AFL-CIO) 584
Air Quality in Beijing and Expatriate Recruiting Union Security 586
Challenges 559
Union Membership and Bargaining Power 586
Nature of the Workforce 561
Legal Framework 590
Communicating with Employees and
Maximizing Benefits Value 562 Unfair Labor Practices—Employers 591
General Regulatory Issues 566 Unfair Labor Practices—Labor Unions 592
Affordable Care Act 566 Enforcement 592
Nondiscrimination Rules, Qualified Plans, and Union and Management Interactions:
Tax Treatment 566 Organizing 594
Sex, Age, and Disability 566 Why Do Employees Join Unions? 594
Monitoring Future Benefits Obligations 568 The Process and Legal Framework of
A Look Back 569 Organizing 594
Summary 569
Using Social Media for Union-Related
Key Terms 570 Communications 599
Discussion Questions 570 Union and Management Interactions: Contract
Self-Assessment Exercise 570 Negotiation 600
Exercising Strategy 571 The Negotiation Process 601
Managing People: The Affordable Care Act—How Management’s Preparation for
Will Small Employers Respond? 572 Negotiations 602
HR in Small Business 573 Negotiation Stages and Tactics 603
Notes 573 Bargaining Power, Impasses, and Impasse
Resolution 603
PART 5 Management’s Willingness to Take a Strike 604

Special Topics in Human Resource Impasse Resolution Procedures: Alternatives to
Strikes 605
Management 576
14 Collective Bargaining and Labor The Give and Take of Contract
Negotiations 606
Relations 576
Union and Management Interactions: Contract
Enter the World of Business: Collective Action
Administration 607
by Nonunion Workers and Supporters 577
Grievance Procedure 607
Introduction 577
Cooperative Labor–Management
The Labor Relations Framework 578
Strategies 609
Goals and Strategies 580
Society 580
Labor Relations Outcomes 613
Management 580
Strikes 613
Labor Unions 581
Wages and Benefits 614
Integrity in Action
Productivity 615
The Alliance for Bangladesh Worker
Safety 582 Profits and Stock Performance 616
Contents xxxiii
The International Context 616 Levels of Global Participation 642

Competing Through Globalization Managing Expatriates in Global Markets 646
When in Germany, Do as the Germans Do? 618 A Look Back 654
The Public Sector 619 Summary 655
Nonunion Representation Systems 620 Key Terms 655
A Look Back 621 Discussion Questions 656
Summary 621 Self-Assessment Exercise 656
Key Terms 621 Exercising Strategy 656
Managing People: The Toyota Way to No. 1 657
Self-Assessment Exercise 622
Notes 659
Managing People: Twinkies, Hohos, and Ding
Dongs: No Treat for Labor Unions 623 16 Strategically Managing the HRM
HR in Small Business 624 Function 662
Notes 625 Enter the World of Business: The Need for HR at
Tech Start-Ups 663
15 Managing Human Resources
Introduction 663
Globally 628
Activities of HRM 664
Enter the World of Business: Walmart’s Global
Strategy 629 Strategic Management of the HRM Function 665
Introduction 629 Building an HR Strategy 667
Competing Through Technology The Basic Process 667
Staying Connected to Work 24/7: Good or Involving Line Executives 669
Bad? 631 Characterizing HR Strategies 669
Current Global Changes 631 Measuring HRM Effectiveness 671
European Union 632 Approaches for Evaluating Effectiveness 671
North American Free Trade Agreement 632 Improving HRM Effectiveness 676
The Growth of Asia 632 Restructuring to Improve HRM
General Agreement on Tariffs and Trade 633 Effectiveness 677
Factors Affecting HRM in Global Markets 633 Outsourcing to Improve HRM Effectiveness 679
Competing Through Globalization Competing Through Globalization
Risks and Rewards of Doing Business in Some U.S. Companies Bringing Jobs Back
Africa 634 Home 680
Culture 634 Improving HRM Effectiveness Through Process
EVIDENCE-BASED HR 637 Redesign 680
Education–Human Capital 638 Competing Through Sustainability
IKEA Cuts Costs Sustainably 682
Political–Legal System 638
Improving HRM Effectiveness Through
Integrity in Action
Using New Technologies—HRM Information
Airlines Pocket Tax Money During Government
Shutdown 639 Systems 683
Economic System 639 Software Applications for HRM 684

Improving HRM Effectiveness Through New
Economic System Can Help Reduce Technologies—E-HRM 684
Poverty 641 Competing Through Technology
Managing Employees in a Global Context 642 Improving Health through Technology 685
Types of International Employees 642 The Future for HR Professionals 689
xxxiv Contents
Integrity in Action Exercising Strategy 695

Did AT&T Deceive Its Customers? 690 Managing People: Saving Starbucks’
The Role of the Chief Human Resource Soul 696
Officer 691 HR in Small Business 698
A Look Back 693 Notes 698
Summary 693
Key Terms 694 Glossary 700
Discussion Questions 694 Name and Company Index 711
Self-Assessment Exercise 694 Subject Index 721
Human Resource
Management
G A I N I N G A C O M P E T I T I V E A DVA N TAG E
Human Resource
Management: Gaining a
Competitive Advantage
1
C H A P T E R
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
LO 1-1 Discuss the roles and activities of a company’s human

resource management function. page 5
LO 1-2 Discuss the implications of the economy, the makeup of the

labor force, and ethics for company sustainability. page 16
LO 1-3 Discuss how human resource management affects

a company’s balanced scorecard. page 27
LO 1-4 Discuss what companies should do to compete

in the global marketplace. page 43
LO 1-5 Identify how new technology, such as social networking, is

influencing human resource management. page 45
LO 1-6 Discuss human resource management practices that

support high-performance work systems. page 49
LO 1-7 Provide a brief description of human resource

management practices. page 51
2
>>>
ENTER THE WORLD OF BUSINESS
Marriott: HR Practices Result in Engaged
Employees and Satisfied Customers
If you have traveled, you probably have seen or wage. Despite the routine nature of the work and
stayed at a Marriott hotel. But did you know that demanding customers, associates often refer to their
Marriott owns few hotels? Most are owned by real co-workers as “family,” and many stay in their jobs
estate partners, and Marriott manages or franchises for many years. Marriott’s general manager tenure
them. Marriott is doing well in a competitive industry. is 25 years—much greater than the industry aver-
Its 2014 revenue and net income ($13.8 billion, and age. More than 10,000 employees have worked at
$753 million, respectively) were at record levels. Marriott more than 20 years.
Financial analysts expect double digit growth in 2015 Marriott emphasizes hiring friendly people who
and the stock price hit a record high. In order to stay can learn through training. For hourly associates the
relevant in the hotel industry Marriott has added new company screens for interpersonal skills, depend-
properties around the world and is reinventing itself ability, and positive disposition. Employees’ opin-
to appeal to tastes of the new Millennial generation ions matter. At every hotel, each shift starts with a
of travelers. Marriott has added three new brands, 15-minute meeting during which employees share
Moxy Hotels, for budget-conscious travelers, and updates and get motivated for the day’s work. The
AC Hotels and Edition brand for more sophisticated meetings often include stretching, music, and danc-
travelers. Also, Marriott is changing room design to ing. Employee benefits also contribute to making it a
reflect Millennials’ tastes and preferences: big com- desirable company to work for. The benefits include
fortable beds, large televisions, large public lounges, flexible scheduling, an employee assistance phone
and instead of traditional room service, online order- number, health care benefits for hourly employees if
ing and food delivery. they work 30 hours a week, and discounts on room
How Marriott manages its employees plays a rates for employees, families, and friends. Employ-
key role in its financial performance and customer ees working at company headquarters have access
satisfaction. Its practices are based on the principle to a gym, dry cleaners, gift store, and day care. The
“Take care of associates and they will take care of company holds a celebration of excellence each
customers.” “We put people first” is one of Marriott’s year that recognizes outstanding employees who
core values. Marriott has been on Fortune maga- are flown in for the event. The best benefit may be
zine’s “Best Companies to Work For” list for all 18 the opportunity that all employees have to grow
years the list has been in existence, a distinction their careers.
shared by only 11 other companies including Publix, Many top executives started as hourly employees
Whole Foods, Nordstrom, and REI. The company has working as housekeepers, waiters, sales people, or
more than 200,000 employees, who work in hotel security guards. Employees are given opportunities
properties around the world. The work isn’t neces- to explore career paths and learn through job expe-
sarily sexy or sophisticated. Most employees, who riences. Mentoring from senior employees is com-
are known as “associates,” work helping guests, mon. Bill Marriott, the company’s executive chairman
serving meals, and cleaning rooms. Housekeep- and CEO for 40 years until stepping down, believes
ers represent the largest category of associates. happy employees result in lower costs. Happy
Eight-five percent of associates earn an hourly employees mean Mariott has lower turnover and less
CONTINUED
3
need to train and orient replacement employees, and customers who experienced a problem were more
an experienced workforce provides better customer satisfied with the solution.
service. Marriott regularly surveys its employees to
SOURCES: Based on L. Gallagher, “Why Employees Love Marriott,” Fortune,
measure their engagement. The results show that March 15, 2015, pp. 112–118; company website, “Careers” and “About Marri-
in hotels where employee engagement is higher, ott: Core Values and Heritage,” www.marriott.com, accessed May 18, 2015.
Introduction
Marriott illustrates the key role that human resource management (HRM) plays in deter-
Competitiveness mining the survival, effectiveness, and competitiveness of U.S. businesses. Competitiveness
A company’s ability to refers to a company’s ability to maintain and gain market share in its industry. Marriott’s
maintain and gain mar- human resource management practices are helping support the company’s business strat-
ket share in its industry.
egy and provide services the customer values. The value of a product or service is deter-
mined by its quality and how closely the product fits customer needs.
Competitiveness is related to company effectiveness, which is determined by whether
the company satisfies the needs of stakeholders (groups affected by business practices).
Important stakeholders include stockholders, who want a return on their investment; cus-
tomers, who want a high-quality product or service; and employees, who desire interest-
ing work and reasonable compensation for their services. The community, which wants
the company to contribute to activities and projects and minimize pollution of the envi-
ronment, is also an important stakeholder. Companies that do not meet stakeholders’
needs are unlikely to have a competitive advantage over other firms in their industry.
Human Resource Human resource management (HRM) refers to the policies, practices, and systems that
Management (HRM) influence employees’ behavior, attitudes, and performance. Many companies refer to
Policies, practices, HRM as involving “people practices.” Figure 1.1 emphasizes that there are several impor-
and systems that
influence employees’
tant HRM practices. The strategy underlying these practices needs to be considered to
behavior, attitudes, and maximize their influence on company performance. As the figure shows, HRM practices
performance. include analyzing and designing work, determining human resource needs (HR plan-
ning), attracting potential employees (recruiting), choosing employees (selection), teach-
ing employees how to perform their jobs and preparing them for the future (training and
development), rewarding employees (compensation), evaluating their performance (per-
formance management), and creating a positive work environment (employee relations).
Figure 1.1
Human Resource Management Practices
Strategic HRM
design of work
Compensation
development
management
Analysis and
Performance
Training and
Recruiting
Employee
Selection
relations
planning
Company
HR
Performance
4
CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 5
The HRM practices discussed in this chapter’s opening highlighted how effective HRM
practices support business goals and objectives. That is, effective HRM practices are stra-
tegic! Effective HRM has been shown to enhance company performance by contributing
to employee and customer satisfaction, innovation, productivity, and development of a
favorable reputation in the firm’s community.1 The potential role of HRM in company
performance has only recently been recognized.
We begin by discussing the roles and skills that a human resource management
department and/or managers need for any company to be competitive. The second sec-
tion of the chapter identifies the competitive challenges that U.S. companies currently
face, which influence their ability to meet the needs of shareholders, customers, employ-
ees, and other stakeholders. We discuss how these competitive challenges are influenc-
ing HRM. The chapter concludes by highlighting the HRM practices covered in this
book and the ways they help companies compete.
What Responsibilities and Roles Do

HR Departments Perform?
Only recently have companies looked at HRM as a means to contribute to profitability, LO 1-1
Discuss the roles and
quality, and other business goals through enhancing and supporting business operations. activities of a com-
Table 1.1 shows the responsibilities of human resource departments. How much pany’s human resource
should companies budget for HR and how many HR professionals should a company management function.
Table 1.1
Responsibilities of HR Departments
FUNCTION RESPONSIBILITIES
Analysis and design of work Job analysis, work analysis, job descriptions
Recruitment and selection Recruiting, posting job descriptions, interviewing, testing,
coordination use of temporary employees
Training and development Orientation, skills training, development programs, career
development
Performance management Performance measures, preparation and administration of
performance appraisals, feedback and coaching, discipline
Compensation and benefits Wage and salary administration, incentive pay, insurance, vacation,
retirement plans, profit sharing, health and wellness, stock plans
Employee relations/Labor relations Attitude surveys, employee handbooks, labor law compliance,
relocation and outplacement services
Personnel policies Policy creation, policy communications
Employee data and information systems Record keeping, HR information systems, workforce analytics,
social media, Intranet and Internet access
Legal compliance Policies to ensure lawful behavior; safety inspections, accessibility
accommodations, privacy policies, ethics
Support for business strategy Human resource planning and forecasting, talent management,
change management, organization development
SOURCES: Based on Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2012–13 Edition, “Human Resources
Specialists,” on the Internet at www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm, visited March 26, 2013; SHRM-BNA Survey
no. 66, “Policy and Practice Forum: Human Resource Activities, Budgets, and Staffs, 2000–2001,” Bulletin to Management, Bureau of National Affairs
Policy and Practice Series (Washington, DC: Bureau of National Affairs, June 28, 2001).
6 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage
employ? One study estimates that HR budgets on average are $2,936 per employee.2
High-impact HR teams have one staff person per 64 employees, spend more than the
average HR budget per employee ($4,434 on average per employee), and employ a higher
percentage of HR specialists than more compliance-driven and basic HR organizations.
High-impact HR functions are more integrated with the business, skilled at helping
managers in attracting, building, engaging, and retaining talented employees. They can
adapt quickly to business needs and workforce changes, identify and promote talent from
within the company, and are continuously trying to identify what motivates employ-
ees to help them grow and develop. Also, high-impact HR functions ensure that they
are continuously building the talent and skills of HR professionals necessary to help
the company meet new competitive challenges. The greater cost-per-employee of high-
impact HR functions is offset by the greater savings resulting from reduced turnover and
increased levels of employee engagement.
The HR department is solely responsible for outplacement, labor law compliance,
record keeping, testing, unemployment compensation, and some aspects of benefits
administration. The HR department is most likely to collaborate with other company func-
tions on employment interviewing, performance management and discipline, and efforts
to improve quality and productivity. Large companies are more likely than small ones to
employ HR specialists, with benefits specialists being the most prevalent. Other common
specializations include recruitment, compensation, and training and development.3
Many different roles and responsibilities can be performed by the HR department
depending on the size of the company, the characteristics of the workforce, the indus-
try, and the value system of company management. The HR department may take full
responsibility for human resource activities in some companies, whereas in others it may
share the roles and responsibilities with managers of other departments such as finance,
operations, or information technology. In some companies the HR department advises
top-level management; in others the HR department may make decisions regarding staff-
ing, training, and compensation after top managers have decided relevant business issues.
One way to think about the roles and responsibilities of HR departments is to con-
sider HR as a business within the company with three product lines. Figure 1.2 shows
the three product lines of HR. The first product line, administrative services and
Figure 1.2
HR as a Business with Three Product Lines
Administrative Services and Business Partner Services: Strategic Partner:

Transactions: Developing effective Contributing to business
Compensation, hiring, HR systems and helping strategy based on
and staffing implement business plans, considerations of human
Emphasis: Resource efficiency talent management capital, business capabilities,
and service quality Emphasis: Knowing the readiness, and developing
business and exercising HR practices as strategic
influence —problem solving, differentiators
designing effective systems to Emphasis: Knowledge of HR
ensure needed competencies and of the business,
competition, the market,
and business strategies
SOURCE: Adapted from Figure 1, “HR Product Lines,” in E. E. Lawler, “From Human Resource Management to Organizational Effectiveness,” Human
Resource Management 44 (2005), pp. 165–69.
transactions, is the traditional product that HR has historically provided. The newer HR
products—business partner services and the strategic partner role—are the HR functions
that top managers want HR to deliver.
To ensure that HR is business-focused, Walgreens HR professionals are paired with
functional leaders.4 The HR field organization works to develop strategic talent plans
for each business and helps implement important initiatives such as succession plan-
ning, change management, organizational design, and culture and leadership develop-
ment. The HR director at TAMKO Building Products Inc. helped align the company’s
HR function to business needs.5 She noticed that inexperienced HR professionals were
spending too much time on transactional duties such as payroll and benefits admin-
istration. She wanted them to focus on supplying managers with skilled, well-trained
employees and meaningful data. She revised their training to ensure that they understood
the industry and the skills that the company needed for continued success. She urged her
staff to be proactive (rather than reactive) about offering HR solutions to help managers
avoid or solve workplace problems. The team responded by identifying and implement-
ing a new time-and-attendance tracking system, a virtual onboarding and orientation
process, and a leadership development program.
Strategic Role of the HRM Function

The amount of time that the HRM function devotes to administrative tasks is decreasing,
and its roles as a strategic business partner, change agent, and employee advocate are
increasing.6 HR managers face two important challenges: shifting their focus from cur-
rent operations to strategies for the future and preparing non-HR managers to develop
and implement human resource practices.7 To ensure that human resources contributes
to the company’s competitive advantage many HR departments are organized on the
basis of a shared service model. The shared service model can help control costs and
improve the business relevance and timeliness of HR practices. A shared service model Shared Service
is a way to organize the HR function that includes centers of expertise or excellence, Model
service centers, and business partners.8 Centers of expertise or excellence include HR A way to organize
the HR function that
specialists in areas such as staffing or training who provide their services companywide. includes centers of
Service centers are a central place for administrative and transactional tasks such as expertise, service
enrolling in training programs or changing benefits that employees and managers can centers, and business
access online. Business partners are HR staff members who work with business-unit partners.
managers on strategic issues such as creating new compensation plans or development
programs for preparing high-level managers. Walgreens provides employee relations,
recruiting, and HR data services through a shared services team.9 Walgreens introduced
a website, myHR, that employees can access to get answers to their questions about ben-
efits, HR policies, and talent management. It provides confidential personalized infor-
mation that is easy for employees to access. We will discuss the shared service model in
more detail in Chapter 16.
The role of HRM in administration is decreasing as technology is used for many
administrative purposes, such as managing employee records and allowing employees to
get information about and enroll in training, benefits, and other programs. The availabil-
ity of the Internet has decreased the HRM role in maintaining records and providing
self-service to employees.10 Self-service refers to giving employees online access to, or Self-service
apps which provide, information about HR issues such as training, benefits, compensa- Giving employees
tion, and contracts; enrolling online in programs and services; and completing online online access to HR
information.
attitude surveys. The shift to self-service means that HR can focus more time on
consulting with managers on important employee issues and less time on day-to-day
transactional tasks. For example, U.S. Bancorp implemented PeopleSoft 9.1 human cap-
ital management system, which allows managers to review or approve basic personnel
actions such as terminations, relocations, and salary changes.11 As managers became
more comfortable with the system they were given control over transactions such as
approving bonuses, reviewing resumes, and evaluating job candidates. Managers were
initially resistant to taking on duties that previously were handled by HR, but they
accepted the change because they saw it made it quicker to execute transactions and gave
them more access to workforce data they could use for decision making. HR profession-
als now have more time to work with managers on ensuring the right employee develop-
ment plans are in place, evaluating workforce needs due to retirements or growth, and
ensuring their organizational structures are efficient and effective.
Many companies are also contracting with human resource service providers to con-
duct important but administrative human resource functions such as payroll processing,
as well as to provide expertise in strategically important practice areas such as recruit-
Outsourcing ing. Outsourcing refers to the practice of having another company (a vendor, third party
The practice of having or consultant) provide services. The most commonly outsourced activities include those
another company pro- related to benefits administration (e.g., flexible spending accounts, health plan eligibility
vide services.
status), relocation, and payroll. The major reasons that company executives choose to
outsource human resource practices include cost savings, increased ability to recruit and
manage talent, improved HR service quality, and protection of the company from poten-
tial lawsuits by standardizing processes such as selection and recruitment.12 ADP,
Hewitt, IBM, and Accenture are examples of leading outsource providers.
Goodyear Tire and Rubber Company reenergized its recruitment and hiring practices
through outsourcing recruiting practices.13 The recruiting outsource provider worked
with the company to understand its culture, history, and its employees’ recruitment
experiences. The recruiting outsourcing service provider was able to help Goodyear
streamline the recruiting process through providing hiring managers with online access
to create new job requisitions, providing interview feedback, scheduling interviews, gen-
erating customized job offer letters, and gaining a real-time perspective on job candi-
dates’ progress in the recruitment process. Goodyear recognized several benefits from
outsourcing recruitment including improving the timeliness of job offers, diversity and
quality of new hires, and reducing turnover.
Traditionally, the HRM department (also known as “Personnel” or “Employee Rela-
tions”) was primarily an administrative expert and employee advocate. The department
took care of employee problems, made sure employees were paid correctly, adminis-
tered labor contracts, and avoided legal problems. The HRM department ensured that
employee-related issues did not interfere with the manufacturing or sales of products or
services. Human resource management was primarily reactive; that is, human resource
issues were a concern only if they directly affected the business. That still remains the
case in many companies that have yet to recognize the competitive value of human
resource management, or among HR professionals who lack the competencies and skills
or understanding needed to anticipate problems and contribute to the business strategy.
However, other companies believe that HRM is important for business success and
therefore have expanded the role of HRM as a change agent and strategic partner.
A discussion group of company HR directors and academic thought-leaders reported
that increasingly HR is expected to lead efforts focused on talent management and per-
formance management.14 Also, HR should take the lead in helping companies attract,
develop, and retain talent in order to create the global workforces that companies need
to be successful. HR professionals have to be able to use and analyze data to make a
business case for ideas and problem solutions. In many companies top HR managers
report directly to the CEO, president, or board of directors to answer questions about
how people strategies drive value for the company. For example, at Pitney Bowes, the
executive vice president and chief human resources officer responsibilities include the
development of HR business strategies, strategic talent management, succession plan-
ning, diversity, total rewards and analytics, employee relations, and shared professional
and transactional services.15 During Johnna Torsone’s tenure she has been a trusted busi-
ness partner to four CEOs and several senior leadership teams. She has helped guide the
company through several leadership and business changes. Under her leadership the HR
function has supported Pitney Bowes’ business strategy while maintaining the company
culture and valuing employees. Like other HR leaders Torsone’s biggest challenge is
having the right talent to meet business needs, especially during times of change requir-
ing new and different skills.
Consider how HR has supported the business at Coeur Mining and MGM Resorts
International.16 HR at Coeur Mining helped support the company’s transformation to an
entrepreneurial business culture that allowed employees to make decisions that affected
their daily performance. For example, engineers working at a mine in Nevada didn’t
need to ask for corporate approval to redesign roads that helped improve productivity. A
new performance management process was introduced (a culture of achievement) that
eliminates ratings and instead reinforces frequent conversations between managers and
employees. Together they set goals and employees are held accountable for achieving
them. This gives employees full responsibility for their performance.
At MGM Resorts International employees worldwide are encouraged to ask questions,
challenge policies, and improve practices. HR works with both top-level executives and
front-line employees to help generate ideas that generate additional revenue, save the
company money, and improve customers’ experiences. HR coordinates meetings once a
month with directors and vice presidents in which topics such as operations and innova-
tion are discussed. The executives work in teams brainstorming ideas, choosing one to
work on, and presenting it to the company’s chief operations officer. One team recom-
mended stopping the practice of branding water bottles with individual property names
and adopting the brand called M Life. This saved the company $400,000. HR has created
focus groups of front-line employees to generate ideas which are communicated to prop-
erty managers. Also, HR developed an employee directory containing the e-mail and
phone numbers of all employees including senior leaders. This empowers employees to
communicate directly with senior managers. As a result of these efforts valet employees
at The Mirage resort implemented several ideas including calling guests by their names
and making changes to more quickly retrieve cars. This resulted in an increase in guest
services scores and in employee perceptions of trust and empowerment measured on
employee opinion surveys.
Table 1.2 provides several questions that managers can use to determine if HRM is
playing a strategic role in the business. If these questions have not been considered, it
is highly unlikely that (1) the company is prepared to deal with competitive challenges
or (2) human resources are being strategically used to help a company gain a competi-
tive advantage. The bottom line for evaluating the relationship between human resource
management and the business strategy is to consider this question: “What is HR doing
to ensure that the right people with the right skills are doing the right things in the jobs
that are important for the execution of the business strategy?”17 We will discuss strategic
human resource management in more detail in Chapter 2.
Some companies that want managers to have more accountability for employees,
believe that traditional HR departments are unnecessary because they inhibit innovation
Table 1.2
Questions to 1. What is HR doing to provide value-added services to internal clients?
Ask: Are Human 2. Do the actions of HR support and align with business priorities?
Resources Playing 3. How are you measuring the effectiveness of HR?
a Strategic Role in 4. How can we reinvest in employees?
the Business? 5. What HR strategy will we use to get the business from point A to point B?
6. From an HR perspective, what should we be doing to improve our marketplace
position?
7. What’s the best change we can make to prepare for the future?
8. Do we react to business problems or anticipate them in advance?
SOURCES: Based on A. Halcrow, “Survey Shows HR in Transition,” Workforce, June 1988, p. 74; P. Wright,
Human Resource Strategy: Adapting to the Age of Globalization (Alexandria, VA: Society for Human Resource
Management Foundation, 2008); J. Mundy, “Be a Strategic Performance Consultant,” HR Magazine, March 2013,
pp. 44–46.
through creating unnecessary and inefficient policies and procedures.18 In these compa-
nies important payroll, benefits, and other HR processes are automated or outsourced.
For example, managers at Ruppert Landscape with 900 employees working in differ-
ent markets across the United States perform human resource responsibilities such as
recruiting employees and explaining the company’s retirement plan. Its managers spend
about 5% of their time on human resources. The CEO feels that local managers are in
a better position to understand and solve employee problems than an HR professional
located in the company’s Maryland headquarters. However, there are many advantages
to having HR professionals and an HR department. Managers often lack the specialized
knowledge necessary to understand employment laws, how to identify potential employ-
ees, determine skills and salaries for positions, and develop current employees. HR
professionals can create systems to avoid legal liability, counsel employees, and coach
managers how to identify, retain, and develop talent.
Consider the role of HR at Tesla Motors, an automotive company with all of the
characteristics of a high-tech company.19 Tesla builds cars, manufactures electric power
trains for other car companies, operates car-charging stations around the world, and sells
its cars directly to customers. The luxurious Model S has won numerous awards and
Tesla plans to introduce a more affordable electric car soon. HR’s role at Tesla is to
support the business by finding and helping to retain the most talented employees and
ensure they understand and believe in the company’s fast-paced culture, which requires
long workdays and constant change. They do this in several different ways. HR seeks
talented employees who have a positive, self-starting attitude and have tried to improve
processes in whatever areas they have worked in. To find talent to fill a robotics team the
HR staffing team looked beyond the traditional sources, such as other automakers, and
instead focused on robotics competitions at colleges and different industries such as bio-
technology which employ robotic-programming specialists. HR worked with employees
from legal, security, and environmental health and safety departments and a small group
of employees from company stores and the factory to develop an employee handbook.
The handbook, known as the “anti-handbook handbook,” captures in just four pages
written in a conversational style what Tesla stands for and what it is like to work there.
For example, the employee attendance policy emphasizes that employees should be
the kind of person their work team can rely on. Emphasis is placed on employees being at
work when they are supposed to be, because the team can’t get things done if employees
are absent. HR supports Tesla’s emphasis on open communications through the “Answer
Bar” at its Freemont, California, factory. At the “Answer Bar” employees can walk up to
HR staffers and ask questions they have about benefits or the company. Tesla does con-
duct employee surveys but they encourage employees to use the “Answer Bar” to pro-
vide personal feedback. This allows Tesla to quickly make changes when new employee
programs are introduced. HR has developed training that meets company and employee
needs for just-in-time learning that is meaningful, short, holds employees’ attention, and
is provided just-in-time. For example, factory employees can use their smartphones next
to their workstations to scan codes which allow them to view short tutorial videos on
job tasks.
HRM may be the most important lever for companies to gain a competitive advan-
tage over both domestic and foreign competitors. We believe this is because HRM prac-
tices are directly related to companies’ success in meeting competitive challenges. These
challenges and their implications for HRM are discussed later in the chapter.
DEMONSTRATING THE STRATEGIC VALUE OF HR:

HR ANALYTICS AND EVIDENCE-BASED HR
For HR to contribute to business goals there is increasing recognition that it is neces-
sary to use data to answer questions such as “Which practices are effective?” “Which
practices are cost effective?” and to project the outcomes of changes in practices on
employees’ attitudes, behavior, and company profits and costs. This helps show that
time and money invested in HR programs are worthwhile and HR is as important to the
business as finance, marketing, and accounting! Evidence-based HR refers to the dem- Evidence-Based HR
onstration that human resources practices have a positive influence on the company’s Demonstrating that
bottom or key stakeholders (employees, customers, community, shareholders). Evidence- human resource
practices have a posi-
based HR requires the use of HR or workforce analytics. HR or workforce analytics tive influence on the
refers to the practice of using quantitative methods and scientific methods to analyze company’s bottom
big data. line or key stakehold-
Big data refers to information merged from human resource databases, corporate ers (employees, cus-
financial statements, employee surveys, and other data sources to make evidence-based tomers, community,
shareholders).
human resource decisions and show that HR practices influence the organization’s bot-
tom line, including profits and costs.20 Intermountain Healthcare used big data and ana-
HR or Workforce
lytics to help reduce turnover.21 The company was able to correlate departments where Analytics
employees had the fewest work hours and those that had the highest turnover rates. Ana- The practice of using
lytics software provides “heat maps” or visualizations of relationships in the data. The data from HR data-
correlation between these two items showed that the fewer hours employees worked the bases and other data
more likely they were to leave. This showed managers that turnover was not due to poor sources to make
evidence-based human
orientation or lack of training. Rather, the data suggested increasing the workers’ hours, resource decisions.
which has resulted in reduced turnover.
Big data and workforce analytics helped Johnson Controls access and understand data
Big Data
related to each business unit’s talent.22 Each business unit completes a “People Score- Information merged
card” that shows the flow of talent in, up, and out of the company. This includes data from a variety of
on headcount, retentions, terminations, new hires, and promotions. Managers can access sources, including HR
this data on dashboards which make it easy to “see” the data. Different hiring, retention, databases, corporate
financial statements,
and promotion scenarios can be modeled by each business unit to help make decisions
and employee surveys,
regarding their workforce goals. For example, based on the modeling results goals for to make evidence-
hiring and retaining employees in specific positions or women and minorities can be set. based HR decisions
To analyze data about how learning contributed to the success of their sales force, Suc- and show that HR
cessFactors used data from three systems: customer relationship management, learning practices can influence
the organization’s bot-
and performance management, and employee records.23 Customer relations data include
tom line.
number and size of sales. Learning data included courses taken and self-evaluation of
training effectiveness. Performance data included managers’ performance ratings and

learning plans. Employee records included sales experience and hire date. They ana-
lyzed the performance and number and value of sales made by employees who com-
pleted training with those who did not.
Because evidence-based HR and analytics are important for showing the value of HR
practices and how they contribute to business strategy and goals, throughout each chap-
ter of the book we provide examples of companies’ use of workforce analytics to make
evidenced-based HR decisions or to evaluate HR practices.
THE HRM PROFESSION: POSITIONS AND JOBS

There are many different types of jobs in the HRM profession. Table 1.3 shows vari-
ous HRM positions and their salaries. A survey conducted by the Society of Human
Resource Management to better understand what HR professionals do found that the pri-
mary activities of HR professionals are performing the HR generalist role (providing a
wide range of HR services), with fewer involved in other activities such as the HR func-
tion at the executive level of the company, training and development, HR consulting,
and administrative activities.24 Projections suggest that overall employment in human
resource–related positions is expected to grow by 21% between 2010 and 2020, much
faster than the occupational average.25
Salaries for HR professionals vary according to position, level of experience, train-
ing, location, and firm size. As you can see from Table 1.3, some positions involve work
in specialized areas of HRM like recruiting, training, or labor and industrial relations.
HR generalists usually make between $39,000 and $63,500 depending on their experi-
ence and education level. HR generalists perform a wide range of activities including
recruiting, selection, training, labor relations, and benefits administration. HR specialists
work in one specific functional area such as training or compensation. Although HR
generalists tend to be found in smaller companies, many mid- to large-size companies
employ HR generalists at the plant or business levels and HR specialists at the corporate,
product, or regional levels. Most HR professionals chose HR as a career because they
found HR appealing as a career, they wanted to work with people, or they were asked by
chance to perform HR tasks and responsibilities.26
Table 1.3
POSITION SALARY
Median Salaries for
HRM Positions
Top HR Executive $225,026
Global HR Manager 116,161
Management Development Manager 109,969
Health and Safety Manager 98,636
Employee Benefits Manager 92,121
HR Manager 90,865
Mid-level Labor Relations Specialist 75,329
Campus Recruiter 62,500
Entry-level HRIS Specialist 52,069
HR Generalist 50,985
Compensation Analyst 56,877
Entry-level Employee Training Specialist 47,680
SOURCE: Based on data from Salary Wizard, www.salary.com, accessed May 14, 2015.
EDUCATION AND EXPERIENCE

The HR profession will likely continue to be in transition in the near future.27 A large
number of HR professionals who will be retiring soon have held mainly administrative
roles with little previous formal education in human resources. As is currently the case
for many HR professionals, the new generation of HR professionals will likely have a
four-year college degree and many will have completed a graduate HR degree. Business
is typically the field of study (human resources or industrial relations) although some
HR professionals have degrees in the social sciences (economics or psychology), the
humanities, or law. Those who have completed graduate work have master’s degrees
in HR management, business management, industrial organizational psychology, or a
similar field. Human resource professionals can be expected to have both strategic and
tactical roles. For example, a senior HR role will likely involve developing and support-
ing the company culture, employee recruitment, retention and engagement, succession
planning, and designing the company’s overall HR strategy. Junior HR roles will handle
all of the transactions related to paperwork, benefits and payroll administration, answer-
ing employee questions, and data management.
Professional certification in HRM is less common than membership in professional
associations. A well-rounded educational background will likely serve a person well in
an HRM position. As one HR professional noted, “One of the biggest misconceptions is
that it is all warm and fuzzy communications with the workers. Or that it is creative and
involved in making a more congenial atmosphere for people at work. Actually it is both
of those some of the time, but most of the time it is a big mountain of paperwork which
calls on a myriad of skills besides the ‘people’ type. It is law, accounting, philosophy,
and logic as well as psychology, spirituality, tolerance, and humility.”28
COMPETENCIES AND BEHAVIORS

Many experts acknowledge that top-level HR professionals are generalists who have
expertise in benefits, compensation, and labor relations and focus on important issues
such as employee engagement and managing company culture.29 However, they lack
business acumen, the expertise in relating HR to real-world business needs, that is, they
don’t know how key decisions are made, and are unable to determine why employees or
parts of the company fail to meet performance goals. This is congruent with the belief of
companies’ top HR leaders that developing the skills of professionals working in HR is
an urgent need.30 Less than 10% of HR leaders believe that their functional teams have
the skills needed to help companies meet their current competitive challenges. Consider
the requirements that Netflix wanted when it was looking for a new HR director.31 Net-
flix wanted someone who puts business first, customer second, and talent third. It did
not want a change agent, organizational development practitioner, a SHRM certificate,
or a people person. HR professionals should consider themselves as business people, not
morale boosters. They need to be able to consider key questions, such as, What’s good
for the company? How do we communicate that to employees? How can we help every
employee understand what is meant by high performance?
HR professionals need to have the nine competencies shown in Figure 1.3. These
are the most recent competencies developed by the Society for Human Resource
Management (SHRM). SHRM developed the competencies based on a literature review,
input from over 1,200 HR professionals, and a survey of over 32,000 respondents.32
The full version of the competency model, which can be found on the SHRM website
(www.shrm.org), provides more detailed information on each competency, behaviors,
and standards for proficiency for HR professionals at entry, mid, senior, and executive
Figure 1.3
Competencies and Example Behaviors for HR Professionals
Example behaviors:
Remains current on
relevant laws, legal
rulings, and regulations;
develops and
Example behaviors: utilizes best practices Example behaviors:
Demonstrates a capacity for Provides customer service to
understanding the business operations organizational stakeholders,
and functions within the organization, Human Resource insures alignment within HR
understands organizational metrics Technical Expertise when delivering services and
and their relationship to business and Practice information to the organization
success. The ability to apply the
principles of human
resource management Relationship
to contribute to the Management
Business Acumen success of the business The ability to manage
Ability to understand business interactions with and
functions and metrics within between others with the
the organization and industry specific goal of providing
service and organizational
success
Example behaviors:
Serves as a workforce
Example behaviors: Critical Evaluation
Consultation and people management
Gathers critical information, Skill in interpreting information expert, develops
makes sound decisions to determine return on Provide guidance to stakeholders consultative and
based on evaluation of investment and organizational such as employees and leaders coaching skills
available information impact in making recommendations Competencies seeking expert advice on a
and business decisions variety of circumstances and
for HR situations
Professionals
Organizational Leadership
Ethical Practice and Navigation
Integration of core values, The ability to direct initiatives
integrity, and accountability and processes within the
throughout all organizational organization and gain buy-in
and business practices from stakeholders
Example behaviors: Example behaviors:
Maintains confidentiality, Global and Cultural Communications Fosters collaboration,
acts with personal, Effectiveness The ability to effectively exhibits behaviors consistent
professional, and Managing human exchange and create a free with and conforming to the
behavioral integrity resources both within flow of information with and organization culture
and across boundaries among various stakeholders
at all levels of the organization
to produce meaningful outcomes
Example behaviors: Example behaviors:

Embraces inclusion, Provides constructive feedback
works effectively with effectively, helps managers
diverse cultures and communicate not just on HR
populations issues
SOURCE: Based on SHRM Competency Model, Society for Human Resource Management, 2012, accessed from www.shrm.org, July 1, 2015.
career stages. Demonstrating these competencies can help HR professionals show man-
agers that they are capable of helping the HR function create value, contribute to the
business strategy, and shape the company culture. They also help the HR department
effectively and efficiently provide the three HR products discussed earlier and shown
in Figure 1.2. These competencies and behaviors show that although the level of exper-
tise required may vary by career level, all HR professionals need to have a working
knowledge of strategic business management, human resource planning, development,
compensation and benefits, risk management (safety, quality, etc.), labor relations, HR
technology, evidence-based decision making, and global human resources. HR profes-
sionals need to be able to interact and coach employees and managers, yet engage in
ethical practice through maintaining confidentiality and acting with integrity. Providing
support for the usefulness and validity of the SHRM competency model, research shows
that HR professionals who have a higher level of proficiency on the SHRM competen-
cies do perform better in their jobs.33
Many top-level managers and HR professionals believe that the best way to develop
competencies of the future effective professionals needed in HR is to train employees
or put them into experiences that help them understand the business and HR’s role in
contributing to it. For example, an HR leader at Rivermark Community Credit Union
developed skills in reading and interpreting financial data by spending time with the
Chief Financial Officer.34 This has allowed her to make more contributions in senior-
level leader meetings.
Consider how Google and Southwest Airlines are developing the right mix of HR
skills and experience to best contribute to the business.35 At Google, approximately one-
third of the HR team’s employees have HR backgrounds and expertise in specialty skill
areas such as employment law, compensation, and benefits. Another one-third have little
or no human resource experience and were recruited from consulting firms or within
Google’s engineering or sales functions. The final one-third is a workforce analytics
group with employees who have doctorates in finance, statistics, and organizational
psychology. Each group has its strengths. For example, HR staff who have limited HR
experience are very skilled in problem solving and how the company works outside HR.
To capitalize on the unique perspectives and skills that each group brings to working
on human resource issues, the vice president of global people operations encourages
interactions and knowledge sharing among the entire group of team members. Google
develops human resources or key people operations staff through a year-long training
program that includes HR specialist training, a business curriculum, and development of
skills related to working with clients, communicating with senior executives, and solving
business problems. The training is designed for HR employees with at least two years of
experience and is taught by People Operations department employees. Google recruits
top MBA program graduates, enticing them to consider HR because the opportunity to
influence change in the company is greater than is common in other specialty areas and
career advancement is faster.
The primary professional organization for HRM is the Society for Human Resource
Management (SHRM). SHRM is the world’s largest human resource management asso-
ciation with more than 250,000 professional and student members throughout the world.
If you are interested in HR, you should join SHRM! SHRM provides education and
information services, conferences and seminars, government and media representation,
and online services and publications (such as HR Magazine and free videos and reports
from the SHRM Foundation). You can visit SHRM’s website to see their services at
www.shrm.org.
Competitive Challenges Influencing

Human Resource Management
Three competitive challenges that companies now face will increase the importance of
human resource management practices: the challenge of sustainability, the global chal-
lenge, and the technology challenge. These challenges are shown in Figure 1.4.
As you will see in the following discussion, these competitive challenges are directly
linked to the HR challenges that companies are facing including developing, attract-
ing, and retaining talented employees, finding employees with the necessary skills, and
breaking down cultural barriers to create a global company.36
Figure 1.4 Competing through Competing through Competing through

Competitive Sustainability Globalization Technology
Challenges
Pr eturn
Influencing U.S.
Companies
Pr Pr
pr Cr
Incr
ce
pr
U.S. Business Competitiveness
THE SUSTAINABILITY CHALLENGE

Traditionally, sustainability has been viewed as one aspect of corporate social responsi-
bility related to the impact of the business on the environment.37 However, we take a
Sustainability broader view of sustainability. Sustainability refers to the company’s ability to meet its
A company’s ability to needs without sacrificing the ability of future generations to meet their needs.38 Organi-
meet its needs without zations pursuing a sustainable strategy pursue the “triple bottom line”: economic, social,
sacrificing the ability of
future generations to
and environmental benefits. Company success is based on how well the company meets
meet their needs. the needs of its stakeholders. Stakeholders refers to shareholders, the community, cus-
tomers, employees, and all of the other parties that have an interest in seeing that the
Stakeholders company succeeds. Sustainability includes the ability to deal with economic and social
The various inter-
est groups who have
changes, practice environmental responsibility, engage in responsible and ethical busi-
relationships with, and ness practices, provide high-quality products and services, and put in place methods to
consequently, whose determine if the company is meeting stakeholders’ needs; that is, HR systems that create
interests are tied to the skills, motivation, values, and culture that help the company achieve its “triple bot-
the organization (e.g., tom line” and insure the long-term benefits for the organizations stakeholders.
employees, suppliers,
customers, sharehold-
The economy has important implications for human resource management. Some key
ers, community). statistics about the economy and the workforce are shown in Table 1.4. These include
the structure of the economy, the development and spread of social networking, and
LO 1-2 growth in professional and service occupations. Growth in these occupations means that
Discuss the implications skill demands for jobs have changed, with knowledge becoming more valuable. Not only
of the economy, the
makeup of the labor have skill demands changed, but remaining competitive in a global economy requires
force, and ethics for demanding work hours and changes in traditional employment patterns. The creation of
company sustainability. new jobs, aging employees leaving the workforce, slow population growth, and a lack
Table 1.4
Highlights of Employment Projections
-
tion of jobs across industries is projected to be similar in 2020.
replace workers who retire or leave an occupation.
increase in total employment in 2022.
SOURCE: D. Sommers and J. Franklin, “Overview of Projections to 2020,” Monthly Labor Review, January 2012, pp. 3–20; C. Lockard and M. Wolf,
“Occupation Employment Projections to 2020,” Monthly Labor Review, January 2012, pp. 84–108; Bureau of Labor Statistics, U.S. Department of
Labor, “Employment Projections: 2012–2022,” news release, www.bls.gov, accessed February 25, 2015.
of employees who have the skills needed to perform the high-demand jobs means that
companies need to give more attention to HR practices that influence attracting and
retaining employees.
Economic Cycles
Today, there are many positive signs that the U.S. economy is experiencing positive
momentum.39 Employers are adding jobs at the fastest rate since the late 1990s. The
unemployment rate was 5.4% in April 2015, the lowest in seven years. Consumer spend-
ing benefited from steady job growth and lower gasoline prices and rose in the fourth
quarter of 2014 at the fastest rate since the first quarter of 2006.40 Growth in the Gross
Domestic Product (GDP) was 2.4% higher than the increase in 2013, and U.S. manufac-
turing output moved past its prerecession levels. Surveys suggest that company CEOs
are optimistic about the U.S. economy’s growth prospects.41 Hiring continues to be a pri-
ority for CEOs with two-thirds of them planning to add new employees in the next year.
However, there are several threats to continued economic growth.42 Despite the low
unemployment rate, employee pay is slowly increasing, which can ultimately result in
reduced consumer spending. Broader measures of unemployment including the numbers
of involuntary part-time employees and long-term unemployed were down during 2014
but still higher than before the recession. Over 6.6 million employees were in part-time
jobs for economic reasons, such as their pay was cut or they couldn’t find full-time work.
Labor force participation has increased to approximately 63% but it is still close to its
lowest level since the 1970s. Also, there are concerns that the Federal Reserve Bank
will begin to raise the borrowing rate for federal funds, which has been near zero since
the end of 2008. The lowest funds rate in history was provided as an emergency mea-
sure during the financial crisis several years ago, but the economy hasn’t shown that it
can grow without it. A fund rate hike could affect growth, inflation, and exchange rates
throughout the world.
There are several implications of this economic period for human resource manage-
ment. Despite companies looking to add new employees to expand operations, replace
retiring employees, or keep up with increased demand for their products and services,
many may be unable to find new employees with the skills they need.43 Also, valuable
high-performing employees may be looking to change jobs for higher wages or better
career opportunities. As a result, companies are having problems attracting and retain-
ing talented employees. Many are increasing wages, paying for benefits, and provid-
ing training as part of the solution. For example, Panera Bread, McDonald’s, Walmart,
Starbucks, Target, and Aetna all raised employees’ pay recently.44 M&M Manufacturing
improved its benefits to attract and retain employees.45 M&M increased coverage of
employees health care premiums from 50 to 80%, and it started matching contributions
to employees’ retirement plans.
In addition to raising pay, Starbucks has focused on learning as a way to attract and
retain employees and show it is committed to their success. Starbucks College Achieve-
ment Plan covers employees’ tuition to earn an online bachelor’s degree from Arizona
State University.46 Employees can choose from 50 different degree programs. The only
requirements are that employees have to be working at least 20 hours each week, are
U.S.-based working in support centers, plants, or at any of company-operated stores
(including Teavana, La Boulange, Evolution Fresh, and Seattle’s Best Coffee stores),
and do not yet have a bachelor’s degree. Employees have no commitment to remain at
Starbucks after they graduate.
HR programs and the HR function are under pressure to relate to the business strat-
egy and show a return on investment. Customer focus needs to be included in all HRM
practices. New technology means that administrative and transactional HR activities will
be delivered via technology, creating less need for HR professionals to provide these
activities. The aging workforce combined with reduced immigration because of security
concerns may lead employers to focus more on retraining employees or encouraging
older, skilled workers to delay retirement or work part-time.47
Table 1.4 highlights 2012–2022 employment projections. Our discussion of employ-
ment projections is based on the work done by the U.S. Bureau of Labor Statistics.48
Population is the most important factor in determining the size and composition of the
labor force. The size of the labor force will increase but less than levels experienced
over the previous 10 years. The median age of the workforce will be the highest ever.
Because the U.S. population is expected to become increasingly diverse so is the work-
force. Immigration is expected to add 1.5 million persons every year from 2012–2022
to the U.S. population. As a result every race and ethnicity will grow from 2012–2022
but the share of nonwhite Hispanics is expected to decline (we discuss the diversity and
aging of the workforce in more detail later in this chapter).
The importance of the service sector in the U.S. economy is emphasized by consider-
ing industry and occupational employment rates and future projections. Almost 80% of
jobs are in the service sector. Currently, the largest percentage of jobs are found in health
care and social assistance, leisure and hospitality, state and local government, profes-
sional and business services, and retail trade. Most of the employment growth between
2012 and 2022 is expected to be in service-providing occupations.49 Employment in con-
struction is the second highest projected employment increase resulting in 1.6 million
jobs between 2012 and 2022.
Table 1.5 provides examples of the largest percentage growth in jobs from 2012–
2022. Of the 30 fastest-growing occupations, 14 are related to health care (such as per-
sonal care aides, home health aides, genetic counselors, and physical therapists) and
5 are related to construction (insulation workers, brickmasons and blockmasons, elec-
trical, tile, and marble setter helpers). The growth in health care reflects the inpatient
and outpatient medical care that is needed for the aging U.S. population. The growth in
construction occupation is related to replacement needs, growth in the economy, and the
need to repair the aging U.S. infrastructure.
Table 1.5
EMPLOYMENT
Examples of the
CHANGE 2012–2022
Occupations with
the Largest Growth
MOST SIGNIFICANT
in Jobs
NUMBER (IN EDUCATION OR
OCCUPATION THOUSANDS) PERCENT TRAINING
Industrial-organizational 1 53 Master’s degree

psychologist
Personal care aides 581 49 Short-term, on-the-job
training
Home health aides 424 49 Short-term, on-the-job
training
Insulation workers 14 47 Apprenticeship
Interpreters and translators 29 46 Bachelor’s degree
Diagnostic medical 27 46 Associate’s degree
sonographers
Helpers—brick masons, 11 43 Short-term, on-the-job
block and stone masons, training
tile and marble setters
Occupational therapy 13 43 Associate’s degree
assistants
Genetic counselors 1 41 Master’s degree
Physical therapist assistants 29 41 Associate’s degree
SOURCE: Based on Bureau of Labor Statistics, U.S. Department of Labor, “Employment Projections: 2012–2022,”
News Release, www.bls.gov, accessed February 25, 2015.
All major occupations are projected to gain jobs between 2012 and 2022 except farm-
ing, fishing, and forestry occupations. Six industries are projected to have decreases
in employment—manufacturing; federal government; agriculture; forestry, fishing, and
hunting; information; and utilities. This loss of jobs and workers is due to several factors
including technological improvements, which means fewer workers are needed; foreign
competition; industry consolidation; cost-cutting and more efficient work processes; and
decrease in the number of workers who want to work in these occupations.
Education plays an important role in meeting occupational or job requirements and in
employee earnings. Slightly less than two-thirds of the 30 fastest-growing occupations
require education beyond high school—at least an associate degree or higher. Occupa-
tions requiring education beyond high school are expected to grow faster than those
requiring a high school diploma or less (14% vs. 9%). The median annual wage for jobs
requiring post-secondary education is $30,000 higher than jobs with no post-secondary
education. Today the median annual wage for jobs requiring no post-secondary educa-
tion is estimated to be approximately $27,670 compared to $35,170 for those with a
high school diploma, $57,590 for an associate’s degree, $67,140 for a bachelor’s degree,
and $96,420 for a doctorate degree. The discrepancy in earning is expected to continue
in the future. Occupations that require an apprenticeship for training, including many
construction jobs, are projected to grow approximately 22% between 2012 and 2022,
which is faster than for jobs requiring any other type of on-the-job training. The median
annual wage for jobs requiring an apprenticeship is $45,440, which is higher than for
jobs requiring a high school diploma but less than for jobs requiring post-secondary
education. Although they pay less than occupations requiring education beyond high
school, occupations that do not typically require post-secondary education will continue
to grow. They are projected to add 8.8 million jobs between 2012 and 2022—accounting
for more than half of all new jobs.
Despite the availability of unemployed and underemployed workers and new high
school and college graduates, companies are having a difficult time finding employ-
ees with the right skills. Several studies illustrate how the skills deficit is influencing
companies and identify what skills are in short supply.50 Although many businesses
plan to hire new employees, they are concerned that they will not be able to find the
talent needed to capitalize on investments they are making in new technology and
other strategic capabilities. Skills deficits are not limited to any one business sector,
industry or job. Nearly half of CEOs of U.S. businesses believe that a significant skills
gap exists that will result in loss of business, revenue, decreased customer satisfaction,
or a delay in new products or services. The Manufacturing Institute found that 80%
of manufacturers report a moderate or serious shortage of qualified applicants for
skilled and highly skilled production positions. The Organization for Economic Coop-
eration and Development found that the United States ranked 21 out of 23 countries
in math and 17 out of 19 countries in problem solving. But skills deficits are not just
a problem facing U.S. companies. They are occurring around the world. For example,
in Italy and Spain nearly 3 out of 10 adults perform at or below the lowest profi-
ciency level in literacy and numerical ability. One study found that regardless of their
education level only half the companies surveyed rated new employees as adequately
prepared for work. Companies’ greatest basic skills needs were in reading, writing,
and math. Many employers also feel that they are having a difficult time finding
employees with the right “soft skills” such as work ethic, teamwork, and communica-
tions that they believe are more important for success on the job than job-specific or
“hard skills” such as blueprint reading or writing. Interpersonal skills, the ability to
learn, creativity, and problem solving are especially important in the service economy
because employees have responsibility for the final product or service provided. There
is especially a shortage of employees with skills in science, technology, engineering,
and math (STEM skills).
Companies are partnering with unions, elementary and secondary schools, and col-
leges and universities to develop the necessary skills needed in today’s workforce.51 For
example, an upturn in the construction industry following the recession has resulted in
contractors having a difficult time finding the skilled workers they need. As result, local
trade unions are advertising apprenticeship programs which can help train much-needed
electricians, plumbers, iron workers, roofers, and pipefitters. The Greater Houston Part-
nership, which includes Exxon Mobil, Royal Dutch Shell PLC, and BP PLC, is work-
ing with pre-kindergarten classes to improve early childhood education. Siemens AG,
an engineering company and manufacturer of medical equipment, wanted to expand
its energy plant in Charlotte, North Carolina, which would require hiring an additional
1,500 employees. Although over 10,000 job applications were received, most did not
have the required STEM skills. As a result, Siemens partnered with a community college
in the area to develop a specialized course to prepare potential employees for jobs in the
energy plant. Siemens put 3,500 of the 10,000 job applicants through the program. Four
hundred were employed by Siemens and the others were encouraged to use their new
STEM skills to find jobs with other companies.
Increased Value Placed on Intangible Assets and Human Capital. Today more and
more companies are interested in using intangible assets and human capital as a way to
gain an advantage over competitors. A company’s value includes three types of assets
that are critical for the company to provide goods and services: financial assets (cash and
securities), physical assets (property, plant, equipment), and intangible assets. Table 1.6
provides examples of intangible assets. Intangible assets include human capital, cus- Intangible Assets
tomer capital, social capital, and intellectual capital. Intangible assets are equally or even A type of company
more valuable than financial and physical assets but they are difficult to duplicate or asset including human
capital, customer capi-
imitate.52 By one estimate, up to 75% of the source of value in a company is in intangible tal, social capital, and
assets.53 intellectual capital.
Intangible assets have been shown to be responsible for a company’s competitive
advantage. Human resource management practices such as training, selection, perfor-
mance management, and compensation have a direct influence on human and social cap-
ital through influencing customer service, work-related know-how and competence, and
work relationships. Consider the effort that Macy’s put into developing human capital,
social capital, and customer capital.54 Almost half of Macy’s department store customer
complaints are focused on interactions with sales associates. To cut costs to survive dur-
ing the recession Macy’s closed stores and invested in technology to improve efficiency
which diverted attention away from customer service. But now Macy’s is making a con-
siderable investment in training its sales associates to provide better customer service.
The new training program requires new sales associates to attend a three-hour training
session and includes refresher courses and coaching from managers when they are work-
ing on the sales floor. The Magic Selling Program (“Magic” stands for meet and make
a connection, ask questions and listen, give options and advice, inspire to buy, and cele-
brate the purchase) is designed to help sales associates make more personal connections
with shoppers. Positive interactions with sales associates contribute to the number of
Table 1.6
Human capital Examples of
Intangible Assets
Customer capital
Social capital
Intellectual capital
SOURCES: Based on L. Weatherly, Human Capital: The Elusive Asset (Alexandria, VA: 2003 SHRM Research
Quarterly); E. Holton and S. Naquin, “New Metrics for Employee Development,” Performance Improvement Quarterly
17 (2004), pp. 56–80; M. Huselid, B. Becker, and R. Beatty, The Workforce Scorecard (Boston: Harvard University
Press, 2005).
items that a customer purchases and can help enhance Macy’s service reputation as cus-
tomers share experiences on social network sites such as Twitter and Facebook. Macy’s
effort has paid off in strong sales growth.
Intangible assets have been shown to be related to a company’s financial performance,
productivity, and innovation.55 The American Society for Training and Development
found that companies that invested the most in training and development had a share-
holder return 86% higher than companies in the bottom half and 46% higher than the
market average.
One way companies try to increase intangible assets is through attracting, developing,
Knowledge Workers and retaining knowledge workers. Knowledge workers are employees who contribute to
Employees who own the company not through manual labor, but through what they know about customers or
the intellectual means a specialized body of knowledge. Employees cannot simply be ordered to perform tasks;
of producing a product
or service.
they must share knowledge and collaborate on solutions. Knowledge workers contribute
specialized knowledge that their managers may not have, such as information about cus-
tomers. Managers depend on them to share information. Knowledge workers have many
job opportunities. If they choose, they can leave a company and take their knowledge to
a competitor. Knowledge workers are in demand because companies need their skills and
jobs requiring them are growing (see Table 1.5).
Emphasis on Empowerment and Continuous Learning

To completely benefit from employees’ knowledge requires a management style that
Empowering focuses on developing and empowering employees. Empowering means giving employ-
Giving employees ees responsibility and authority to make decisions regarding all aspects of product devel-
responsibility and opment or customer service.56 Employees are then held accountable for products and
authority to make
decisions.
services; in return, they share the rewards and losses of the results. For empowerment to
be successful, managers must be trained to link employees to resources within and out-
side the company (people, websites, etc.), help employees interact with their fellow
employees and managers throughout the company, and ensure that employees are
updated on important issues and cooperate with each other. Employees must also be
trained to understand how to use the Web, e-mail, and other tools for communicating,
collecting, and sharing information.
As more companies become knowledge-based, it’s important that they promote con-
Learning tinuous learning at the employee, team, and company levels. A learning organization
Organization embraces a culture of lifelong learning, enabling all employees to continually acquire
A culture of lifelong and share knowledge. Improvements in product or service quality do not stop when for-
learning in which
employees are continu-
mal training is completed.57 Employees need to have the financial, time, and content
ally trying to learn new resources (courses, experiences, development opportunities) available to increase their
things. knowledge. Managers take an active role in identifying training needs and helping to
ensure that employees use training in their work. Also, employees should be actively
encouraged to identify problems, make decisions, continuously experiment, and improve.
At Cheesecake Factory Inc., which operates about 170 restaurants in the United
States, the focus is on driving continuous learning related to guest satisfaction, perfect
food, and execution of the many dishes on its menu.58 To do so, the company is creat-
ing interactive learning content that employees access at work. Through the VideoCafe
employees can upload and share short videos on topics such as customer greetings and
food preparation. The company plans to develop interactive games including a simu-
lation for building the perfect hamburger. Hands-on employee-driven learning is sup-
ported by managers observing employees and providing coaching and feedback to help
them develop new skills and reinforce their use in the workplace.
Social collaboration and social networking technology are also contributing to the
development of a learning organization.59 CareSource uses Wikis, websites with content
created by users, and discussion boards to encourage employees to engage in critical
thinking and learn from each other by sharing ideas about how to apply skills that they
have acquired in formal training programs. Coldwell Banker encourages its real estate
professionals to develop and share videos of best sales techniques using the company’s
video portal. Coldwell Banker also uses communities of practice to encourage employ-
ees to share best practices and provide insights on how to best approach specific types
of job assignments. inVentiv Health Inc. uses tools on Facebook to help sales employees
share information and update lessons learned.
Need to Adapt to Change Change refers to the adoption of a new idea or behavior by a Change
company. Technological advances, changes in the workforce or government regulations, The adoption of a new
globalization, and new competitors are among the many factors that require companies idea or behavior by a
company.
to change. Change is inevitable in companies as products, companies, and entire indus-
tries experience shorter life cycles.60 This has played a major role in reshaping the
employment relationship.61 New or emergent business strategies that result from these
changes cause companies to merge, acquire new companies, grow, and in some cases
downsize and restructure. This has resulted in changes in the employment relationship.
Companies demand excellent customer service and high productivity levels. Employees
are expected to take more responsibility for their own careers, from seeking training to
balancing work and family. In exchange for top performance and working longer hours
without job security, employees want companies to provide flexible work schedules,
comfortable working conditions, more autonomy in accomplishing work, training and
development opportunities, and financial incentives based on how the company per-
forms. Employees realize that companies cannot provide employment security, so they
want employability—that is, they want their company to provide training and job experi-
ences to help ensure that employees can find other employment opportunities. The
human resource management challenge is how to build a committed, productive work-
force in economic conditions that offer opportunity for financial success but can also
quickly turn sour, making every employee expendable.
For example, every aspect of Capital BlueCross is changing due to health care
reform.62 The company’s leadership development curriculum helps prepare leaders at
all levels of the company to deal with these changes. It includes providing each leader
with a coach who reinforces what was learned in the curriculum and tailors it to the
individual strengths and challenges of each learner. Each leader also shares what they
learned with the employees who report to them. Hu-Friedy, a company that manufac-
tures dental instruments, employs 750 employees.63 Hu-Friedy is spending $60,000
on an apprenticeship program to develop its employees’ skills. Many of the employees
have worked on the factory floor making instruments for years but don’t have the com-
plex understanding of heat treatment, metallurgy, and metal composition necessary for
making improvements to the company’s products and production processes. Hu-Friedy
hopes the apprenticeship program will help keep production work in the United States
and keep the company competitive.
Employee
Concerns with Employee Engagement. Employee engagement refers to the degree to Engagement
which employees are fully involved in their work and the strength of their commitment The degree to which
to their job and the company.64 How do we know if an employee is engaged? An engaged employees are fully
involved in their work
employee is passionate about his or her work, is committed to the company and its mis- and the strength of
sion, and works hard to contribute. Engagement survey results show that approximately their job and company
30% of U.S. employees are engaged in their work, 52% are not engaged, and 18% are commitment.
actively disengaged.65 Actively disengaged employees cost the United States billions of
dollars every year in lost productivity.
Perhaps the best way to understand engagement is to consider how companies mea-
sure employee engagement. Companies measure employees’ engagement levels with
attitude or opinion surveys (we discuss these in detail in Chapter 10). Although the types
of questions asked on these surveys vary from company to company, research suggests
the questions generally measure 10 common themes shown in Table 1.7. As you prob-
ably realize after reviewing the themes shown in Table 1.7, employees’ engagement is
influenced by how managers treat employees as well as human resource practices such as
recruiting, selection, training and development, performance management, work design,
and compensation. For example, Bridgepoint Education recognizes that employee
engagement is necessary for success.66 To increase employee engagement the com-
pany uses events, celebrations, and a social learning platform to facilitate conversations
among employees and employees and their managers. Company leaders host discus-
sions with employees, communicate goals, and give employees a chance to ask ques-
tions. The results of Satellite Healthcare’s engagement survey showed that the renal care
provider’s employees want more resources supporting their career development.67 As a
result, Satellite developed a Career Pyramid that defines the positions within a dialysis
career category including the position titles from entry-level jobs to top management.
The education, experience, and competencies for each position are listed. Standards for
promotion and development to advance to each level on the pyramid are provided. The
Career Pyramid is especially useful for employees in entry-level jobs such as patient care
technicians because it provides a clear structure on possible career moves and the skills
that employees need to develop. Employee engagement scores collected after the Career
Pyramid was implemented have improved and 92% of employees report they expect to
have a long-term career with Satellite.
Talent Management Talent Management. Talent management refers to the systematic planned strategic
A systematic planned effort by a company to use bundles of human resource management practices including
strategic effort by a acquiring and assessing employees, learning and development, performance manage-
company to attract,
retain, develop, and
ment, and compensation to attract, retain, develop, and motivate highly skilled employ-
motivate highly skilled ees and managers. This means recognizing that all HR practices are inter-related, aligned
employees and with business needs, and help the organization manage talent to meet business goals. For
managers. example, at Qualcomm, a San Diego company, talent management is organized around
core values that emphasize recruiting smart, motivated employees and creating a work
Table 1.7
Common Themes Pride in employer
of Employee Satisfaction with employer
Engagement Satisfaction with the job
Opportunity to perform challenging work
Recognition and positive feedback from contributions
Personal support from manager
Effort above and beyond the minimum
Understanding the link between one’s job and the company’s mission
Prospects for future growth with the company
Intention to stay with the company
SOURCE: Based on R. Vance, Employee Engagement and Commitment (Alexandria, VA: Society for Human Resource
Management, 2006).
environment that allows them to innovate, execute, partner, and lead.68 When Qualcomm
wanted to introduce technology for its performance management process, human
resources generalists worked together with organizational development and information
technology specialists to ensure that what employees were being evaluated on (perfor-
mance management) and what employees were paid and rewarded for (compensation
and rewards) were aligned. HR trained managers to use the performance management
system and now focus on identifying employee skills gaps to identify opportunities to
improve performance.
Survey results suggest that opportunities for career growth, learning, and development
and performing exciting and challenging work are some of the most important factors
in determining employees’ engagement and commitment to their current employer.69 As
the economy improves, high-achieving employees may be looking to leave companies
if they do not feel they have adequate opportunities to develop or move to positions in
which they can best utilize their skills. For Cognizant, a global technology solutions
company, business is based on knowledge, which depends on the skills of its work-
force.70 As a result, talent development is seen as a strategic business driver. To develop
talent all employees have individual development plans that support their career goals.
Learning at Cognizant focuses on building both technical and leadership talent to ensure
employees help improve their clients’ businesses. Cognizant has several programs to
build talent. The Career Architecture program helps employees choose a career track
that matches their interests and skills. It helps identify training courses and job rotations
that can help employees move along their career track. The Emerging Partners program
develops senior account managers and senior delivery managers. The program includes
case studies, role plays, and simulations. More than 100 managers have completed the
program and 45% have moved within six months into leadership roles involving interac-
tions with clients.
Use of Alternative Work Arrangements. Alternative work arrangements include inde- Alternative Work
pendent contractors, on-call workers, temporary workers, and contract company work- Arrangements
ers. The Bureau of Labor Statistics estimates that alternative work arrangements make Independent contrac-
tors, on-call workers,
up 11% of total employment.71 There are 10.3 million independent contractors, temporary workers,
2.5 million on-call workers, 1.2 million temporary help agency workers, and approxi- and contract company
mately 813,000 workers employed by contract firms. Contingent workers, or workers workers who are not
who do not expect their jobs to last or who believe their jobs are temporary, account for employed full-time by
approximately 2 to 4% of total employment. the company.
More workers in alternative employment relationships are choosing these arrange-
ments. Alternative work arrangements can benefit both individuals and employers. More
and more individuals don’t want to be attached to any one company. They want the
flexibility to work when and where they choose. They may want to work fewer hours to
effectively balance work and family responsibilities. Also, individuals who have been
downsized may choose alternative work arrangements while they are seeking full-time
employment. From the company perspective, it is easier to add temporary employees
when they are needed and easier to terminate their employment when they are not needed.
Part-time workers can be a valuable source of skills that current employees may not have
and are needed for a specific project that has a set completion date. Part-time workers
can be less expensive than permanent employees because they do not receive employer
health benefits or participate in pension plans. Employing part-time workers such as
interns allows the company to determine if the worker meets performance requirements
and fits in with the company culture, and if so, to offer the employee a permanent posi-
tion. For example, Verigy, a semiconductor manufacturer in California, employs only
a small number of permanent employees and nonessential jobs are outsourced. When
demand for its products increases, engineers and other high-tech employees are hired
through staffing companies or as independent contractors.72 Alternative work arrange-
ments have potential disadvantages. These include concerns about work quality, inability
to maintain the company culture or team environment, and legal liability.73
Demanding Work, but with More Flexibility. The globalization of the world econ-
omy and the development of e-commerce have made the notion of a 40-hour work week
obsolete. As a result, companies need to be staffed 24 hours a day, seven days a week.
Employees in manufacturing environments and service call centers are being asked to
move from 8- to 12-hour days or to work afternoon or midnight shifts. Similarly, profes-
sional employees face long hours and work demands that spill over into their personal
lives. Notebook computers, smartphones, and smartwatches bombard employees with
information and work demands. In the car, on vacation, on planes, and even in the bath-
room, employees can be interrupted by work demands. More demanding work results in
greater employee stress, less satisfied employees, loss of productivity, and higher turn-
over—all of which are costly for companies.
One study found that because of work demands 75% of employees report having not
enough time for their children, and 61% report not having enough time for their hus-
bands and wives. However, only half of employees in the United States strongly agree
that they have the flexibility they need to successfully manage their work and personal or
family lives.74 Many companies are recognizing the benefits that can be gained by both
the company and employees through providing flexible work schedules, allowing work-
at-home arrangements, protecting employees’ free time, and more productively using
employees’ work time.75 The benefits include the ability to have an advantage in attract-
ing and retaining talented employees, reduced stress resulting in healthier employees,
and a rested workforce that can maximize the use of their skills. One estimate is that
9.5% or 13.4 million U.S. employees are working at home at least one day a week.76 One
in four home-based employees is working in management, business, and finance jobs
and half are self-employed. Employees in health care and installation, maintenance and
repair occupations are the least likely to work from home. Banana Republic, known for
its stylish, yet affordable fashions, has implemented a results-oriented work environment
(ROWE) at its San Francisco and New York headquarters offices. ROWE gives employ-
ees the opportunity to decide how and where they work according to the deliverables and
results they are accountable for achieving.77 At Medtronic, 150 of its 1,000 employees
in Santa Bosa, California, are home-office workers.78 They come into the office once
or twice a week. Medtronic took several steps to ensure its program was successful. It
allowed employees to work at home only if they had jobs in which most of their work
was done by computer. This eliminated research and development jobs and other jobs
requiring face-to-face social interaction. It provided both managers and employees with
guidelines for telecommuting. These guidelines included emphasizing the importance
of managers setting specific performance targets and requiring employees to respond to
e-mails by the end of the day. Medtronic also provides rooms that home-office workers
can use for meetings when they are in Santa Bosa. The program has saved Medtronic
over $1 million dollars in office space costs and improves productivity. Also, it helps
Medtronic attract employees from San Francisco (an hour away) who want to con-
tinue to live there but avoid commuting hassles and daycare expenses. Employees at
Salesforce.com Inc. can work from home and use Chatter, a Facebook-type application,
to coordinate projects.79 Managers can monitor whether employees working at home
have answered questions and finished reports.
The use of alternative work arrangements and work-at-home has resulted in the devel-
opment of co-working sites where diverse workers such as designers, artists, freelancers,
consultants, and other independent contractors pay a daily or monthly fee for a guaran-
teed work space.80 Co-working sites are equipped with desks and wireless Internet and
some provide access to copy machines, faxes, and conference rooms. Co-working sites
help facilitate independent contractors and, employees working at home, traveling, or
telecommuting, who have feelings of isolation, and give them the ability to collaborate
and interact, provide a more professional working atmosphere than coffee shops, and
help decrease traffic and pollution.
Meeting the Needs of Stakeholders, Shareholders,

Customers, Employees, and Community
As we mentioned earlier, company effectiveness and competitiveness are determined by
whether the company satisfies the needs of stakeholders. Stakeholders include stockhold-
ers (who want a return on their investment), customers (who want a high-quality product
or service), and employees (who desire interesting work and reasonable compensation
for their services). The community, which wants the company to contribute to activities
and projects and minimize pollution of the environment, is also an important stakeholder.
Measuring Performance to Stakeholders: The Balanced Scorecard. The balanced Balanced Scorecard
scorecard gives managers an indication of the performance of a company based on the A means of perfor-
degree to which stakeholder needs are satisfied; it depicts the company from the per- mance measurement
that gives managers
spective of internal and external customers, employees, and shareholders.81 The bal- a chance to look at
anced scorecard is important because it brings together most of the features that a their company from the
company needs to focus on to be competitive. These include being customer-focused, perspectives of internal
improving quality, emphasizing teamwork, reducing new product and service develop- and external custom-
ment times, and managing for the long term. ers, employees, and
shareholders.
The balanced scorecard differs from traditional measures of company performance
by emphasizing that the critical indicators chosen are based on the company’s business
strategy and competitive demands. Companies need to customize their balanced score-
cards based on different market situations, products, and competitive environments.
The balanced scorecard should be used to (1) link human resource management activi- LO 1-3
ties to the company’s business strategy and (2) evaluate the extent to which the HRM Discuss how human
function is helping the company meet its strategic objectives. Communicating the score- resource management
affects a company’s
card to employees gives them a framework that helps them see the goals and strategies of balanced scorecard.
the company, how these goals and strategies are measured, and how they influence the
critical indicators. Measures of HRM practices primarily relate to productivity, people,
and process.82 Productivity measures involve determining output per employee (such as
revenue per employee). Measuring people includes assessing employees’ behavior, atti-
tudes, or knowledge. Process measures focus on assessing employees’ satisfaction with
people systems within the company. People systems can include the performance man-
agement system, the compensation and benefits system, and the development system. To
show that HRM activities contribute to a company’s competitive advantage, managers
need to consider the questions shown in Table 1.8 and be able to identify critical indica-
tors or metrics related to human resources. As shown in the last column of Table 1.8, criti-
cal indicators of HR practices primarily relate to people, productivity, and processes.
For example, at ConocoPhillips, the balanced scorecard for top executives includes
costs, health and safety, production, and resource replacement.83 ConocoPhillips has
also developed scorecards for operational-level activity such as safety. Some physicians
Table 1.8
The Balanced Scorecard
QUESTIONS EXAMPLES OF CRITICAL EXAMPLES OF CRITICAL HR

PERSPECTIVE ANSWERED BUSINESS INDICATORS INDICATORS
Customer How do customers Time, quality, performance, Employee satisfaction with HR

see us? service, cost department services
Employee perceptions of the
company as an employer
Internal What must we Processes that influence customer Training costs per employee,
excel at? satisfaction, availability of informa- turnover rates, time to fill open
tion on service and/or manufactur- positions
ing processes
Innovation Can we continue to Improve operating efficiency, Employee/skills competency
and learning improve and create launch new products, continuous levels, engagement survey
value? improvement, empowering of results, change management
workforce, employee satisfaction capability
Financial How do we look to Profitability, growth, shareholder Compensation and benefits
shareholders? value per employee, turnover costs,
profits per employee, revenues
per employee
SOURCE: Based on B. Becker, M. Huselid, and D. Ulrich, The HR Scorecard: Linking People, Strategy, and Performance (Boston: Harvard Business
School Press, 2001).
employed by OhioHealth, a hospital system, receive up to 10% of their pay based on a

balanced scorecard consisting of quality, service, financial performance, and employee
engagement.84
Social Responsibility. Increasingly, companies are recognizing that social responsibil-
ity can help boost a company’s image with customers, gain access to new markets, and
help attract and retain talented employees. Companies thus try to meet shareholder and
general public demands that they be more socially, ethically, and environmentally respon-
sible. For example, Bill Gates, former chief executive officer and Microsoft Corporation
founder, through personal involvement in a charitable foundation dedicated to bringing
science and technology to improve lives around the world, has improved Microsoft’s
corporate reputation. Coke is applying its product development expertise along with its
supply chain and distribution network to make essential nutrition accessible to people
in need.85 Coke offers a ready-to-drink fortified juice product, Nursha, that addresses
micronutrient deficiencies in schoolchildren in Colombia and Ghana under the global
trademark name Nurisha. Coke is also working to economically empower women. In the
Philippines, women own or operate more than 86% of the small neighborhood stores that
sell Coke products. Companies are realizing that helping to protect the planet can also
save money.86 International Paper, a global paper and packaging company, has focused
on using less water and energy at its manufacturing operations. International Paper cut
fossil fuel purchases by 21% by burning tree limbs and debris from tree processing. Dow
Chemical has sustainability goals that include the use of sustainable chemistry, reduc-
ing energy usage, and publishing safety evaluations for all of its products.87 American
Express supports preservation of historic sites and has a mentoring program for nonprof-
its and social entrepreneurs around the world.
COMPETING THROUGH SUSTAINABILITY
Socially Responsible Programs Help Improve the World
Sustainability is an important determining where to grow employees with
part of many companies’ busi- plants that could provide medi- the opportunity for a
ness strategy. Dow developed cine for malaria and working three-month internship where
a new leadership development with a trade school to develop they can work for global orga-
program, Leadership in Action, education, science, technol- nizations who are affiliated with
with its first location in Accra, ogy, engineering, and math Mothers for Merck. Merck Gives
Ghana, where the company had curriculum. Back is a website employees
recently opened its first office. The pharmaceutical company can access to learn about chari-
The program is part of Dow’s Novartis is actively involved in table opportunities they can get
approach to meeting the world’s improving health care in Africa involved with.
basic needs by matching its by helping the fight against
employees with organizations infectious diseases that have DISCUSSION QUESTION
that need support for sustain- made life expectancy in Africa 15 How do companies’ sustain-
able development projects, years less than the global aver- ability efforts help a company
especially in business growth age. Novartis worked with the attract, retain, and develop
areas for Dow. Accra, the west World Health Organization to employees? Explain your
African country’s capital, was develop e-learning for managing answer.
chosen because it provided a childhood illnesses and provide SOURCES: Based on “Dow Chemical’s New
way to get potential leaders to 500 million free treatments. Formula for Global Leaders,” Chief Learning
understand a new business terri- Merck has invested in a 10-year, Officer, April 2015, pp. 42–43, 49; company
website, “Mission & Vision,” www.dow.com,
tory, develop a new market, and $500 million dollar program, accessed April 14, 2015; company website,
establish community relation- Mothers for Merck, which part- “Corporate Responsibility Performance Report
ships. High-potential employees ners with nonprofit organizations 2013” and “Improving Healthcare in Africa,”
http://www.novartis.com, accessed April 22,
organized into teams worked worldwide to seek to reduce a 2015; and W. Bunch, “Doing the Right Thing,”
with a nongovernment orga- drop in childbirth mortality rates. Human Resource Executive, October 2014,
nization on projects including Merck provides top company pp. 10–12.
The “Competing through Sustainability” box highlights the sustainable business

practices of several companies.
Customer Service and Quality Emphasis

Companies’ customers judge quality and performance. As a result, customer excellence
requires attention to product and service features as well as to interactions with cus-
tomers. Customer-driven excellence includes understanding what the customer wants
and anticipating future needs. Customer-driven excellence includes reducing defects
and errors, meeting specifications, and reducing complaints. How the company recovers
from defects and errors is also important for retaining and attracting customers.
Due to increased availability of knowledge and competition, consumers are very
knowledgeable and expect excellent service. This presents a challenge for employees
who interact with customers. The way in which clerks, sales staff, front-desk person-
nel, and service providers interact with customers influences a company’s reputation
and financial performance. Employees need product knowledge and service skills, and
they need to be clear about the types of decisions they can make when dealing with
customers.
29
To compete in today’s economy, whether on a local or global level, companies need

to provide a quality product or service. If companies do not adhere to quality standards,
their ability to sell their product or service to vendors, suppliers, or customers will be
restricted. Some countries even have quality standards that companies must meet to con-
Total Quality duct business there. Total quality management (TQM) is a companywide effort to contin-
Management (TQM) uously improve the ways people, machines, and systems accomplish work.88 Core values
A cooperative form of of TQM include the following:89
doing business that
relies on the talents ∙ Methods and processes are designed to meet the needs of internal and external
and capabilities of both
labor and management
customers.
to continually improve ∙ Every employee in the company receives training in quality.
quality and productivity. ∙ Quality is designed into a product or service so that errors are prevented from occur-
ring rather than being detected and corrected.
∙ The company promotes cooperation with vendors, suppliers, and customers to
improve quality and hold down costs.
∙ Managers measure progress with feedback based on data.
One way that companies can improve the quality of their products or services is
Malcolm Baldrige through competing for the Malcolm Baldrige National Quality Award or gaining certifica-
National Quality tion in the ISO 9000:2000 standards. The Baldrige award, created by public law, is the
Award highest level of national recognition for quality that a U.S. company can receive. To
An award established in
1987 to promote quality
become eligible for the Baldrige, a company must complete a detailed application that
awareness, to recognize consists of basic information about the firm as well as an in-depth presentation of how it
quality achievements addresses specific criteria related to quality improvement.90 The categories and point
of U.S. companies, and values for the Baldrige Award are found in Table 1.9. The award is not given for specific
to publicize successful products or services. Organizations can compete for the Baldrige Award in one of sev-
quality strategies.
eral different categories, including: manufacturing, service, small business, education,
ISO 9000:2000 health care and non-profit. The Baldrige Award is given annually in each of the catego-
Quality standards ries with a total limit each year of 18 awards. All applicants for the Baldrige Award
adopted worldwide. undergo a rigorous examination process that takes from 300 to 1,000 hours. Applications
are reviewed by an independent board of about 400 examiners who come primarily from
the private sector. One of the major benefits of applying for the Baldrige Award is the
feedback report from the examining team noting the company’s strengths and areas for
improvement.91
The Baldrige Award winners usually excel at human resource practices. For example,
consider PricewaterhouseCoopers Public Sector Practice (PwC PSP), a 2014 award win-
ner.92 PwC PSP provides risk, management, and technology consulting to state, local,
and federal governments. Contractor performance assessment reports have been nearly
100% “exceptional” or “very good” from 2010 to 2014. PwC PSP scores on a tool used
to assess customer engagement and loyalty has been equal to or better than scores from
other U.S. consulting companies. An important reason for its customer satisfaction and
loyalty is that PwC PSP makes extensive use of knowledge management to help employ-
ees learn and to serve clients. It collects knowledge through the Knowledge Gateway
where it is reviewed by knowledge management team members and content experts.
The knowledge is then shared through a web-based tool designed to help employees col-
laborate with each other. Employees use this tool to share and find knowledge, exchange
ideas, and seek developmental opportunities. Senior leaders at PwC PSP identify high-
performing operations and invite them to present their practices at managing partner
meeting. The practices are also shared on the Knowledge Gateway.
ISO (International Organization for Standardization), a network of national stan-
dards institutes including 160 countries with a central governing body in Geneva,
Table 1.9
Leadership 120 Categories and
The way senior executives create and sustain vision, values, and mission; Point Values for the
promote legal and ethical behavior; create a sustainable company and Malcolm Baldrige
communicate with and engage the workforce. National Quality
Measurement, Analysis, and Knowledge Management 90 Award Examination
The way the company selects, gathers, analyzes, uses, manages, and
improves its data, information, and knowledge assets
Strategic Planning 85
The way the company sets strategic direction, how it determines action
plans, how it changes strategy and action plans if required, and how it
measures progress
Workforce Focus 85
Company’s efforts to develop and utilize the workforce to achieve high
performance; how the company engages, manages, and develops the
potential of the workforce in alignment with company goals
Operations Focus 85
Design, management, and improvement of work systems and work pro-
cesses to deliver customer value and achieve company success and
sustainability
Results 450
Company’s performance and improvement in key business areas (product,
service, and supply quality; productivity; operational effectiveness and
related financial indicators; environmental, legal, and regulatory compli-
ance); ethically and socially responsible
Customer Focus 85
Company’s knowledge of the customer, customer service systems, current
and potential customer concerns, customer satisfaction and engagement
Total Points 1,000
SOURCE: Based on “2014–2015 Criteria for Performance Excellence” from the website for the National Institute of
Standards and Technology, www.nist.gov/baldrige.
Switzerland, is the world’s largest developer and publisher of international standards.93

The ISO develops standards related to management, as well as a wide variety of other
areas including education, music, ships, and even protecting children! ISO standards are
voluntary but countries may decide to adopt ISO standards in their regulations and as
a result they may become a requirement to compete in the market. The ISO 9000 is a
family of standards related to quality (ISO 9000, 9001, 9004, and 10011). The ISO 9000
quality standards address what the company does to meet regulatory requirements and
the customer’s quality requirements while striving to improve customer satisfaction and
continuous improvement. The standards represent an international consensus on qual-
ity management practices. ISO 9000:2000 has been adopted as the quality standard in
nearly 100 counties around the world meaning that companies have to follow the stan-
dards to conduct business in those countries. The quality management standards of the
ISO 9000 are based on eight quality management principles including customer focus,
leadership, people involvement, a process approach, a systems approach to management,
continuous improvement, using facts to make decisions, and establishing mutually ben-
eficial relationships with suppliers. ISO 9001:2008 is the most comprehensive standard
because it provides a set of requirements for a quality management system for all orga-
nizations both private and public. The ISO 9001:2008 has been implemented by over
1 million organizations in 176 countries. ISO 9004 provides a guide for companies that
want to improve.
Why are standards useful? Customers may want to check that the product they ordered
from a supplier meets the purpose for which it is required. One of the most efficient ways
to do this is when the specifications of the product have been defined in an International
Standard. That way, both supplier and customer are on the same wavelength, even if
they are based in different countries, because they are both using the same references.
Many products require testing for conformance with specifications or compliance with
safety or other regulations before they can be put on many markets. In addition, national
legislation may require such testing to be carried out by independent bodies, particularly
when the products concerned have health or environmental implications. One example
of an ISO standard is on the back cover of this book and nearly every other book. On the
back cover is something called an ISBN. ISBN stands for International Standard Book
Number. Publishers and booksellers are very familiar with ISBNs, because they are the
method through which books are ordered and bought. Try buying a book on the Internet,
and you will soon learn the value of the ISBN—there is a unique number for the book
you want! And it is based on an ISO standard.
In addition to competing for quality awards and seeking ISO certification, many com-
Six Sigma Process panies are using the Six Sigma process and lean thinking. The Six Sigma process refers
System of measuring, to a process of measuring, analyzing, improving, and then controlling processes once
analyzing, improving, they have been brought within the narrow Six Sigma quality tolerances or standards. The
and controlling pro-
cesses once they meet
objective of Six Sigma is to create a total business focus on serving the customer, that is,
quality standards. to deliver what customers really want when they want it. Six Sigma involves highly
trained employees known as Champions, Master Black Belts, Black Belts, and Green
Belts who lead and teach teams that are focusing on an ever-growing number of quality
projects. The quality projects focus on improving efficiency and reducing errors in prod-
ucts and services. The Six Sigma quality initiative has produced more than $2 billion in
benefits for GE. For example, at General Electric introducing the Six Sigma quality ini-
tiative meant going from approximately 35,000 defects per million operations—which is
average for most companies, including GE—to fewer than four defects per million in
every element of every process GE businesses perform—from manufacturing a locomo-
tive part to servicing a credit card account to processing a mortgage application to
answering a phone.94
Training is an important component of quality programs because it teaches employ-
Lean Thinking ees statistical process control and how to engage in “lean thinking.” Lean thinking is a
A process used to way to do more with less effort, time, equipment, and space, but still provide custom-
determine how to use ers with what they need and want. Part of lean thinking includes training workers in
less effort, time, equip-
ment, and space but
new skills or how to apply old skills in new ways so they can quickly take over new
still meet customers’ responsibilities or use new skills to help fill customer orders. Baylor Health Care Sys-
requirements. tem wanted to decrease waste and improve patient satisfaction and outcomes through
implementing lean thinking and process improvements in several of its hospitals.95
This included training employees for how to make changes to work processes. Lean
thinking and process improvement supported by training provided significant value.
For example, the corporate supply management team eliminated two-thirds of the time
for completing contracts, developed a decision tree for different types of projects, and
reduced errors, saving $10 million dollars. A hospital re-admission team redesigned
the patient discharge process to reduce the chances of patients returning within 30 days.
They realized a 44% decrease in re-admissions over a six-month period, which
improved the quality of life for patients and Baylor’s ability to receive Medicare/
Medicaid payments from the government.
In addition to developing products or providing services that meet customer needs,

one of the most important ways to improve customer satisfaction is to improve the qual-
ity of employees’ work experiences. Research shows that satisfied employees are more
likely to provide high-quality customer service. Customers who receive high-quality
service are more likely to be repeat customers. As Table 1.10 shows, companies that
are recognized as providing elite customer service emphasize state-of-the-art human
resource practices including rigorous employee selection, employee loyalty, training,
and keeping employees satisfied by offering generous benefits.
Internal Labor Force
Labor force of current
Changing Demographics and Diversity of the Workforce employees.
Company performance on the balanced scorecard is influenced by the characteristics of
its labor force. The labor force of current employees is often referred to as the internal External Labor
Market
labor force. Employers identify and select new employees from the external labor market Persons outside the
through recruiting and selection. The external labor market includes persons actively firm who are actively
seeking employment. As a result, the skills and motivation of a company’s internal labor seeking employment.
Wegmans Table 1.10

Gives away $59 million in scholarships to 19,000 employees. Senior managers sit side- Examples of HR
by-side with employees listening in on phones in the company’s call center. Practices That
Asana Enhance Customer
Gives employees a $10,000 dollar allowance for computers and office décor which Service
employees can use to purchase mini-refrigerators, headphones, and ergonomic chairs.
Asana also offers free yoga classes and in-house chefs.
Google
Provides employees with food service, fitness centers, bicycle repairs, and napping pods.
Unilever
Agile Working Program allows employees to work any hours, anywhere they want to.
Office cubicles have been replaced with collaborative workspaces with small, shared
work pods. The new work areas are designed to provide a comfortable environment by
including televisions, foosball tables, and treadmills.
Delaware North Companies
Uses tests that assess job candidates’ personality and work styles to ensure they have
the friendliness, curiosity, and ability to multitask that are needed as customer service
representatives to help customers plan vacations.
Cadillac
Performance of repair technicians is carefully monitored to ensure they are not repeat-
ing mistakes in repairs. Dealers who maintain good customer service ratings based on
customer surveys receive cash rewards.
Starbucks
Entry-level baristas get 24 hours of training that prepares them to stay calm and courte-
ous in busy times.
Publix Super Markets
Employees receive bonuses based on their unit’s performance and share grants as part
of their incentive plans.
SOURCES: Based on L. Weber, “To Get a Job, New Hires Are Put to the Test,” The Wall Street Journal, April 15,
2015, pp. A1, A10; R. Feintzeig, “Meet Silicon Valley’s Little Elves,” The Wall Street Journal, November 21, 2014, pp. A1,
A10; W. Bunch, “Unleashing the Workforce,” Human Resource Executive, November 2012, pp. 14–17; J. McGregor,
“Customer Service Champs,” BusinessWeek, March 5, 2007, pp. 52–64.
force are influenced by the composition of the available labor market (the external labor
market). The skills and motivation of a company’s internal labor force determine the
need for training and development practices and the effectiveness of the company’s com-
pensation and reward systems.
Important changes in the demographics and diversity of the workforce are projected.
First, the average age of the workforce will increase. Second, the workforce will become
more diverse in terms of gender, race, and generations, and third, immigration will con-
tinue to affect the size and diversity of the workforce.
Aging of the Workforce. The labor force will continue to age and the number of workers
age 55 or older will grow from 21 to 26% by 2022.96 Figure 1.5 compares the projected
distribution of the age of the workforce in 2012 and 2022. The labor force participation
of those 55 years and older is expected to grow because older individuals are leading
healthier and longer lives than in the past, providing the opportunity to work more years;
the high cost of health insurance and decrease in health benefits causes many employees
to keep working to keep their employer-based insurance or to return to work after retire-
ment to obtain health insurance through their employer; and the trend toward pension
plans based on individuals’ contributions to them rather than years of service provides an
incentive for older employees to continue working. The aging labor force means compa-
nies are likely to employ a growing share of older workers—many in their second or third
career. Older people want to work and many say they plan a working retirement. Despite
myths to the contrary, worker performance and learning are not adversely affected by
aging.97 Older employees are willing and able to learn new technology. An emerging
trend is for qualified older workers to ask to work part-time or for only a few months at
a time as a means to transition to retirement. Employees and companies are redefining
the meaning of retirement to include second careers as well as part-time and tempo-
rary work assignments. An aging workforce means that employers will increasingly face
HRM issues such as career plateauing, retirement planning, and retraining older workers
to avoid skill obsolescence. Companies will struggle with how to control the rising costs
of benefits and health care. Companies face competing challenges with older workers.
Companies will have to ensure that older workers are not discriminated against in hiring,
training, and workforce reduction decisions. At the same time companies will want to
encourage retirement and make it financially and psychologically acceptable.
Many companies are offering special programs to capitalize on older employees’
skills and accommodate their needs.98 CVS/pharmacy has stores in every climate and
region in the U.S. CVS created its Snowbirds Program to allow older employees to move
Figure 1.5
Comparison of the
Age Distribution of
the 2012 and 2022 11%
14% 16 to 24 years old
Labor Force 65% 63%
25 to 54 years old
55 years and older
26%
21%
2012 2022
SOURCE: Bureau of Labor Statistics, “Employment Projections: 2012–2022,” News Release, www.bls.gov, accessed
February 25, 2015.
among locations according to their preferences. This is especially important for older
employees who spend winters in the southern states and summer in the northern states.
Over 1,000 employees including retail clerks, pharmacists, and managers have partici-
pated in the program.
At Herman Miller, the Michigan-based furniture manufacturer, employees can begin
the retirement process two years ahead of their actual retirement date by working fewer
hours. This helps ease their transition out of their job and workplace but provides them
time to share their knowledge and help train other employees to take their job. National
Institutes of Health (NIH) has two phased-retirement programs that allow employees to
choose to gradually transition to retirement by reducing hours or a trial-retirement program
that allows retirees to return to work within one year of retiring in case they decide they
aren’t ready to leave the workforce.
Generational Differences. Because employees are working longer the workforce now
has five generations, each one with unique characteristics and characteristics similar to
the others. In Table 1.11 the year born, nicknames, and ages of each generation are shown.
Consider some of the attributes that are believed to characterize each generation.99 For
example, Millennials grew up with access to computers at home and school and access
to the Internet. They grew up with diversity in their schools and were coached, praised,
and encouraged for participation rather than accomplishment by their Baby Boomer par-
ents. Millennials are characterized as being optimistic, willing to work and learn, eager
to please, self-reliant, globally aware and as valuing diversity and teamwork. They are
also believed to have high levels of self-esteem and narcissism. Generation Xers grew up
during a time when the divorce rate doubled, the number of women working outside the
home increased, and the personal computer was invented. They were often left to their
own after school (latchkey kids). They value skepticism, informality, practicality, seek
work/life balance, and dislike close supervision. They tend to be impatient and cynical.
They have experienced change all of their lives (in terms of parents, homes, and cit-
ies). Baby Boomers, the “Me” generation, marched against the “establishment” for equal
rights and an end to the Vietnam War. They value social conscientiousness and inde-
pendence. They are competitive, hard working, and concerned with the fair treatment
of all employees. They are often considered to be workaholics and rigid in conforming
to rules. Traditionalists grew up during the Great Depression and lived during World
War II. They tend to value frugality, are patriotic and loyal, adhere to rules, are loyal to
employers, and take responsibility and sacrifice for the good of the company.
Members of each generation may have misperceptions of each other causing ten-
sions and misunderstanding in the workplace.100 For example, Millennials may think
Table 1.11
YEAR BORN GENERATION AGES
Generations in the
Workforce
1925–45 Traditionalists .69
Silent Generation
1946–64 Baby Boomers 51–69
1965–80 Generation X 35–50
1981–95 Millennials 20–34
Generation Y
Echo Boomers
1996 Generation Z ,20
Digital Natives
Generation X managers are bitter, jaded, abrasive, uninterested in them, and poor delega-
tors. In turn, their Generation X managers consider Millennials too needy for attention,
demanding, and overly self-confident. Millennials might believe that Baby Boomers
are too rigid and follow company rules too closely. They believe employees in the older
generations have been too slow in adopting social media tools and overvalue tenure
rather than knowledge and performance. Traditionalists and Baby Boomers believe
that Millennials don’t have a strong work ethic because they are too concerned with
work-life balance. Also, members of the younger generations may resent Baby Boomers
and Traditionalists who are working longer before retiring, blocking promotions and
career moves.
It is important to note that although generational differences likely exist, members of the
same generation are no more alike than members of the same gender or race. This means
that you should be cautious in attributing differences in employee behaviors and attitudes to
generational differences or expecting all employees of a generation to have similar values.
Research suggests that the generations of employees have similarities as well as differ-
ences.101 Although differences in work ethic have been found among Baby Boomers, Gen-
eration Xers, and Millennials, Millennial employees are more similar than different from
other generations in their work beliefs, job values, and gender beliefs. Most employees
view work as a means to more fully use their skills and abilities, meet their interests, and
allow them to live a desirable lifestyle. They also value work-life balance, meaning flexible
work policies are necessary to allow them to choose where and when work is performed.
Consider what Dell Inc. does to alleviate misunderstandings and misperceptions of
its multigenerational workforce.102 Dell provides a course for all of their new managers
that includes topics such as leading multigenerational teams and developing connections
with the employees who report to them. The ability to relate to and motivate a multigen-
erational workforce, to lead teams to work together, and encourage an entrepreneurial
spirit are required qualities that all successful managers at Dell must have regardless of
what generation they come from. Dell also uses employee resource groups for employ-
ees to connect, build relationships, and network. For example, the resource group for
Millennials is called “GenNext.” Dell also encourages employees to participate in dis-
cussion with managers about new ways to consider where and how work gets done. This
allows employees to choose to work remotely and telecommute, which helps them meet
their personal needs, yet successfully complete their work.
Gender and Racial Composition of the Workforce. As Figure 1.6 shows, by 2022 the
workforce is expected to be 78% white, 12% African American, 6% Asian, and 4% other
Figure 1.6
The U.S. Workforce,
2022
78% White
African American
Asian
6% Other groups
12%
4%
SOURCE: Bureau of Labor Statistics, “Employment Projections: 2012–2022,” news release, www.bls.gov, accessed
February 25, 2015.
groups, which includes individuals of multiple racial origin, American Indian, Alaskan
Native or Native Hawaiian, and other Pacific Islanders.103 The diversity of the workforce
is expected to increase by 2022. As a result of different fertility rates and differences
in immigration patterns, race and ethnic groups will show different trends in labor
force growth.
Many U.S. industries, including meatpacking, construction, farming, and service, rely
on immigrants from Mexico and other countries to perform short-term or labor-intensive
jobs. Immigration contributes to the diversity of the U.S. population and workforce.
More than 1 million immigrants come to the U.S. each year, and 6 out of 10 are rela-
tives of U.S. citizens.104 Another 14% come on work-related visas, some of which are
available only for workers with exceptional qualifications in science, business, or the
arts. The U.S. government also provides temporary visas to a limited number of highly
educated workers, allowing them to work in the country for a set period of time but not to
remain as immigrants. U.S. law requires employers to verify that any job candidate who
is not a U.S. citizen has received permission to work in the United States as an immigrant
or with a temporary permit. U.S. immigrants come from countries around the world
but most come from Asia, the Americas, and Central America. Although a common
belief is that immigrants have few skills, the percentage of highly skilled immigrants
now exceeds the percentage of low–skilled immigrants. While the U.S. government is
debating how to deal with illegal immigration, many companies would face a labor crisis
if they were forced to terminate employment of illegal immigrants, many of whom have
lived and worked in the United States for years but lack the work authorizations and visas
needed to work legally in this country. However, in recent years Immigrations, Customs,
and Enforcement has focused its efforts on auditing employers to insure they are not
employing undocumented immigrants. For example, an oyster-processing operation in
Maryland brings in workers from Mexico to perform the dirty and smelly work needed
Table 1.12
1. Cost argument As organizations become more diverse, the cost of a poor job How Managing
in integrating workers will increase. Those who handle this Cultural Diversity
well will thus create cost advantages over those who don’t. Can Provide
2. Employee Companies develop reputations on favorability as prospective Competitive
attraction employers for women and ethnic minorities. Those with the Advantage
and retention best reputations for managing diversity will win the competi-
argument tion for talent. As the labor pool shrinks and changes composi-
tion, this edge will become increasingly important.
3. Marketing The insight and cultural sensitivity that diverse employees
argument bring to the marketing effort should help the company enter
new markets and develop products and services for diverse
populations.
4. Creativity Diversity of perspectives and less emphasis on conformity to
argument norms of the past improves the level of creativity.
5. Problem-solving Heterogeneity in decisions and problem-solving groups poten-
argument tially produces better decisions through a wider range of per-
spectives and more thorough critical analysis of issues.
6. System flexibility Greater flexibility to react to changes in customer preferences
argument and tastes (i.e., reactions should be faster and cost less).
SOURCES: Academy of Management Executive, by T. H. Cox and S. Blake, 1991; N. Lockwood, Workplace Diversity:
Leveraging the Power of Difference for Competitive Advantage (Alexandria, VA: Society for Human Resource
Management, 2005).
to shuck oysters from October to February. The family-owned business has tried to hire
U.S. workers but so far has had little success although the typical worker makes $12 per
hour.105 Many business owners believe the annual cap on visas is too low because they
cannot find enough employees to fill their jobs.
The implications of the changing labor market for managing human resources are
far-reaching. Managing diversity involves many different activities, including creating
an organizational culture that values diversity, ensuring that HRM systems are bias-free,
facilitating higher career involvement of women, promoting knowledge and acceptance
of cultural differences, ensuring involvement in education both within and outside the
company, and dealing with employees’ resistance to diversity.106 Table 1.12 presents
ways that managing cultural diversity can provide a competitive advantage. How diver-
sity issues are managed has implications for creativity, problem solving, retaining good
employees, and developing markets for the firm’s products and services. To successfully
manage a diverse workforce, managers must develop a new set of skills, including:
1. Communicating effectively with employees from a wide variety of cultural
backgrounds.
2. Coaching and developing employees of different ages, educational backgrounds,
ethnicity, physical ability, and race.
3. Providing performance feedback that is based on objective outcomes rather than
values and stereotypes that work against women, minorities, and handicapped per-
sons by prejudging these persons’ abilities and talents.
4. Creating a work environment that makes it comfortable for employees of all back-
grounds to be creative and innovative.
5. Recognizing and responding to generational issues.107
Diversity is important for tapping all employees’ creative, cultural, and commu-
nication skills and using those skills to provide competitive advantage as shown in
Table 1.12. For example, the Latino Employee Network at Frito-Lay played a key role
during the development of Doritos Guacamole Flavored Tortilla Chips.108 The chips
generated more than $500 million in sales during their first year, making this one of
the most successful product launches in the company’s history. Network members pro-
vided feedback on the taste and packaging to ensure that the product would be seen as
authentic in the Latino community. Disabled workers can also be a source of competitive
advantage. Innotrac provides contact-center support and packing services for a variety of
global brands including Target, AT&T, Ferrari, Rodale’s, and Groupon.109 Over the past
30 years, Innotrac has hired employees with physical and mental disabilities, accom-
modated them, and partnered with organizations who help the disabled find work. For
example, Innotrac contracted with a sign-interpreting firm to help a deaf maintenance
employee communicate with his manager, allowed workers who have physical disabili-
ties to sit down while packing products, and changed how mentally challenged workers
who worked at a slower pace than nondisabled employees were paid (from hourly rate
to pay by the piece). Innotrac believes that true diversity is hiring based on capabilities.
They don’t track the percentage of employees with disabilities because they don’t want
the emphasis to be on disabilities rather than abilities.
The bottom line is that to gain a competitive advantage, companies must harness the
power of the diverse workforce. These practices are needed not only to meet employee
needs but to reduce turnover costs and ensure that customers receive the best service
possible. The implication of diversity for HRM practices will be highlighted throughout
this book. For example, from a staffing perspective, it is important to ensure that tests
used to select employees are not biased against minority groups. From a work design
perspective, employees need flexible schedules that allow them to meet nonwork needs.
From a training perspective, it is clear that all employees need to be made aware of the
potential damaging effects of stereotypes. From a compensation perspective, new ben-
efits such as elder care and day care need to be included in reward systems to accommo-
date the needs of a diverse workforce.
Legal Issues
There will likely be development and debate of new employment laws and regulations,
as well as increased emphasis on enforcing specific aspects of current laws and regula-
tions.110 An emphasis on eliminating discrimination in recruitment and hiring will con-
tinue. The focus will likely be on pre-employment tests, criminal background screening,
and online searches that might reveal the age of job applicants. Also, greater attention
will be given to eliminating discrimination based on disability, pay rates, job category,
family leave, religion (based on employee need to pray during work and wear religious
clothing), and harassment. There are likely to be more challenges of sex and race dis-
crimination because of lack of access to training and development opportunities that are
needed for promotions to better paying jobs or higher level management positions. Elim-
inating discrimination against veterans and people with disabilities, especially among
federal contractors, is likely. This is especially likely due to the expanded definition of
disability under the Americans with Disabilities Act to include cancer, diabetes, epi-
lepsy, and intellectual disabilities.
Workplace safety will get more attention as new regulations are considered,
requiring companies to identify workplace hazards and either fix them or provide
employees with protection. Companies in industries that are considered to be the most
dangerous for employees will be asked to meet additional reporting and inspection
requirements.
In their efforts to reduce employee health care insurance costs, companies are offer-
ing incentives for employees to participate in wellness programs and providing penal-
ties if they do not. Wellness programs typically include smoking cessation, exercise,
dieting, and submitting to biometric screening tests (e.g., blood tests) to detect illness
or risk of illness such as heart attacks. However, wellness programs are coming under
scrutiny. The Equal Employment Opportunity Commission has issued preliminary rules
about when the penalties or rewards related to participating in wellness programs are too
extreme and may violate the Americans with Disabilities Act.
Scrutiny of companies who employ unlawful immigrants or abuse laborers will con-
tinue to increase. Companies can face criminal charges if immigration and customs offi-
cials can show that they knowingly employed undocumented and illegal immigrants. The
number of company audits conducted by the Immigration and Customs Enforcement
(ICE) has increased over the past several years, resulting in over $10 million in fines.
The publication of classified documents by WikiLeaks and Wall Street insider trad-
ing probes have resulted in companies more carefully scrutinizing data-security practices
and increased concerns about protecting intellectual property. This will likely influence
human resource practices related to performance management such as the use of electronic
monitoring and surveillance of knowledge workers. We may see more litigation related
to employee privacy rights and intellectual property rights as a result of companies terminat-
ing employees or taking disciplinary action against them for data-security breaches, discuss-
ing employment practices using social media, or sharing or stealing intellectual property for
personal gain. Also, issues regarding the confidentiality and security of employees’ health
care information will receive more attention as employees use wearables (such as Fitbits)
and apps to track what they eat and drink, their heart rate, and physical activity. Employers
who provide employees with wearables as part of wellness programs are not allowed by
health privacy laws to view any single employee’s health statistics.
Ethics Ethical Issues

The fundamental Many organizations have engaged in serious ethical misconduct, including General
principles of right
Motors (failure to fix and notify customers about faulty ignition switches), the Veterans
and wrong by which
employees and compa- Administration (concealed patient wait times), U.S. Secret Service (security breaches
nies interact. involving partying and prostitutes), and JPMorganChase (misrepresented mortgage-
backed securities to the public). Many decisions related to managing human resources are
Sarbanes-Oxley Act
of 2002 characterized by uncertainty. Ethics can be considered the fundamental principles of right
A congressional act and wrong by which employees and companies interact.111 These principles should be
passed in response to considered in making business decisions and interacting with clients and customers. Ethi-
illegal and unethical cal, successful companies can be characterized by four principles shown in Figure 1.7.112
behavior by managers First, in their relationships with customers, vendors, and clients, these companies empha-
and executives. The
act sets stricter rules size mutual benefits. Second, employees assume responsibility for the actions of the com-
for business; especially pany. Third, such companies have a sense of purpose or vision the employees value and
accounting practices use in their day-to-day work. Finally, they emphasize fairness; that is, another person’s
including requiring interests count as much as their own. HR and business decisions should be ethical but that
more open and con- is not always the case. A recent survey of employees found that 41% had witnessed some
sistent disclosure of
financial data, CEOs’ form of unethical conduct at their workplace.113 This probably helps explain public per-
assurance that the data ception of business ethics. Only 15% of Americans trust that business leaders are telling
is completely accurate, the truth and globally only 28% believe that businesses follow ethical practices.114 It is
and provisions that important to note that ethics refers to behavior that is not clearly right or wrong. Compli-
affect the employee– ance means that the company is not violating legal regulations. But a company can be
employer relationship
(e.g., development of compliant and still have employees engaging in unethical practices.
a code of conduct for The Sarbanes-Oxley Act of 2002 sets strict rules for corporate behavior and sets heavy
senior financial officers). fines and prison terms for noncompliance: organizations are spending millions of dollars
Figure 1.7
Principles of Ethical
Companies
Emphasize mutual
benefits in customer, Employees take
vendor, client, responsibility
and community for company
relationships actions
A sense of purpose Emphasize fairness in

or vision valued treatment of
and used by employees,
employees customers, vendors,
in their work and clients
each year to comply with regulations under the Sarbanes-Oxley Act, which imposes
criminal penalties for corporate governing and accounting lapses, including retaliation
against whistle-blowers reporting violations of Security and Exchange Commission
rules.115 Due to Sarbanes-Oxley and new Security and Exchange Commission regula-
tions that impose stricter standards for disclosing executive pay, corporate boards are
paying more attention to executive pay as well as issues like leadership development and
succession planning.116 This has resulted in an increase in the number of HR executives
and individuals with HR expertise who are being asked to serve on corporate boards to
provide data and analysis. For example, a CEO or chief financial officer (CFO) who
falsely represents company finances may be fined up to $1 million and/or imprisoned for
up to 10 years. The penalty for willful violations is up to $5 million and/or 20 years
imprisonment. The law requires CEOs and CFOs to certify corporate financial reports,
prohibits personal loans to officers and directors, and prohibits insider trading during
pension fund blackout periods.117 A “blackout” is any period of more than three con-
secutive business days during which the company temporarily stops 50% or more of
company plan participants or beneficiaries from acquiring, selling, or transferring an
interest in any of the company’s equity securities in the pension plan. The law also
requires retention of all documents relevant to a government investigation.
The law also has a number of provisions that directly affect the employer–employee rela-
tionship.118 For example, the act prohibits retaliation against whistle-blowers (individuals
who have turned in the company or one of its officers for an illegal act) and government
informants. The act also requires that publically traded companies disclose whether they
have a code of ethics.119 Other federal guidelines such as the Federal Acquisition Regulation
also require or provide incentives to encourage all businesses to adopt codes of conduct,
train employees on these codes, and create effective ways to audit and report ethical and
unethical behavior. This means that companies, with HR taking the lead, should develop
codes of conduct that clearly define ethics and professional responsibility. HR professionals
along with other top-level managers usually play a key role in helping conduct ethics audits,
develop ethical codes of conduct, and respond to ethical violations. Guidelines for disciplin-
ary actions for employees guilty of unethical behavior and conduct need to be developed.
Managers and employees will need to be trained on ethics policies to ensure that business
processes and procedures are correctly followed. HR professionals will need to document
the fact that employees have received these policies and have attended training to ensure
their compliance with the act. Because of the potential liability for retaliation in the context
of discrimination and harassment, policies should include assurances that an employee will
not be retaliated against for making a complaint or for serving as a witness. Executive com-
pensation programs will need to be monitored to ensure that the program is in compliance
with the no personal loans and no sales of pension funds during blackout period provisions.
Consider the policies and practices that companies are using to help ensure an ethical
workplace.120 Dimension Data’s employees participate in a half-day ethics program dis-
cussing how they would respond to different ethical dilemmas that occur at work. South-
ern Company invited a convicted felon to speak to employees about how a good person
can violate ethics. Before his conviction, which resulted in a five-year prison term, the
felon was chief financial officer for a health care company. Eaton Corporation includes
its ethics principles on its website. Examples of their principles include obeying the law,
avoiding conflicts of interest, acting with integrity, protecting assets and information, and
respecting human rights. Eaton Corporation’s employees receive regular training on how
to apply ethical principles to their daily work. The Global Ethics and Compliance Office
provides ethics training programs and communications designed to ensure that Eaton’s
ethics and values are integrated into its business practices on a consistent basis around the
INTEGRITY IN ACTION
CEO Cuts Pay to Reduce Income Inequality
Gravity Payments, a credit-card on their current salaries. Second, that reducing
payment processing company, he feels that the new pay policy wage inequal-
was started by Dan Price in his is a “moral imperative” that is ity was an issue he was in posi-
dorm room at Seattle Pacific Uni- necessary to reduce the large tion to do something about as
versity with money from his older pay gap between his pay as CEO a business leader, is not raising
brother. Price, the CEO, pledged and other employees. Although customer prices or cutting back
to make sure all of his employees he is a capitalist, he believes that on service. Instead, he plans to
make at least $70,000 annually the pay rates for CEOs compared keep his salary low until the com-
in the next three years. The aver- to regular employees are absurd. pany earns back the profits it had
age salary at Gravity is $48,000. Third, he believes the pay cut before the new pay plan.
Under this pay plan, 30 employ- is necessary to make the com-
ees will double their salaries. pany’s more than 100 employees DISCUSSION QUESTION
To achieve this, Price is cutting happy and build loyalty. When he Money is not supposed to buy
his $1 million salary to $70,000 told employees of the new pay happiness (or love). In this situ-
policy at a meeting there was ation will the new pay plan con-
of Gravity’s annual $2 million in silence followed by applause tribute to employee happiness
profits. There are several reasons and high-fives. The 50 employ- and loyalty? Explain your answer.
why Price is instituting the new ees who already earn more than
pay plan. First, he believes that $70,000 were as appreciative of SOURCES: Based on “CEO Cuts His Pay,
Boosts Workers,” Columbus Dispatch, April
Seattle’s $15 an hour minimum the pay plan as their lower-paid 16, 2015, p. A15; C. Isidore, “Gravity Payments
wage law is insufficient. He had peers. They are happy that the
been hearing his employees talk team members who helped them Raise,” April 14, 2015, from www.money.com; P.
Cohen, “One Company’s New Minimum Wage:
about difficulties in finding hous- earn higher pay are going to be $70,000 a Year,” The New York Times, April 13,
ing and meeting their expenses taken care of. Price, who feels 2015, www.nytimes.com.
world. Xerox conducts regular ethics surveys, which ask employees if they have experi-
enced an ethics violation. To receive promotions managers are expected to take an active
role in supporting Xerox’s ethics strategy. Managers review their previous year’s perfor-
mance, create action plans as to how they plan to improve the ethics policy (such as more
training or better communications), and are expected to chair their local ethics committee.
All employees are encouraged to report ethical violations or questions to the ethics office
either face-to-face, using an ethics hotline, or sending them to an e-mail address. Xerox’s
high ethical standards have won it recognition as one of the world’s most ethical compa-
nies. This has helped recruit high-quality employees especially in global locations where
business decisions are not transparent to employees and ethics are frequently violated.
Human resource managers must satisfy three basic standards for their practices to be
considered ethical.121 First, HRM practices must result in the greatest good for the larg-
est number of people. Second, employment practices must respect basic human rights
of privacy, due process, consent, and free speech. Third, managers must treat employees
and customers equitably and fairly.
To call attention to the important role of ethics in the workplace, throughout the
book we include “Integrity in Action” boxes that highlight the good (and bad) decisions
related to ethical HR practices made by company leaders and managers. The “Integrity
in Action” box shows how the CEO of Gravity Payments introduced a new pay policy to
help employees meet their expenses.
42
THE GLOBAL CHALLENGE

Companies are finding that to survive they must compete in international markets as well LO 1-4
as fend off foreign corporations’ attempts to gain ground in the United States. To meet Discuss what com-
these challenges, U.S. businesses must develop global markets, use their practices to panies should do to
compete in the global
improve global competitiveness, and better prepare employees for global assignments. marketplace.
Every business must be prepared to deal with the global economy. Global business
expansion has been made easier by technology. The Internet allows data and information
to be instantly accessible and sent around the world. The Internet, e-mail, social net-
working, and video conferencing enable business deals to be completed between compa-
nies thousands of miles apart.
Globalization is not limited to any particular sector of the economy, product market,
or company size.122 Companies without international operations may buy or use goods
that have been produced overseas, hire employees with diverse backgrounds, or compete
with foreign-owned companies operating within the United States.
Businesses around the world are attempting to increase their competitiveness and
value by increasing their global presence, often through mergers and acquisitions.
Entering International Markets

Many companies are entering international markets by exporting their products overseas,
building manufacturing facilities or service centers in other countries, entering into alliances
with foreign companies, and engaging in e-commerce. One estimate is that developing
economies and emerging markets such as those found in the BRIC nations (Brazil, Russia,
India, and China) are responsible for 19% of the world’s economy.123 Other countries such
as Indonesia, Malaysia, Kenya, Colombia, and Poland have a growing middle class, strong
infrastructure, business-friendly regulations, and stable governments and are likely new
emerging markets. The importance of globalization is seen in recent hiring patterns of large
U.S. multinational corporations that have increased their overseas workforce, particularly
in Asia.124 Markets in Brazil, China, and India have resulted in 60% of General Electric’s
business outside the United States with over half of its employees overseas. Clothing retailer
Gap Inc. believes it needs to expand its international presence because the U.S. market is
maturing and has many competitors. It opened its first company-owned store in China in
2010.125 The retailer has stores in 48 countries including Asia, Australia, Eastern Europe,
Latin America, the Middle East, and Africa. Banana Republic, a Gap Inc. company, recently
expanded to important cities for fashions including Ginza, Paris, and Milan. The Coca-Cola
Company operates in more than 200 countries. It recently opened its 43rd production facil-
ity in China and plans to invest $5 billion dollars in Africa over the next six years.126 Coke
also plans to open its first bottling plant in Myanmar, which will create thousands of jobs
over the next five years. Yum! Brands, parent company of KFC, Pizza Hut, and Taco Bell,
has over 6,200 stores in China contributing over 50% of the company’s profits.127
Global companies are struggling both to find and retain talented employees, espe-
cially in emerging markets. Companies are moving into China, India, eastern Europe, the
Middle East, Southeast Asia, and Latin America, but the demand for talented employees
exceeds supply. Also, companies often place successful U.S. managers in charge of over-
seas operations, but these managers lack the cultural understanding necessary to attract,
motivate, and retain talented employees. To cope with these problems, companies are
taking actions to better prepare their managers and their families for overseas assign-
ments and to ensure that training and development opportunities are available for global
employees. Cross-cultural training prepares employees and their families to understand
the culture and norms of the country they are being relocated to and to return to their
home country after the assignment. Cross-cultural training is discussed in Chapter 7. For
example, McDonald’s continues to open new stores throughout the world.128 It opened its
first restaurant in Vietnam in 2014 and is planning to open a store in Kazakhstan in 2015.
The Vietnam store is the 10,000th restaurant for McDonald’s in Asia, the Pacific region,
the Middle East, and Africa. Kazakhstan is McDonald’s 120th global market! To train
future managers in store operations, leadership, and staff management skills needed for
global expansion to be successful, McDonald’s has seven Hamburger Universities in the
United States and abroad including campuses at Oak Brook, Illinois; Sydney; Munich;
London; Tokyo; São Paulo; and Shanghai. All provide training materials and tools that
can be used in different languages and cultures.
IBM obtains more than two-thirds of its revenue from outside the United States and
is seeking to build team leadership in order to compete in emerging markets around the
world. IBM’s Corporate Service Program has donated the time and service of about
600 employees for over 1,000 projects in countries such as Turkey, Romania, Ghana,
Vietnam, the Phillipines, and Tanzania.129 The goal of the program is to develop a lead-
ership team that learns about the needs and culture of these countries, at the same time
providing valuable community service. For example, eight IBM employees from five
countries traveled to Timisoara, Romania. Each employee was assigned to help a dif-
ferent company or nonprofit organization. One software-development manager helped
GreenForest, a manufacturer of office, hotel, school, and industrial furniture, reach its goal
of cutting costs and becoming more efficient by recommending computer equipment and
systems needed to increase production and exports to western Europe. Another employee
worked with a nonprofit organization that offers services to disabled adults. Besides ben-
efiting the companies, the employees have also found that the experience has helped them
understand cultural differences, improve their communication and teamwork skills, and
gain insights on global marketing and strategy. The “Competing Through Globalization”
box shows how several global companies are preparing employees for global assignments.
Offshoring & Reshoring

Offshoring Offshoring refers to the exporting of jobs from developed countries, such as the United
Exporting jobs from States, to countries where labor and other costs are lower. India, Canada, China, Russia,
developed to less Ireland, Mexico, Brazil, and the Philippines are some of the destination countries for
developed countries.
offshored jobs. Why are jobs offshored?130 The reasons given for offshoring factory and
other jobs often include lower labor costs and the availability of a skilled workforce with
Reshoring a strong work ethic. However, rather than offshoring work, reshoring is becoming more
Moving jobs from over- common. There are several reasons for this including higher product shipping costs, fear
seas to the U.S. of supply chain disruptions due to natural disasters and political instability, quality con-
cerns, and customer preference for U.S.-made products.131 Also, rising labor costs in
some countries, such as China, are becoming more comparable to those in the United
States. Finally, some countries’ local standards for safety, health, and working conditions
may be substantially lower than those in the United States, resulting in negative publicity
and turning off potential customers. For example, Hanesbrands has added workers to a
plant in North Carolina.132 The socks are knitted there and then sent to a plant in El
Salvador that sews, dyes, and packages the socks. Although El Salvador has the advan-
tage on labor costs, electricity costs in North Carolina are much less. Also, having plants
in both places also provides a backup in case of problems. Peds Legwear also makes
socks in North Carolina, allowing the company to avoid import taxes, cut shipping costs,
and respond faster to shifts in demand. Plus, selling socks made in the United States was
a major reason why Walmart contracted with the company.
COMPETING THROUGH GLOBALIZATION
Effectiveness in Global Business Requires
More Than Just a First-Class Ticket
For companies that conduct To prepare employees for with employees
business around the world, international assignments, in 28 countries, employees
employees need to go beyond Iberdrola pays training consul- and their families going on an
just understanding cultural dif- tants $1,500 to $3,000 per day international assignment are
ferences. Employees have to to teach employees language provided with one-on-one cul-
adapt and adjust their behavior and cultural basics, such as tural sensitivity training and ori-
to effectively work and live in understanding preferences for entation. Boeing also provides
the host culture. This means that personal space. The company “lunch and learn” cultural talks
employees and their families also has an exchange program and rotation programs that allow
need to be prepared for inter- in which children of U.S. employ- overseas staff to work up to nine
national assignments. Iberdrola ees temporarily stay with host months in the United States.
USA, a global company with families overseas and vice versa.
5,000 U.S. employees, is in SAP, the software company, DISCUSSION QUESTION
the electricity transmission and is based in Germany but has What topics should be included
generation business. Iberdrola locations in 130 countries. SAP in training programs designed
sends U.S. employees to work at provides cultural briefings that to prepare employees for global
its locations in Mexico, Scotland, employees can access online. All assignments? Why is it impor-
Brazil, and Britain and other SAP employees can take training tant for employees’ families to
European Union countries. that is customized based on the receive training, too?
Also, it brings employees to the employees’ overseas location SOURCE: Based on R. Chebium, “A Common
United States to work for two to and their specific skill needs. At Language: Training Across Borders,” HR Maga-
three years. Boeing, the aerospace company zine, January/February 2015, pp. 52–58.
THE TECHNOLOGY CHALLENGE

Technology has reshaped the way we play, communicate, plan our lives, and where we
work. Many companies’ business models include e-commerce which allows consumers
to purchase products and services online. The Internet is a global collection of com-
puter networks that allows users to exchange data and information. Roughly 84% of
U.S. households have a computer (desktop, laptop, tablet, or smartphone) and 75% have
Internet access. Sixty percent visit Google during the week and 43% have a Facebook
page.133 Using Facebook, Twitter, LinkedIn, and other social networking tools available
on the Internet accessed through smartphones, notebooks, or personal computers, com-
panies can connect with job candidates and employers can connect with friends, family,
and co-workers.
LO 1-5
Identify how new tech-
nology, such as social
Social Networking networking, is influenc-
Advances in sophisticated technology along with reduced costs for the technology are ing human resource
changing many aspects of human resource management. Technological advances in elec- management.
tronics and communications software have made possible mobile technology such as per-
Social Networking
sonal digital assistants (PDAs), iPads, and iPods and enhanced the Internet through Websites, wikis, and
developing enhanced capability for social networking. Social networking refers to websites blogs that facilitate inter-
such as Facebook, Twitter, and LinkedIn, and wikis and blogs that facilitate interactions actions between people.
45
Table 1.13
ISSUES USE
Potential Uses of
Social Networking
Loss of expert knowledge due to Knowledge sharing, capturing, and storing
retirement
Employee engagement Collect employees’ opinions, chat with
employees
Identify and promote employee Create online expert communities
expertise
Promote innovation and creativity Encourage participation in online discussions
Reinforce learning Share best practices, applications, learning,
points, links to articles and webinars
Employees need coaching and Interact with mentors and coaching peers
mentoring
Need to identify and connect with Share job openings, respond to candidates’
promising job candidates questions, cultivate a pool of potential
employees
SOURCES: Based on D. Robb, “Cultivating Connections,” HR Magazine, September 2014, pp. 65–66; M. McGraw,
“Managing the Message,” Human Resource Executive, December 2014, pp. 16–18; P. Brotherson, “Social Networks
Enhance Employee Learning,” T + D, April 2011, pp. 18–19; M. Derven, “Social Networking: A Frame for Development,”
T + D, July 2009, pp. 58–63; M. Weinstein, “Are You Linked In?” Training, September/October, 2010, pp. 30–33.
between people usually around shared interests. Table 1.13 shows some of the potential
issues that can be addressed by using social networking.134 In general, social networking
facilitates communications, decentralized decision making, and collaboration. Social net-
working can be useful for connecting to customers and valuable for busy employees to
share knowledge and ideas with their peers and managers with whom they may not have
much time to interact face-to-face on a daily basis. Employees, especially young workers
from the Millennial or Gen-Y generations have learned to use social networking tools
such as Facebook throughout their lives and see them as valuable tools for both their work
and nonwork lives.
Despite its potential advantages, many companies are uncertain as to whether they
should embrace social networking.135 They fear that social networking will result in
employees wasting time or offending or harassing their co-workers. Other companies
believe that the benefits of using social networking for HR practices and allowing
employees to access social networks at work outweigh the risks. They trust employees
to use social networking productively and are proactive in developing policies about
personal use and training employees about privacy settings and social network etiquette.
They realize that employees will likely check their Twitter, Facebook, or LinkedIn
accounts but ignore it unless productivity is decreasing. In some ways, social network-
ing has become the electronic substitute for daydreaming at one’s desk or walking to the
break room to socialize with co-workers!
Robotics, tracking systems, radio frequency identification, and nanotechnology are
transforming work.136 Technology has also made it easier to monitor environmental con-
ditions and employees and operate equipment. Driverless cars, self-driving trucks at iron
ore mines that need no human operators, and computers that perform legal research are
recent advances in automation. But computing technology has been unable to replicate
human skills and abilities used to fold laundry! Unlike humans, robots have been unable
to make the distinctions between fabric types and weights and irregular clothes sizes that
are needed to neatly fold clothes.
Amelia is a computer that learns from textbooks, transcriptions of conversations,

e-mail chains, and other texts.137 As long as the answer is in the data she receives,
Amelia can solve problems. She also has the ability to learn. Programmers have tried to
provide her with the human ability to think. Amelia is already being tested in customer
call centers. Customer service depends on providing the right answer to the same ques-
tion, regardless of who calls. Amelia can provide the correct answer because prior to
working on her own she has worked alongside a human customer service rep listening
to every support request received and the answers given. Amelia helps to automate tasks
but she is not alive. However, she does have three emotional states, arousal, dominance,
and pleasure, which are influenced by how customers communicate with her. These
emotions affect her decision making in dealing with customers. Robots with artificial
intelligence such as Amelia will likely increasingly provide performance support in the
future or entirely replace employees in nonexpert repetitive jobs.
Wearables are just beginning to be developed and used for training and performance
support solutions. Wearable Intelligence provides smart eyewear technology and camera
technology that gives employees hands-free, voice-activated access to procedures and
checklists, live access to experts using tablet computers which allows data and live video
sharing, and the opportunity to review best practice videos before or during the perfor-
mance of complex procedures and operations, and it provides real-time notifications and
alerts.138 For example, an operator who might be working on a remote oil rig or a surgeon
in a sterile operating room can share live video with experts and get their advice needed
to fix a broken valve or complete a medical procedure, while remaining focused on the
equipment or patient. To understand whether personal interactions between employees
made a difference, Bank of America asked call center employees to wear badges that
contained sensors to record their movements and tone of their conversations.139 The data
showed that the most productive employees belonged to cohesive teams and they spoke
frequently to their peers. To get employees to interact more the bank scheduled employ-
ees for group breaks. As a result productivity increased more than 10 percent.
Use of HRIS, Mobile Devices, Cloud Computing, and HR Dashboards

Companies continue to use human resource information systems to store large quantities
of employee data including personal information, training records, skills, compensation
rates, absence records, and benefits usages and costs. A human resource information Human Resource
system (HRIS) is a computer system used to acquire, store, retrieve, and distribute infor- Information System
mation related to a company’s human resources.140 An HRIS can support strategic deci- (HRIS)
A system used to
sion making, help the company avoid lawsuits, provide data for evaluating policies and acquire, store, manipu-
programs, and support day-to-day HR decisions. Hilton Worldwide is giving managers late, analyze, retrieve,
access to talent data so they can integrate it with business data to make more effective and distribute HR
and strategic decisions about talent and performance.141 This allows managers to per- information.
form workforce planning by seeing the gaps between workforce projections and avail-
able supply of staff or projected turnover and modeling different scenarios.
Mobile devices refer to smartphones and tablet computers. Mobile devices are increas- Mobile Devices
ingly being used to provide employees with anytime and anywhere access to HR applica- Equipment such as
tions and other work-related information. For example, at Rackspace, employees can smartphones and tablet
computers that provide
check their pay stubs, bonus reports, time cards, and share knowledge.142 At Biogen Idec, employees with any-
salespersons can access e-learning modules on their tablets. PepsiCo has a mobile- time, anywhere access
accessible career site. In the first year of using the recruitment app, the company found to HR applications and
150 job candidates who started an employment application each month. The “Compet- other work-related
ing Through Technology” box shows how Verizon is using social networking tools and information.
COMPETING THROUGH TECHNOLOGY
Connectiveness and Mobility Enhance HR Practices
Verizon uses social networking product experts. Learning Com- SIMON (Simplified
tools and mobile devices to train munities are accessed through Information for the
employees, interact with custom- the Device Blog. They include Moment of Need) runs on both
ers, and support new products video blogs, message boards, Apple and Android devices and
and devices. Device Blog, Device links to online training modules, is designed to be used when
Forum, and Learning Communi- and product demonstrations. In interacting with a customer. Also,
ties help insure that employees addition to these tools, employ- Verizon provided its field techni-
are ready to support customers ees have access to My Network cians with tablets. They can use
when new products and devices for collaborating with their peers, the tablets to access product
are introduced to the market, knowledge and document knowledge and fixes to service
engages Verizon’s multigenera- sharing, and creating working problems. Previously, each day
tional workforce, and facilitates groups. Some instructors also local managers gave them hand-
peer-to-peer learning. Device use it for posting supplemental outs that contained this type of
Blog makes available information content for learners use. information.
and updates on wireless devices In 2013 Verizon implemented
(such as DROID), FAQs (fre- tablet computers for perfor- DISCUSSION QUESTION
quently asked questions), how- mance support and training of What are some of the potential
to-videos, and troubleshooting retail store employees. An app disadvantages of using social
tips. Device Forums enable retail puts all the data that retail store networks and mobile devices for
employees to learn from peers employees need to learn about HR practices?
and product manufacturers. devices, service plans, promo-
Employees can ask each other tions, and policies on the easy- SOURCES: Based on J. Salopek, “Good Con-
nections,” T + D, October 2014, pp. 48–50;
questions, share issues, post tips, to-use and readily accessible M. Weinstein, “Verizon Connects to Success,”
make suggestions, and access tablet computer. The app called Training, January/February 2011, pp. 40–42.
mobile devices to support its products and provide customer service through employee
training, collaboration, and performance support.
“Cloud computing” allows companies to lease software and hardware and employees
don’t even know the location of computers, databases, and applications they are using
Cloud Computing (they are in the “cloud”). Cloud computing refers to a computing system that provides
A computing system information technology infrastructure over a network in a self-service, modifiable, and
that provides informa- on-demand model.143 Clouds can be delivered on-demand via the Internet (public cloud)
tion technology infra-
structure over a network
or restricted to use by a single company (private cloud). Cloud computing gives compa-
in a self-service, modifi- nies and their employees access to applications and information from mobile devices
able, and on-demand rather than relying soley on personal computers. It also allows groups to work together in
model. new ways, can make employees more productive by allowing them to more easily share
documents and information, and provides greater access to large company databases. This
means that tools for conducting workforce analytics using metrics on turnover, absentee-
iem, and performance and social media and collaboration tools such as Twitter, blogs,
Google documents, and YouTube videos will be more easily accessible and available for
use. Cloud computing also can make it easier for employees to access training programs
from a variety of vendors and educational institutions. Siemens has a cloud computing
system for its more than 400,000 employees who work in 190 countries. This allowed
Siemens to standardize its global recruitment and development processes into a single
system using the cloud.144
48
More sophisticated systems extend management applications to decision making in

areas such as compensation and performance management. Managers can schedule job
interviews or performance appraisals, guided by the system to provide the necessary infor-
mation and follow every step called for by the procedure.145 One of the most important
uses of Internet technology is the development of HR dashboards. An HR dashboard is a HR Dashboard
series of indicators or metrics that managers and employees have access to on the com- HR metrics such as
pany intranet or human resource information system. The HR dashboard provides access productivity and absen-
teeism that are acces-
to important HR metrics for conducting workforce analytics. HR dashboards are impor- sible by employees and
tant for determining the value of HR practices and how they contribute to business goals. managers through the
As a result, the use of dashboards is critical for evidence-based HR discussed earlier in the company intranet or
chapter. For example, Cisco Systems views building talent as a priority so it has added to human resource infor-
its dashboard of people measures a metric to track how many people move and the reasons mation system.
why.146 This allows Cisco to identify divisions that are developing new talent.
High-Performance Work Systems and Virtual Teams

New technology causes changes in skill requirements and work roles and often results
in redesigning work structures (e.g., using work teams).147 High-performance work High-Performance
systems maximize the fit between the company’s social system (employees) and its Work Systems
technical system.148 For example, computer-integrated manufacturing uses robots and Work systems that max-
imize the fit between
computers to automate the manufacturing process. The computer allows the production the company’s social
of different products simply by reprogramming the computer. As a result, laborer, mate- system and technical
rial handler, operator/assembler, and maintenance jobs may be merged into one posi- system.
tion. Computer-integrated manufacturing requires employees to monitor equipment and
troubleshoot problems with sophisticated equipment, share information with other LO 1-6
employees, and understand the relationships between all components of the manufac- Discuss human
turing process.149 resource management
practices that support
Besides changing the way that products are built or services are provided within compa-
high-performance work
nies, technology has allowed companies to form partnerships with one or more other com- systems.
panies. Virtual teams refer to teams that are separated by time, geographic distance, culture,
and/or organizational boundaries and that rely almost exclusively on technology (e-mail, Virtual Teams
Internet, videoconferencing) to interact and complete their projects. Virtual teams can be Teams that are
formed within one company whose facilities are scattered throughout the country or the separated by time,
world. A company may also use virtual teams in partnerships with suppliers or competitors geographic distance,
to pull together the necessary talent to complete a project or speed the delivery of a product culture and/or orga-
nizational boundaries
to the marketplace. For example, Art & Logic software developers all work remotely from and rely exclusively on
across the U.S. and Canada from home offices, rented office space, or at a co-working technology for interac-
facility.150 Their clients represent a diverse set of industries, including education, aero- tion between team
space, music technology, consumer electronics, entertainment, and financial services. The members.
project teams work on the most unusual and difficult problems, which developers at other
companies have failed to solve. Art & Logic tries to accommodate the unique schedule and
work-style requirements of its developers, but its work is highly collaborative within proj-
ect teams. Every project consists of at least a project manager/developer and has a maxi-
mum of five to seven developers. Teams use Google Apps for Business for sharing
documents and communicating (both within the team and with clients).
Human resource management practices that support high-performance work systems
are shown in Table 1.14. The HRM practices involved include employee selection, per-
formance management, training, work design, and compensation. These practices are
designed to give employees skills, incentives, knowledge, and autonomy. Research stud-
ies suggest that high-performance work practices are usually associated with increases
Table 1.14
How HRM Practices Staffing
Support High- interviews.
Performance Work Work Design
Systems product or service.
and work methods.
used to encourage flexibility and interaction between employees.
information sharing.
Training
Compensation
financial performance.
Performance
Management involved in the performance improvement process.
SOURCES: Based on K. Birdi, C. Clegy, M. Patterson, A. Robinson, C. Stride, T. Wall, and S. Wood, “The Impact of
Human Resource and Operational Management Practices on Company Productivity: A Longitudinal Study,” Personnel
Psychology 61(2008), pp. 467–501; A. Zacharatos, J. Barling, and R. Iverson, “High Performance Work Systems and
Occupational Safety,” Journal of Applied Psychology 90 (2005), pp. 77–93; S. Way, “High Performance Work Systems
and Intermediate Indicators of Performance within the U.S. Small Business Sector,” Journal of Management 28 (2002),
pp. 765–85; M. A. Huselid, “The Impact of Human Resource Management Practices on Turnover, Productivity, and
Corporate Financial Performance,” Academy of Management Journal 38 (1995), pp. 635–72.
in productivity and long-term financial performance.151 Research also suggests that it is

more effective to improve HRM practices as a whole, rather than focus on one or two
isolated practices (such as the pay system or selection system).152 There may be a best
HRM system, but whatever the company does, the practices must be aligned with each
other and be consistent with the system if they are to positively affect company perfor-
mance.153 We will discuss this alignment in more detail in Chapters 2 and 16.
Employees often have responsibility for hiring and firing team members and can make
decisions that influence profits. As a result, employees must be trained in principles of
employee selection, quality, and customer service. They need to understand financial
data so they can see the link between their performance and company performance.
In high-performance work systems, previously established boundaries between man-
agers and employees, employees and customers, employees and vendors, and the various
functions within the company are abandoned. Employees, managers, vendors, custom-
ers, and suppliers work together to improve service and product quality and to create
new products and services. Line employees are trained in multiple jobs, communicate
directly with suppliers and customers, and interact frequently with engineers, quality
experts, and employees from other functions.
Consider how human resource management practices support high-performance
work systems at both small and large companies.154 HindlePower is a manufacturer of
battery chargers. Most of HindlePower’s 75 employees work in the factory as assem-
blers. There is no time clock. Employees do not need to punch in or out and there are no
rules for time off. Employees don’t abuse the policy—hours in the factory consistently
reach 97% to 100% of full time. Hindle established a program called the Professional
EVIDENCE-BASED HR
General Cable, one of the world’s largest makers of wire and cable products, uses
a high-performance work system at its Jackson, Tennessee, plant. Managers and
employees worked together to determine how to exceed quality and safety expecta-
tions. They rearranged work into production cells, with employee teams making a
completed product. Team members were responsible for their cell’s safety, quality,
and productivity. Employees were trained in new skills needed to work in cells. The
move to a high-performance work system resulted in a 129% productivity increase,
and 54% growth in first-pass yield, a measure of product quality. The Jackson plant
also received Industry Week’s 2013 Best Plant Award.
SOURCES: Based on A. Selko, “From Chopping Block to Award Banquet,” Industry Week, January 2014, pp. 16–17;
company website, “About Us” and “Careers,” www.generalcable.com, accessed May 17, 2015.
Manufacturing Team, which pairs training with employee involvement in designing

more efficient processes. The training includes 25 to 30 courses customized for each pro-
duction line. Employees are responsible for completing all of the courses and when they
do they are designated as a manufacturing professional. Employees are also involved in
decisions that go beyond training. For example, employees redesigned a production line
resulting in an additional 150,000 units produced per week. At Chrysler Dundee Engine
plant, hourly employees rotate jobs and shifts, giving the company greater flexibility
and employees more family time. The plant’s culture emphasizes problem solving and
the philosophy that anyone can do anything, anytime, anywhere. Every employee is
either a team member or a team leader. Job candidates have to make it through a dif-
ficult screening process that includes testing, evaluation of how they perform in team
activities, and interviews with managers and team leaders. Rotating jobs helps keep
employees motivated and reduces injuries. Team leaders and engineers are expected on
the shop floor as part of six-person teams. Large electronic screens hanging from the
plant ceiling provide alerts of machinery parts that are ending their lifespan and need to
be replaced before they malfunction. A performance management system, accessible on
personal computers, alerts employees to delays or breakdowns in productivity. Employ-
ees are empowered to fix problems—not just managers or engineers.
Meeting Competitive Challenges

through HRM Practices
We have discussed the global, stakeholder, new economy, and high-performance work sys- LO 1-7
tem challenges U.S. companies are facing. We have emphasized that management of human Provide a brief descrip-
resources plays a critical role in determining companies’ success in meeting these chal- tion of human resource
management practices.
lenges. HRM practices have not traditionally been seen as providing economic value to the
company. Economic value is usually associated with equipment, technology, and facilities.
However, HRM practices have been shown to be valuable. Compensation, staffing, training
and development, performance management, and other HRM practices are investments that
directly affect employees’ motivation and ability to provide products and services that are
valued by customers. Research has shown that companies that attempt to increase their
competitiveness by investing in new technology and becoming involved in the quality
movement also invest in state-of-the-art staffing, training, and compensation practices.155
Figure 1.8 shows examples of human resource management practices that help companies
Figure 1.8
Examples of How Global Sustainability
HRM Practices Can Challenge Challenge
Help Companies
Meet Competitive
Challenges
Technology
Challenge
Figure 1.9
Major Dimensions Dimensions of HRM Practices
of HRM Practices Managing Acquiring Assessment and Compensating
Contributing the human and preparing development human Competitiveness
to Company resource human of human resources
Competitiveness environment resources resources
deal with the three challenges. For example, to meet the sustainability challenge, companies
need to identify through their selection processes whether prospective employees value
customer relations and have the levels of interpersonal skills necessary to work with fellow
employees in teams. To meet all three challenges, companies need to capitalize on the
diversity of values, abilities, and perspectives that employees bring to the workplace.
HRM practices that help companies deal with the competitive challenges can be
grouped into the four dimensions shown in Figure 1.9. These dimensions include
the human resource environment, acquiring and preparing human resources, assess-
ment and development of human resources, and compensating human resources. In
addition, some companies have special issues related to labor–management rela-
tions, international human resource management, and managing the human resource
function.
Managing the Human Resource Environment

Managing internal and external environmental factors allows employees to make the
greatest possible contribution to company productivity and competitiveness. Creating a
positive environment for human resources involves
∙ Linking HRM practices to the company’s business objectives—that is, strategic
human resource management.
∙ Ensuring that HRM practices comply with federal, state, and local laws.
∙ Designing work that motivates and satisfies the employee as well as maximizes cus-
tomer service, quality, and productivity.
Acquiring and Preparing Human Resources

Customer needs for new products or services influence the number and type of employ-
ees businesses need to be successful. Terminations, promotions, and retirements also
influence human resource requirements. Managers need to predict the number and type
of employees who are needed to meet customer demands for products and services.
Managers must also identify current or potential employees who can successfully deliver
products and services. This area of human resource management deals with
∙ Identifying human resource requirements—that is, human resource planning,
recruiting employees, and selecting employees.
∙ Training employees to have the skills needed to perform their jobs.
Assessment and Development of Human Resources

Managers need to ensure that employees have the necessary skills to perform current
and future jobs. As we discussed earlier, because of new technology and the quality
movement, many companies are redesigning work so that it is performed by teams.
As a result, managers and employees may need to develop new skills to succeed in
a team environment. Companies need to create a work environment that supports
employees’ work and nonwork activities. This area of human resource management
addresses
∙ Measuring employees’ performance.
∙ Preparing employees for future work roles and identifying employees’ work inter-
ests, goals, values, and other career issues.
∙ Creating an employment relationship and work environment that benefits both the
company and the employee.
Compensating Human Resources

Besides interesting work, pay and benefits are the most important incentives that com-
panies can offer employees in exchange for contributing to productivity, quality, and
customer service. Also, pay and benefits are used to reward employees’ membership in
the company and attract new employees. The positive influence of new work designs,
new technology, and the quality movement on productivity can be damaged if employees
are not satisfied with the level of pay and benefits or believe pay and benefits are unfairly
distributed. This area of human resource management includes
∙ Creating pay systems.
∙ Rewarding employee contributions.
∙ Providing employees with benefits.
Special Issues
In some companies, employees are represented by a labor union. Managing human
resources in a union environment requires knowledge of specific laws, contract adminis-
tration, and the collective bargaining process.
Many companies are globally expanding their business through joint ventures, merg-
ers, acquisitions, and establishing new operations. Successful global expansion depends
on the extent to which HRM practices are aligned with cultural factors as well as man-
agement of employees sent to work in another country. Human resource management
practices must contribute to organizational effectiveness.
Human resource management practices of both managers and the human resource func-
tion must be aligned and contribute to the company’s strategic goals. The final chapter of
the book explains how to effectively integrate human resource management practices.
Organization of This Book

The topics in this book are organized according to the four areas of human resource man-
agement and special issues. Table 1.15 lists the chapters covered in the book.
Table 1.15
Topics Covered in 1 Human Resource Management: Gaining a Competitive Advantage
This Book I The Human Resource Environment
2 Strategic Human Resource Management
3 The Legal Environment: Equal Employment Opportunity and Safety
4 The Analysis and Design of Work
II Acquisition and Preparation of Human Resources
5 Human Resource Planning and Recruitment
6 Selection and Placement
7 Training
III Assessment and Development of HRM
8 Performance Management
9 Employee Development
10 Employee Separation and Retention
IV Compensation of Human Resources
11 Pay Structure Decisions
12 Recognizing Employee Contributions with Pay
13 Employee Benefits
V Special Topics in Human Resource Management
14 Collective Bargaining and Labor Relations
15 Managing Human Resources Globally
16 Strategically Managing the HRM Function
The content of each chapter is based on academic research and examples of effec-
tive company practices. Each chapter includes examples of how the human resource
management practice covered in the chapter helps a company gain a competitive advan-
tage by addressing sustainability, global, and technological challenges. Also, each chap-
ter includes an example of a company that demonstrates how HR practices add value
(evidence-based HR).
A LOOK BACK
HRM at Marriott
One of Marriott’s core values, “We Put People First,” drives its management and
human resources practices, which in turn lead to high levels of employee engage-
ment, satisfied customers, and a positive “bottom line.”
QUESTIONS
1. Which HR practices do you believe are the most critical for Marriott to maintain
and grow its competitive advantage? Explain why.
2. Would Marriott have been successful without its current HR practices? Explain.
3. Can companies in other industries such as health care, manufacturing, or
research and development adopt Marriott’s value and practices and have simi-
lar success? Explain why or why not.
4. What other types of HR practices should Marriott consider adopting that would
appeal to its growing number of Millennial employees?
SUMMARY
This chapter introduced the roles and activities of a compa- products and services, return to shareholders, and social
ny’s human resource management function and emphasized responsibility). Global challenges include entering inter-
that effective management of human resources can con- national markets, immigration, and offshoring. Technol-
tribute to a company’s business strategy and competitive ogy challenges include using new technologies to support
advantage. HR can be viewed as having three product lines: flexible and virtual work arrangements, high-performance
administrative services, business partner services, and stra- work systems, and implementing and using social net-
tegic services. To successfully manage human resources, works, wearables, human resource information systems,
individuals need personal credibility, business knowl- and mobile devices.
edge, understanding of the business strategy, technology The chapter concludes by showing how the book is orga-
knowledge, and the ability to deliver HR services. Human nized. The book includes four topical areas: the human
resource management practices should be evidence-based, resource environment (strategic HRM, legal, analysis and
that is, based on data showing the relationship between the design of work), acquisition and preparation of human
practice and business outcomes related to key company resources (HR planning and recruitment, selection, training),
stakeholders (customers, shareholders, employees, com- assessment and development of human resources (perfor-
munity). In addition to contributing to a company’s busi- mance management, development, separation and retention),
ness strategy, human resource practices are important for compensation of human resources (pay structures, recognizing
helping companies deal with sustainability, globalization, employee contributions with pay, benefits), and special topics
and technology challenges. The sustainability challenges (collective bargaining and labor relations, managing human
are related to the economy, the characteristics and expecta- resources globally, and strategically managing the HR func-
tions of the labor force, how and where work is done, the tion). All of the topical areas are important for companies to
value placed on intangible assets and human capital, and deal with the competitive challenges and contribute to busi-
meeting stakeholder needs (ethical practices, high-quality ness strategy.
KEY TERMS
Competitiveness, 4 Learning organization, 22 Ethics, 40
Human resource management Change, 23 Sarbanes-Oxley Act of 2002, 40
(HRM), 4 Employee engagement, 23 Offshoring, 44
Shared service model, 7 Talent management, 24 Reshoring, 44
Self-service, 7 Alternative work arrangements, 25 Social networking, 45
Outsourcing, 8 Balanced scorecard, 27 Human resource information system
Evidence-based HR, 11 Total quality management (TQM), 30 (HRIS), 47
HR or workforce analytics, 11 Malcolm Baldrige National Quality Mobile devices, 47
Big data, 11 Award, 30 Cloud computing, 48
Sustainability, 16 ISO 9000:2000, 30 HR dashboard, 49
Stakeholders, 16 Six Sigma process, 32 High-performance work systems, 49
Intangible assets, 21 Lean thinking, 32 Virtual teams, 49
Knowledge workers, 22 Internal labor force, 33
Empowering, 22 External labor market, 33
DISCUSSION QUESTIONS
1. Traditionally, human resource management practices acquiring and preparing human resources, assessment
were developed and administered by the company’s and development of human resources, and compensat-
human resource department. Some companies are ing human resources. Which area do you believe con-
abandoning or don’t have HR departments. Why is this tributes most to helping a company gain a competitive
occurring? Is it a good idea for companies not to have advantage? Which area do you believe contributes the
an HR department or HR professionals? Explain your least? Why?
position. 9. What is the balanced scorecard? Identify the four per-
2. Staffing, training, compensation, and performance spectives included in the balanced scorecard. How can
management are important HRM functions. How can HRM practices influence the four perspectives?
each of these functions help companies succeed in 10. Is HRM becoming more strategic? Explain your answer.
meeting the global challenge, the challenge of using 11. What is sustainability? How can HR practices help a
new technology, and the sustainability challenge? company become more socially and environmentally
3. What are intangible assets? How are they influenced by conscious?
human resource management practices? 12. Explain the implications of each of the following labor
4. What is “evidence-based HR”? Why might an HR force trends for HRM: (1) aging workforce, (2) diverse
department resist becoming evidence-based? workforce, (3) skill deficiencies.
5. What types of big data would you collect and analyze to 13. What role do HRM practices play in a business decision
understand why an employer was experiencing a high to expand internationally?
turnover rate? 14. What might a quality goal and high-performance work
6. Which HR practices can benefit by the use of social col- systems have in common in terms of HRM practices?
laboration tools like Twitter and Facebook? Identify the 15. What disadvantages might result from outsourcing
HR practices and explain the benefits gained. HRM practices? From employee self-service? From
7. Do you agree with the statement “Employee engage- increased line manager involvement in designing and
ment is something companies should be concerned using HR practices?
about only if they are making money”? Explain. 16. What factors should a company consider before reshor-
8. This book covers four human resource management prac- ing? What are the advantages and disadvantages of
tice areas: managing the human resource environment, reshoring?
SELF-ASSESSMENT EXERCISE Additional assignable self-assessments available in Connect.
Do You Have What It Takes to Work in HR?

Instructions: Read each statement and circle yes or no.
Yes No 1. I have leadership and management skills I Yes No 8. I listen to issues before reacting with
have developed through prior job experi- solutions.
ences, extracurricular activities, community Yes No 9. I can collect and analyze data for business
service, or other noncourse activities. solutions.
Yes No 2. I have excellent communications, dispute Yes No 10. I am a good team member.
resolution, and interpersonal skills. Yes No 11. I have knowledge of local and global eco-
Yes No 3. I can demonstrate an understanding of the nomic trends.
fundamentals of running a business and Yes No 12. I demonstrate accountability for my actions.
making a profit.
Yes No 4. I can use spreadsheets and the World Wide Scoring: The greater the number of yes answers, the better
Web, and I am familiar with information prepared you are to work as an HR professional. For ques-
systems technology. tions you answered no, you should seek courses and expe-
Yes No 5. I can work effectively with people of differ- riences to change your answer to yes—and better prepare
ent cultural backgrounds. yourself for a career in HR!
Yes No 6. I have expertise in more than one area of
SOURCE: Based on B. E. Kaufman, “What Companies Want from HR
human resource management. Graduates,” HR Magazine, September 1994; SHRM Elements for HR Success
Yes No 7. I have a willingness to learn. Competency Model, 2012, from www.shrm.org, March 21, 2012.
EXERCISING STRATEGY
Zappos Faces Competitive Challenges
Zappos, based in Las Vegas, is an online retailer with the initial Deliver WOW through Service means that call center
goal of trying to be the best website for buying shoes by offer- employees need to provide excellent customer service. Call
ing a wide variety of brands, styles, colors, sizes, and widths. center employees encourage callers to order more than one
The zappos.com brand has grown to offer shoes, handbags, size or color because shipping and return shipping is free.
eyewear, watches, and accessories for online purchase. The They are also encouraged to use their imaginations to meet
company’s goal is to provide the best service online, not just customer needs.
in shoes but in any product category. Zappos believes that the Zappos has received many awards for its workplace cul-
speed at which a customer receives an online purchase plays a ture and practices including being recognized as the 86th
critical role in how that customer thinks about shopping online Best Company to Work for in Fortune magazine’s 2014
again in the future, so they are focusing on making sure the ranking of the 100 Best Companies to Work For. HR’s job
items get delivered to our customers as quickly as possible. at Zappos is more than just a rule enforcer. HR’s job is to
Zappos CEO Tony Hsieh has shaped the company’s cus- protect the culture and to educate employees. HR focuses
tomer-service focused culture, brand, and business strategy on interactions with managers and employees to understand
around 10 core values. They are: what they need from HR (HR is even invited to attend work
Deliver WOW through service. teams’ happy hours!). Zappos’ employment practices help
Embrace and drive change. perpetuate its company culture. Only about one out of 100
Create fun and a little weirdness. applicants passes a hiring process that is equally weighted
Be adventurous, creative, and open-minded. on job skills and on the potential to work in Zappos’ culture.
Pursue growth and learning. Some managers at Zappos believe that if you want to get a
Build open and honest relationships with communication. job the most important value to demonstrate is “be humble”
Build a positive team and family spirit. including a focus on “we” instead of “I.” Job candidates are
Do more with less. interviewed for cultural fit and a willingness to change and
Be passionate and determined. learn. For example, they observe whether at lunch job candi-
Be humble. dates talk with others or just the person they think is making
the hiring decision. The HR team uses unusual interview enabled individuals in the group to learn more about how
questions—such as, How weird are you? and What’s your integral their work was. To keep the vibrant company CEO
theme song?—to find employees who are creative and have Tony Hsieh spent $350 million to develop a neighborhood
strong individuality. Zappos provides free lunch in the cafete- in downtown Las Vegas which is the home of Zappos.com’s
ria (cold cuts) and a full-time life coach (employees have to new headquarters. Hsieh wants to provide employees with a
sit on a red velvet throne to complain), managers are encour- great place to work as well as to live and socialize. Recently,
aged to spend time with employees outside of the office, and Zappos adopted a management philosophy, Holocracy, which
any employee can reward another employee a $50 bonus for eliminates managers and gives employees the freedom and
good performance. Call center employees can use an online responsibility to decide how to get their work done. Hsieh’s
scheduling tool that allows them to set their own hours and intent was to allow employees to act more like entrepreneurs
they can earn more pay if they work during hours with greater and help stimulate new ideas which would benefit the busi-
customer demand. Most of the 1,441 employees at Zappos ness. However, employees are finding the new management
are hourly. Every new hire undergoes four weeks of train- system confusing and requiring them to spend more time in
ing, during which the company culture must be committed meetings. Also, they wonder how they will earn raises and
to memory, and spends two weeks dealing with customers advance their career without management jobs. Two hun-
by working the telephones. New recruits are offered $2,000 dred ten employees found the new philosophy so dissatisfy-
to leave the company during training to weed out individuals ing that they took three months of severance pay and left the
who will not be happy working at the company. Zappos pro- company.
vides free breakfast, lunch, snacks, coffee, tea, and vending Despite this setback, other companies are trying to learn
machine snacks. Work is characterized by constant change, from Zappos’ practices. Zappos Insights is a department
a loud, open office environment, and interacting in teams. within Zappos created to share the Zappos culture with other
Employees at Zappos move around. For example, in the call companies. Zappos Insights provides programs about build-
center employees can bid for different shifts every month. ing a culture (3-Day Culture Camp), its WOW service phi-
To reinforce the importance of the 10 core values Zappos’ losophy (School of WOW), the power of a coaching-based
performance management system asks managers to evaluate culture (Coaching Event), how the human resources function
how well employees’ behaviors demonstrate the core values protects the culture and how its programs support it (People
such as being humble or expressing their personalities. To Academy), and custom programs. The cost to attend these
evaluate task performance managers are asked to regularly programs ranges from $2,000 to $6,000 for each attendee.
provide employees with status reports on such things as how
QUESTIONS
much time they spend on the telephone with customers. The
1. Zappos seems to be well-positioned to have a competi-
status reports and evaluations of the core values are informa-
tive advantage over other online retailers. What chal-
tional or used to identify training needs. Zappos also believes
lenges discussed in Chapter 1 pose the biggest threat to
in helping others understand what inspired the company cul-
Zappos’ ability to maintain and enhance its competitive
ture. The company created the Zappos.com library which
position? How can human resource management prac-
provides a collection of books about creating a passion for
tices help Zappos meet these challenges?
customer service, products, and local communities. These
2. Do you think that employees of Zappos have high levels
books can be found in the front lobby of Zappos offices and
of engagement? Why?
are widely read and discussed by company employees.
3. Which of Zappos’ 10 core values do you believe that
Corporate culture is more than a set of values, and it is
human resource practices can influence the most? The
maintained by a complex web of human interactions. At
least? Why? For each of the core values, identify the HR
Zappos, the liberal use of social media including blogs and
practices that are related to it. Explain how each of the
Twitter facilitates the network that links employees with one
HR practice(s) you identified is related to the core values.
another and with the company’s customers. Zappos takes
4. How might the change to the holocracy management
the pulse of the organization monthly, measuring the health
style undermine the core values and cause employees to
of the culture with a happiness survey. Employees respond
have lower levels of engagement?
to such unlikely questions as whether they believe that the
company has a higher purpose than profits, whether their SOURCES: Based on website for Zappos, www.zappos.com, accessed May
own role has meaning, whether they feel in control of their 18, 2015; J. McGregor, “Zappos Gives Exit Prize If Its Culture Is a Turnoff,”
The Columbus Dispatch, April 6, 2015, p. C3; “Zappos Insights” from www.
career path, whether they consider their co-workers to be like zapposinsights.com, accessed March 16, 2015; M. Moskowitz and R. Levering,
family and friends, and whether they are happy in their jobs. “The 100 Best Companies to Work For,” Fortune, March 15, 2015, pp. 140–154;
Results from the survey are broken down by department, D. Richard, “At Zappos, Culture Pays,” Strategy + Business, August 2010, p. 60,
and opportunities for development are identified and acted www.strategybusiness.com, accessed March 25, 2013; K. Gurchick, “Delivering
HR at Zappos,” HR Magazine, June 2011; R. Pyrillis, “The Reviews Are In,”
upon. For example, when it was clear from the survey that
Workforce Management, May 2011, pp. 20–25; J. O’Brien, “Zappos Knows How
one department had veered off course and felt isolated from to Kick It,” Fortune, February 2, 2009, pp. 55–66; R. Silverman, “Going Bossless
the rest of the organization, a program was instituted that Backfires at Zappos,” The Wall Street Journal, May 21, 2015, pp. A1, A10.
MANAGING PEOPLE
Mars Incorporated: HR Practices Help Create Sweet Success
You may have enjoyed Mars Incorporated products if you Mars employees love the products they make but they
have had M&Ms, Snickers, Lifesavers, Wrigley’s Juicy also love the HR practices that help put the Five Principles
Fruit, or Uncle Ben’s Converted Rice. But are you aware that into action. The turnover of non–sales force employees is
the “Ms” on M&Ms stand for Forrest Mars and R. Bruce only 5%. What is responsible for the low turnover as well as
Murrie, the son of the president of competitor Hershey’s, $33 billion in global revenue in 2012? Perhaps one reason is
which supplied Mars with chocolate when there was limited that Mars has an egalitarian workplace with no fancy offices
availability of cocoa during World War II? Mars is the third or special perks for managers. Employees are officially
largest private company in the United States with 72,000 called “associates” but because of the unifying value of the
employees located in the U.S. and 72 other countries around Five Principles, they often refer to themselves as Martians.
the world. It operates in six business segments including Most employees have to “punch in” at their worksite every
food, drinks, pet care, chocolate, gum and confections, and day, even the company president. Employees who are late
symbioscience (a technology-based health and life sciences are docked 10% of their pay. Also, the principle of Respon-
business focused on product development). Today, Mars sibility means that all employees, not just managers, have a
includes eleven brands with revenues of $1 billion or more. “voice” and are expected to put themselves in the position of
Granted some of that success is attributed directly to the the consumer. They are encouraged to speak up rather than
quality of and demand for the products that Mars offers con- ever provide an inferior product or service.
sumers (who doesn’t like M&Ms?). But a lot of the success Mars does not offer stock options or company pensions
is due to the HR practices that Mars uses to attract, moti- or game rooms or private chefs for its employees. It does
vate, and retain high-caliber employees. This has resulted in provide vending machines that provide employees with free
Mars ranking #95 on the 2013 Fortune 100 Best Companies candy, and chewing Wrigley’s gum at meetings is encour-
to Work For. aged. Perhaps another reason for the low turnover and high
It all starts with the Five Principles of Mars—Quality, revenues is that employees have many career and develop-
Responsibility, Mutuality, Efficiency and Freedom—which ment opportunities both within their current business and in
are the foundation of the company culture and business new ones. All new employees attend The Essence of Mars
approach. The Five Principles, found on the walls in its training program which introduces and reinforces the Five
offices and manufacturing plants throughout the world, pro- Principles. Mars also has a corporate university (Mars Uni-
vide a common bond for all employees regardless of their versity) which offers online and classroom-based courses
business segment, location, national language, or generation. in functional topics as well as on leadership skills. Forty
All employees are familiar with the Five Principles and they percent of associates have participated in a program offered
influence their daily work. Mars believes that quality work by Mars University. Also, many employees have mentors,
is the first ingredient of quality brands and the source of the even executives who learn about social media from younger
company’s reputation for high standards. All associates are employees. Mars insures that all employees regardless of
asked to take direct responsibility for results, to exercise background have the opportunity to grow and advance. For
initiative and judgment, and to make decisions as required. example, Mars was ranked #25 in the 2012 World’s Best
Mutuality refers to the company’s belief that all business Multinational Workplaces list, the world’s first global work-
relationships should be measured by the degree to which place excellence ranking by Great Place to Work®, for its
mutual benefits are created. The actions of Mars should high percentage of women in executive and senior manage-
never be at the expense, economic or otherwise, of others. ment positions.
Efficiency is seen as a strength of the company. It allows the Or, maybe turnover is low and revenues are high because
company to organize physical, financial, and human assets of the bonuses that employees can earn which range from
for maximum productivity. It also contributes to making and 10 to 20% of their salaries if their team performs well. Con-
delivering products and services with the highest quality, tributing to employees’ motivation to earn their bonuses is
lowest possible costs, and lowest consumption of resources. the availability of performance data. Flat screens displays
Finally, Mars cherishes the freedom of being a privately held current financials including sales, earnings, cash flows,
company, which allows it to make decisions free of short- and factory efficiency. Mars also encourages community
term earnings reports and to be financially answerable to no involvement, which gives employees opportunities to gain
one. This gives management and employees the ability to new insights and make meaningful contributions. The
experiment with ideas and take the time to develop talents Mars Volunteer Initiative offers paid time off for associates
for longer-term gains. to clean parks, teach courses, help pets find homes, work
in medical clinics, and plant gardens. In 2012, employees QUESTIONS

devoted 50,000 hours to volunteering! The Mars Ambas- 1. What HR practices do you believe are critical for Mars
sadors is a select program in which employees spend six Incorporated to maintain the culture and product qual-
weeks working with Mars partners in developing areas of the ity and growth it’s known for?
world. In late 2012, seven Mars Drinks Associates traveled 2. Could Mars be successful without its current HR prac-
from all over the globe and met in Kenya. Their objective tices? Explain.
was to learn about the coffee farming process and about how 3. Do you think that Mars’s culture and HR practices can
Mars Drinks supports and improves the farming business also help the bottom line at companies in other indus-
through a partnership with Sustainable Management Ser- tries such as health care, manufacturing, or research and
vices (SMS). During their week-long trip, that objective was development? Explain why or why not.
met, and the experience became much more than a simple 4. Mars is a privately held company and a family-owned
learning opportunity. As one Drinks Associate from France business. What advantages (or disadvantages) can this
noted, “I realized that selling or buying coffee in Europe can provide for developing effective HR practices compared
have great repercussions in third world countries.” Sustain- to a public company “owned” by its shareholders?
ability is not just a marketing operation but is a way of living
SOURCE: Based on D. Kaplan, “Inside Mars,” Fortune, February 4, 2013, p.
and needs to be sponsored by everyone. 82; www.mars.com, website for Mars Incorporated, accessed March 15, 2013.
HR IN SMALL BUSINESS
Managing HR at a Services Firm
Susan K. Dubin describes herself as someone who enjoys “She doesn’t put up with any nonsense . . . but does it in a
helping others and making her company a positive place to wonderful way.”
work. Those attitudes have provided a strong basis for her Perhaps the Careers page of the company’s website puts
successful career in human resource management. In two it best. Besides promoting the agency as an “honest and
different companies, Dubin took on responsibilities for pay- hardworking team,” it says simply, “Please be advised that
roll, training, and employee relations. As she built her expe- our organization cares about its employees.”
rience, she established a strong working relationship with
Danone Simpson, an insurance agent. QUESTIONS
Dubin was impressed with what she saw as Simpson’s 1. Based on the description in this case, how well would
“commitment to client services.” So when Simpson pre- you say Susan Dubin appreciates the scope of human
pared to open her own insurance services business, Dubin resource management? What, if any, additional skills
was interested in signing on. For several years now, Dubin of an HR professional would you encourage her to
has been HR director for Montage Insurance Solutions develop?
(formerly Danone Simpson Insurance Services), which 2. Look up descriptions of HR jobs by searching under
operates from offices in Woodland Hills, California. She “human resources” in the latest edition of the Bureau
also answers questions from clients who call the agency’s of Labor Statistics’ Occupational Outlook Handbook
HR hotline. (available online at www.bls.gov/OCO/). What position
Dubin sees herself as contributing to the fast growing in the handbook best matches Dubin’s job, as described
company’s success. For example, she looks for the best in this case?
deals in benefits programs in order to have room in her 3. How would you expect Dubin’s job in a small services
budget for the little things that contribute to an employee- company to be different from a similar position in a
friendly workplace: monthly luncheons, raffle prizes, large manufacturing company?
and break rooms. That’s a priority, Dubin says, because
employees who are “happy at work” are “more productive, SOURCES: Montage Insurance Solutions corporate website, http://www.
montageinsurance.com, accessed May 26, 2015; Mark R. Madler, “Valley’s
so everybody wins.” Simpson sees that balance between Top Human Resources Professionals: Susan K. Dubin,” San Fernando Valley
nurturing and practicality in Dubin. According to Simpson, Business Journal, April 13, 2009, Business & Company Resource Center,
Dubin is supportive but also firm in enforcing standards: http://galenet.galegroup.com.
NOTES
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Strategic Human Resource
Management
PART ONE
2
C H A P T E R
The Human Resource Environment
LEARNING OBJECTIVES
LO 2-1 Describe the differences between strategy formulation

and strategy implementation. page 70
LO 2-2 List the components of the strategic management process. page 72
LO 2-3 Discuss the role of the HRM function in strategy formulation. page 74
LO 2-4 Describe the linkages between HRM and strategy formulation. page 74
LO 2-5 Discuss the more popular typologies of generic strategies and

the various HRM practices associated with each. page 80
LO 2-6 Describe the different HRM issues and practices associated

with various directional strategies. page 88
66
>>>
Southwest Airlines Hits Middle Age
Southwest Airlines has perennially been considered
a model of how an innovative strategy combined
with strong culture and a strong relationship between
management and employees can lead to business
success. The company was founded in 1967 and
was built on low costs, labor harmony, simplicity, and
rapid expansion. While labor strife seems endemic to
the airline industry, Southwest always stood up for its
workforce, which seemed unflinchingly committed to
the company’s success.
However, as the company has expanded and
grown older, the original strategy seems to be in
© rypson
peril. Mergers among the major airlines such as
American/US Airways, United/Continental, and Delta/
part-time workers and has floated the idea of out-
Northwest have enabled them to reduce their cost
sourcing a number of jobs.
structures and come closer to Southwest on price. In
Employees pine for the former CEO and co-founder,
addition, ultra-discount airlines, such as Spirit Airlines,
Herb Kelleher, who was beloved by employees. Says
can undercut Southwest on price. Finally, airlines like
Randy Barnes, a union representative for the ramp
JetBlue and Virgin America compete for Southwest’s
workers, “Ever since Herb . . . left, this has been more
traditional middle-class customers.
of a corporation and less of a family.”
While Southwest faces a number of competitive
This chapter explores how firms seek to align
and technological challenges, its labor costs stand
their human resources with strategy through a pro-
front and center. Because Southwest is not expand-
cess called “strategic human resource management.”
ing as fast, the company cannot hire as many new
employees at the lowest rungs of the wage scale. SOURCES: Based on T. Maxon, “Southwest Airlines Tops $1 Billion in
With 83% of its workforce unionized, Southwest now Annual Profits for First Time,” Dallas Morning News, January 22, 2015,
http://aviationblog.dallasnews.com; J. Nicas and S. Carey, “Southwest
seeks to negotiate wage freezes and tighten rules on Airlines, Once a Brassy Upstart, Is Showing Its Age,” The Wall Street
sick time. In addition, the airline wants to hire more Journal, April 1, 2014, www.wsj.com.
Introduction
As the Southwest Airlines example just illustrated, business organizations exist in an
environment of competition. They can use a number of resources to compete with other
companies. These resources are physical (such as plant, equipment, technology, and
geographic location), organizational (the structure, planning, controlling, and coordinat-
ing systems, and group relations), and human (the experience, skill, and intelligence of
employees). It is these resources under the control of the company that provide competi-
tive advantage.1
67
68 CHAPTER 2 Strategic Human Resource Management
The goal of strategic management in an organization is to deploy and allocate

resources in a way that gives it a competitive advantage. As you can see, two of the
three classes of resources (organizational and human) are directly tied to the human
resource management function. As Chapter 1 pointed out, the role of human resource
management is to ensure that a company’s human resources provide a competitive
advantage. Chapter 1 also pointed out some of the major competitive challenges that
companies face today. These challenges require companies to take a proactive, strategic
approach in the marketplace.
To be maximally effective, the HRM function must be integrally involved in the
company’s strategic management process.2 This means that human resource manag-
ers should (1) have input into the strategic plan, both in terms of people-related issues
and in terms of the ability of the human resource pool to implement particular stra-
tegic alternatives; (2) have specific knowledge of the organization’s strategic goals;
(3) know what types of employee skills, behaviors, and attitudes are needed to support
the strategic plan; and (4) develop programs to ensure that employees have those skills,
behaviors, and attitudes.
We begin this chapter by discussing the concepts of business models and strategy
and by depicting the strategic management process. Then, we discuss the levels of inte-
gration between the HRM function and the strategic management process in strategy
formulation. Next, we review some of the more common strategic models and, within
the context of these models, discuss the various types of employee skills, behaviors, and
attitudes, and the ways HRM practices aid in implementing the strategic plan. Finally,
we discuss the role of HR in creating competitive advantage.
What Is a Business Model?

A business model is a story of how the firm will create value for customers and,
more important, how it will do so profitably. We often hear or read of companies that
have “transformed their business model” in one way or another, but what that means
is not always clear. To understand this, we need to grasp a few basic accounting
concepts.
First, fixed costs are generally considered the costs that are incurred regardless of
the number of units produced. For instance, if you are producing widgets in a factory,
you have the rent you pay for the factory, depreciation of the machines, the utilities, the
property taxes, and so on. In addition, you generally have a set number of employees
who work a set number of hours with a specified level of benefits, and while you might
be able to vary these over time, on a regular basis you pay the same total labor costs
whether your factory runs at 70% capacity or 95% capacity.
Second, you have a number of variable costs, which are those costs that vary directly
with the units produced. For instance, all of the materials that go into the widget might
cost a total of $10, which means that you have to charge at least $10 per widget, or you
cannot even cover the variable costs of production.
Third is the concept of “contribution margins,” or margins. Margins are the difference
between what you charge for your product and the variable costs of that product. They
are called contribution margins because they are what contributes to your ability to cover
your fixed costs. So, for instance, if you charged $15 for each widget, your contribution
margin would be $5 ($15 price – $10 variable cost).
CHAPTER 2 Strategic Human Resource Management 69
Fourth, the gross margin is the total amount of margin you made and is calculated
as the number of units sold times the contribution margin. If you sold 1,000,000 units,
your gross margin would then be $5,000,000. Did you make a profit? That depends.
Profit refers to what is left after you have paid your variable costs and your fixed costs.
If your gross margin was $5,000,000, and your fixed costs were $6,000,000, then you
lost $1,000,000.
GM’S ATTEMPT TO SURVIVE

Let’s look at how a business model plays out with the recent challenges faced by General
Motors (GM). Critics of GM talk about the fact that GM has higher labor costs than their
foreign competitors. This is true, but misleading. GM’s average hourly wage for their
existing workforce is reasonably competitive. However, the two aspects that make GM
uncompetitive are their benefit costs (in particular, health care) and most important, the
cost of their legacy workforce.
A legacy workforce describes the former workers (i.e., those no longer working for
the company) to whom the firm still owes financial obligations. GM and the United Auto
Workers (UAW) union have negotiated contracts over the years that provide substan-
tial retirement benefits for former GM workers. In particular, retired GM workers have
defined benefit plans that guarantee a certain percentage of their final (preretirement)
salary as a pension payment as long as they live as well as having the company pay for
their health insurance. In addition, the contract specifies that workers are entitled to
retire at full pension after 30 years of service.
This might have seemed sustainable when the projections were that GM would con-
tinue growing its sales and margins. However, since the 1970s, foreign competitors
have been eating away at GM’s market share to the extent that GM’s former 50% of
the market has shrunk to closer to 20%. In addition, with the current economic crisis,
the market itself has been shrinking, leaving GM with a decreasing percentage of a
decreasing market. For instance, in December of 2005, GM sold 26% of the cars in
the global market but by 2012 that market share had shrunk to 17.9%. Thus, in addi-
tion to the legacy workforce, they had a significant number of plants with thousands
of employees that were completely unnecessary, given the volume of cars GM can
produce and sell.3,4
If you look at Figure 2.1, you’ll see that the solid lines represent the old GM busi-
ness model, which was based on projections that GM would be able to sell 4 million
units at a reasonably high margin, and thus completely cover its fixed costs to make a
strong profit. However, the reality was that its products didn’t sell at the higher prices,
so to try to sell 4 million vehicles, GM offered discounts, which cut into its margins.
When GM ended up selling only 3.5 million vehicles, and those were sold at a lower
margin, the company could not cover its fixed costs, resulting in a $9 billion loss in
2008 (this is illustrated by the dotted blue line in the figure). So, when GM refers to the
“redesigned business model,” what it is referring to is a significant reduction in fixed
costs (through closing plants and cutting workers) to get the fixed-cost base low enough
(the dotted brown line) to be able to still be profitable selling fewer cars at lower margins
(again, the dotted blue line).
One can easily see how, given the large component that labor costs are to most compa-
nies, reference to business models almost inevitably leads to discussions of labor costs.
These can be the high cost associated with current unionized employees in developed
countries within North America or Europe or, in some cases, the high costs associated
Figure 2.1 Old

An Illustration of GM
a Business Model Business
for GM Profit Model
Fixed
Costs
Margin
Pressure
New
$ Gross Margin GM
Business
Model
Loss
0 3 4 5
Number of Vehicles Sold, in millions
with a legacy workforce. For instance, the Big Three automakers have huge numbers
of retired or laid-off workers for whom they still have the liability of paying pensions
and health care benefits. This is a significant component of their fixed-cost base, which
makes it difficult for them to compete with other automakers that either have fewer retir-
ees to cover or have no comparable costs because their home governments provide pen-
sions and health care. In fact, this changing business model at GM has driven them
to locate more manufacturing outside of the United States. The “Competing through
Globalization” box describes the challenges Facebook faces as it tries to meet the pri-
vacy protection requirements across the globe.
What Is Strategic Management?

LO 2-1 Many authors have noted that in today’s competitive market, organizations must engage
Describe the differ- in strategic planning to survive and prosper. Strategy comes from the Greek word stra-
ences between strategy
tegos, which has its roots in military language. It refers to a general’s grand design
formulation and strat-
egy implementation. behind a war or battle. In fact, Webster’s New American Dictionary defines strategy as
the “skillful employment and coordination of tactics” and as “artful planning and
management.”
Strategic management is a process, an approach to addressing the competitive chal-
lenges an organization faces. It can be thought of as managing the “pattern or plan that
integrates an organization’s major goals, policies, and action sequences into a cohesive
whole.”5 These strategies can be either the generic approach to competing or the specific
adjustments and actions taken to deal with a particular situation.
First, business organizations engage in generic strategies that often fit into some stra-
tegic type. One example is “cost, differentiation, or focus.”6 Another is “defender, ana-
lyzer, prospector, or reactor.”7 Different organizations within the same industry often
have different generic strategies. These generic strategy types describe the consistent
way the company attempts to position itself relative to competitors.
Facebook’s European Privacy Policy Problems
As a student in the United their real identity, social network to recognize
States, you might not think twice interactions, and sensitive data the application
about how Facebook uses data such as medical information and of Belgian law
it gains from you when you are religious, sexual, and political as well as the legitimacy of the
surfing the social media site. preferences.” Belgian Privacy Commission’s
When you “like” or “share” The regulator also seems questions.
something, you know you are frustrated by Facebook’s sug-
DISCUSSION QUESTION
publicly proclaiming something. gestion that it only needs to
Is it possible for multinational
However, in Europe, a number adhere to regulators in Ire-
firms to tailor their policies to
of regulators have questioned land, the home of Facebook’s
each government’s jurisdiction?
whether or not Facebook actu- European headquarters. The
How should they do so?
ally invades users’ privacy. The Belgian regulator disagrees:
Belgian Privacy Commission “There is not a shadow of doubt SOURCE: L. Fleisher and T. Fairless,
“Belgian Watchdog Group Raps Facebook
says Facebook is “in a unique on the applicability of the Bel- for Treating Personal Data ‘with Contempt,’”
position, since it can easily link gian privacy legislation.” Yet The Wall Street Journal, May 15, 2015,
its users’ surfing behavior to Facebook continues to refuse www.wsj.com.
However, a generic strategy is only a small part of strategic management. The second
aspect of strategic management is the process of developing strategies for achieving the
company’s goals in light of its current environment. Thus, business organizations engage
in generic strategies, but they also make choices about such things as how to scare off
competitors, how to keep competitors weaker, how to react to and influence pending leg-
islation, how to deal with various stakeholders and special interest groups, how to lower
production costs, how to raise revenues, what technology to implement, and how many
and what types of people to employ. Each of these decisions may present competitive
challenges that have to be considered.
Strategic management is more than a collection of strategic types. It is a process for
analyzing a company’s competitive situation, developing the company’s strategic goals,
and devising a plan of action and allocation of resources (human, organizational, and
physical) that will increase the likelihood of achieving those goals. This kind of strategic
approach should be emphasized in human resource management. HR managers should
be trained to identify the competitive issues the company faces with regard to human
resources and think strategically about how to respond.
Strategic human resource management (SHRM) can be thought of as “the pattern of Strategic Human
planned human resource deployments and activities intended to enable an organization Resource
to achieve its goals.”8 For example, many firms have developed integrated manufactur- Management
(SHRM)
ing systems such as advanced manufacturing technology, just-in-time inventory control, A pattern of planned
and total quality management in an effort to increase their competitive position. How- human resource
ever, these systems must be run by people. SHRM in these cases entails assessing the deployments and activi-
employee skills required to run these systems and engaging in HRM practices, such as ties intended to enable
selection and training, that develop these skills in employees.9 To take a strategic an organization to
achieve its goals.
approach to HRM, we must first understand the role of HRM in the strategic manage-
ment process.
71
COMPONENTS OF THE STRATEGIC MANAGEMENT PROCESS

LO 2-2 The strategic management process has two distinct yet interdependent phases: strategy
List the components of formulation and strategy implementation. During strategy formulation the strategic
the strategic manage- planning groups decide on a strategic direction by defining the company’s mission and
ment process.
goals, its external opportunities and threats, and its internal strengths and weaknesses.
Strategy They then generate various strategic alternatives and compare those alternatives’ abil-
Formulation ity to achieve the company’s mission and goals. During strategy implementation, the
The process of decid-
organization follows through on the chosen strategy. This consists of structuring the
ing on a strategic
direction by defining organization, allocating resources, ensuring that the firm has skilled employees in
a company’s mis- place, and developing reward systems that align employee behavior with the organiza-
sion and goals, its tion’s strategic goals. Both of these strategic management phases must be performed
external opportunities effectively. It is important to note that this process does not happen sequentially. As we
and threats, and its
will discuss later with regard to emergent strategies, this process entails a constant
internal strengths and
weaknesses. cycling of information and decision making. Figure 2.2 presents the strategic manage-
ment process.
Strategy In recent years organizations have recognized that the success of the strategic
Implementation
The process of devising
management process depends largely on the extent to which the HRM function is
structures and allocat- involved.10
ing resources to enact
the strategy a company
has chosen.
LINKAGE BETWEEN HRM AND THE STRATEGIC
MANAGEMENT PROCESS
The strategic choice really consists of answering questions about competition—that is,
how the firm will compete to achieve its missions and goals. These decisions consist of
addressing the issues of where to compete, how to compete, and with what to compete,
which are described in Figure 2.3.
Although these decisions are all important, strategic decision makers often pay less
attention to the “with what will we compete” issue, resulting in poor strategic deci-
sions. For example, PepsiCo in the 1980s acquired the fast-food chains of Kentucky
Fried Chicken, Taco Bell, and Pizza Hut (“where to compete” decisions) in an effort
to increase its customer base. However, it failed to adequately recognize the differ-
ences between its existing workforce (mostly professionals) and that of the fast-food
industry (lower skilled people and high schoolers) as well as its ability to manage such
a workforce. This was one reason that PepsiCo, in 1998, spun off the fast-food chains.
In essence, it had made a decision about where to compete without fully understanding
what resources would be needed to compete in that market.
Boeing illustrates how failing to address the “with what” issue resulted in problems
in its “how to compete” decisions. When the aerospace firm’s consumer products divi-
sion entered into a price war with Airbus Industrie, it was forced to move away from
its traditional customer service strategy toward emphasizing cost reduction.11 The
strategy was a success on the sales end as Boeing received large numbers of orders
for aircraft from firms such as Delta, Continental, Southwest, and Singapore Airlines.
However, it had recently gone through a large workforce reduction (thus, it didn’t have
enough people to fill the orders) and did not have the production technology to enable
the necessary increase in productivity. The result of this failure to address “with what
will we compete” in making a decision about how to compete resulted in the firm’s
inability to meet delivery deadlines and the ensuing penalties it had to pay to its cus-
tomers. The end result is that after all the travails, for the first time in the history of the
industry, Airbus sold more planes than Boeing in 2003. Luckily, Boeing was able to
Figure 2.2
A Model of the Strategic Management Process
Strategy formulation Strategy implementation
External HR practices
analysis
Recruitment Job analysis
Opportunities
Training Job design
Threats
Performance Selection
management Development
Labor Pay structure
relations Incentives
Employee Benefits
Mission Goals Strategic Human relations Firm
choice resource performance
needs Productivity
Skills Quality
Behaviors Profitability
Culture Human Human
resource resource
capability actions
Skills Behaviors
Internal
Abilities Results
analysis
Knowledge (Productivity,
Strengths Strategy
absenteeism,
Weaknesses evaluation
turnover)
Emergent strategies
73
Figure 2.3
Strategy—Decisions 1. Where to compete?
about Competition In what market or markets (industries, products, etc.) will we compete?
2. How to compete?
On what criterion or differentiating characteristic(s) will we compete? Cost?
Quality? Reliability? Delivery?
3. With what will we compete?
What resources will allow us to beat our competition?
How will we acquire, develop, and deploy those resources to compete?
overcome this stumble, in large part because of a number of stumbles on the part of its
chief rival, Airbus. However, Boeing has faced difficulties as its new Dreamliner was
grounded for fires starting in the wiring. The “Competing through Technology” box
illustrates the increasing use of robotics in China.
ROLE OF HRM IN STRATEGY FORMULATION

LO 2-3 As the preceding examples illustrate, often the “with what will we compete” questions
Discuss the role of the present ideal avenues for HRM to influence the strategic management process. This
HRM function in strat- might be through either limiting strategic options or forcing thoughtfulness among the
egy formulation.
executive team regarding how and at what cost the firm might gain or develop the human
resources (people) necessary for such a strategy to be successful. For example, HRM
executives at PepsiCo could have noted that the firm had no expertise in managing the
workforce of fast-food restaurants. The limiting role would have been for these execu-
tives to argue against the acquisition because of this lack of resources. On the other hand,
they might have influenced the decision by educating top executives as to the costs (of
hiring, training, and so on) associated with gaining people who had the right skills to
manage such a workforce.
A firm’s strategic management decision-making process usually takes place at its
top levels, with a strategic planning group consisting of the chief executive officer,
the chief financial officer, the president, and various vice presidents. However, each
component of the process involves people-related business issues. Therefore, the HRM
function needs to be involved in each of those components. One recent study of 115
strategic business units within Fortune 500 corporations found that between 49 and
69% of the companies had some link between HRM and the strategic planning pro-
cess.12 However, the level of linkage varied, and it is important to understand these
different levels.
Four levels of integration seem to exist between the HRM function and the stra-
tegic management function: administrative linkage, one-way linkage, two-way link-
age, and integrative linkage.13 These levels of linkage will be discussed in relation
to the different components of strategic management. The linkages are illustrated in
Figure 2.4.
LO 2-4
Describe the linkages Administrative Linkage
between HRM and In administrative linkage (the lowest level of integration), the HRM function’s attention
strategy formulation. is focused on day-to-day activities. The HRM executive has no time or opportunity to
The Rise of the Robot in China
Much of China’s economic China will be the country with a way to man-
growth can be traced to its the most robots in the world. age costs in the
low labor costs as a number of China is seen as the world’s larg- developing world, with the risk
manufacturing firms entered the est market for industrial robots that they may reduce the job
market to hire semi-skilled and because it has approximately 30 creation that those economies
skilled employees at a huge dis- robots for every 10,000 factory seek.
count compared to the United workers, as compared to Ger-
States and Europe. However, many which has 300 and Japan DISCUSSION QUESTION
with the growth in demand for with 330. Can China afford to reduce job
such employees, labor costs Economists have always creation in this competitive envi-
have soared, leading a number seen robots as a way to save on ronment by using more robots?
of firms to replace the people costly labor in developed econ- Why or why not?
with robots. omies, providing a rationale
Sales of robots increased to maintain operations rather SOURCE: T. Aeppel, “Why China May Have
the Most Factory Robots in the World by 2017,”
54% from 2013 to 2014, and than offshore them. However, The Wall Street Journal, April 1, 2015, http://
some suggest that by 2017 robots are increasingly seen as blogs.wsj.com.
Administrative One-way Two-way Figure 2.4

linkage linkage linkage Integrative Linkages of Strategic
linkage Planning and HRM
Strategic Strategic Strategic
planning planning planning Strategic
planning
HRM
HRM HRM HRM function
function function function
SOURCE: Adapted from K. Golden and V. Ramanujam, “Between a Dream and a Nightmare: On the
Integration of the Human Resource Function and the Strategic Business Planning Process,” Human
take a strategic outlook toward HRM issues. The company’s strategic business planning
function exists without any input from the HRM department. Thus, in this level of inte-
gration, the HRM department is completely divorced from any component of the strate-
gic management process in both strategy formulation and strategy implementation. The
department simply engages in administrative work unrelated to the company’s core busi-
ness needs.
75
One-Way Linkage
In one-way linkage, the firm’s strategic business planning function develops the stra-
tegic plan and then informs the HRM function of the plan. Many believe this level of
integration constitutes strategic HRM—that is, the role of the HRM function is to design
systems and/or programs that implement the strategic plan. Although one-way linkage
does recognize the importance of human resources in implementing the strategic plan, it
precludes the company from considering human resource issues while formulating the
strategic plan. This level of integration often leads to strategic plans that the company
cannot successfully implement.
Two-Way Linkage
Two-way linkage allows for consideration of human resource issues during the strategy
formulation process. This integration occurs in three sequential steps. First, the strategic
planning team informs the HRM function of the various strategies the company is con-
sidering. Then HRM executives analyze the human resource implications of the various
strategies, presenting the results of this analysis to the strategic planning team. Finally,
after the strategic decision has been made, the strategic plan is passed on to the HRM
executive, who develops programs to implement it. The strategic planning function and
the HRM function are interdependent in two-way linkage.
Integrative Linkage
Integrative linkage is dynamic and multifaceted, based on continuing rather than sequen-
tial interaction. In most cases the HRM executive is an integral member of the senior
management team. Rather than an iterative process of information exchange, companies
with integrative linkage have their HRM functions built right into the strategy formula-
tion and implementation processes. It is this role that we will discuss throughout the rest
of this chapter.
Thus, in strategic HRM, the HRM function is involved in both strategy formulation
and strategy implementation. The HRM executive gives strategic planners informa-
tion about the company’s human resource capabilities, and these capabilities are usu-
ally a direct function of the HRM practices.14 This information about human resource
capabilities helps top managers choose the best strategy because they can consider
how well each strategic alternative would be implemented. Once the strategic choice
has been determined, the role of HRM changes to the development and alignment
of HRM practices that will give the company employees having the necessary skills
to implement the strategy.15 In addition, HRM practices must be designed to elicit
actions from employees in the company.16 In the next two sections of this chapter we
show how HRM can provide a competitive advantage in the strategic management
process.
Strategy Formulation
Five major components of the strategic management process are relevant to strategy
formulation.17 These components are depicted in Figure 2.5. The first component is the
organization’s mission. The mission is a statement of the organization’s reason for being;
it usually specifies the customers served, the needs satisfied and/or the values received
Figure 2.5
External Strategy Formulation
analysis
Opportunities
Threats
Mission Goals Strategic

choice
Internal
analysis
Strengths
Weaknesses
HR input
SOURCE: Adapted from K. Golden and V. Ramanujam, “Between a Dream and a Nightmare,” Human
by the customers, and the technology used. The mission statement is often accompa-
nied by a statement of a company’s vision and/or values. For example, Table 2.1 illus-
trates the mission and values of Merck & Co., Inc. In addition, the “Integrity in Action”
box describes why 3M continues to be recognized as one of the world’s most ethical Goals
companies. What an organization
An organization’s goals are what it hopes to achieve in the medium- to long-term hopes to achieve in the
medium- to long-term
future; they reflect how the mission will be operationalized. The overarching goal of
future.
most profit-making companies in the United States is to maximize stockholder wealth.
But companies have to set other long-term goals in order to maximize stockholder
wealth.
External analysis consists of examining the organization’s operating environment to External Analysis
identify the strategic opportunities and threats. Examples of opportunities are customer Examining the orga-
markets that are not being served, technological advances that can aid the company, and nization’s operating
environment to identify
labor pools that have not been tapped. Threats include potential labor shortages, new strategic opportunities
competitors entering the market, pending legislation that might adversely affect the com- and threats.
pany, and competitors’ technological innovations.
Internal analysis attempts to identify the organization’s strengths and weaknesses. It Internal Analysis
The process of exam-
focuses on the quantity and quality of resources available to the organization—financial, ining an organiza-
capital, technological, and human resources. Organizations have to honestly and accu- tion’s strengths and
rately assess each resource to decide whether it is a strength or a weakness. weaknesses.
Table 2.1
MISSION STATEMENT
Merck & Co.’s
Mission and Values
Merck & Co., Inc. is a leading research-driven pharmaceutical products and services
company. Merck discovers, develops, manufactures and markets a broad range of
innovative products to improve human and animal health. The Merck-Medco Managed
Care Division manages pharmacy benefits for more than 40 million Americans, encour-
aging the appropriate use of medicines and providing disease management programs.
Our Mission
The mission of Merck is to provide society with superior products and services—
innovations and solutions that improve the quality of life and satisfy customer
needs—to provide employees with meaningful work and advancement opportunities
and investors with a superior rate of return.
Our Values
1. Our business is preserving and improving human life. All of our actions must
be measured by our success in achieving this goal. We value above all our ability
to serve everyone who can benefit from the appropriate use of our products and
services, thereby providing lasting consumer satisfaction.
2. We are committed to the highest standards of ethics and integrity. We are
responsible to our customers, to Merck employees and their families, to the envi-
ronments we inhabit, and to the societies we serve worldwide. In discharging our
responsibilities, we do not take professional or ethical shortcuts. Our interactions
with all segments of society must reflect the high standards we profess.
3. We are dedicated to the highest level of scientific excellence and commit our
research to improving human and animal health and the quality of life. We strive
to identify the most critical needs of consumers and customers; we devote our
resources to meeting those needs.
4. We expect profits, but only from work that satisfies customer needs and ben-
efits humanity. Our ability to meet our responsibilities depends on maintaining a
financial position that invites investment in leading-edge research and that makes
possible effective delivery of research results.
5. We recognize that the ability to excel—to most competitively meet society’s
and customers’ needs—depends on the integrity, knowledge, imagination,
skill, diversity, and teamwork of employees, and we value these qualities most
highly. To this end, we strive to create an environment of mutual respect, encour-
agement, and teamwork—a working environment that rewards commitment and
performance and is responsive to the needs of employees and their families.
SOURCE: Courtesy of Merck.
External analysis and internal analysis combined constitute what has come to be
called the SWOT (strengths, weaknesses, opportunities, threats) analysis. Table 2.2
shows an example of a SWOT analysis for Google. After going through the SWOT anal-
ysis, the strategic planning team has all the information it needs to generate a number of
strategic alternatives. The strategic managers compare these alternatives’ ability to attain
Strategic Choice the organization’s strategic goals; then they make their strategic choice. The strategic
The organization’s strat- choice is the organization’s strategy; it describes the ways the organization will attempt
egy; the ways an orga- to fulfill its mission and achieve its long-term goals.
nization will attempt to
fulfill its mission and
Many of the opportunities and threats in the external environment are people-related.
achieve its long-term With fewer and fewer highly qualified individuals entering the labor market, organiza-
goals. tions compete not just for customers but for employees. It is HRM’s role to keep close
tabs on the external environment for human resource–related opportunities and threats,
INTEGRITY IN ACTION
3M Named One of World’s Most Ethical Companies
One often hears jokes that the Zappa, 3M’s chief compliance culture . . .
term “business ethics” is an oxy- officer. “The commitment of our involves more than
moron, but a number of firms people to the highest ethical just an outward facing message
prove that the joke is just that: only standard and to doing business or a handful of senior executives
a joke. Ethisphere Institute, which the right way promotes trust with saying the right thing. Earning
seeks to lead the world in defining our customers and the quality this recognition involves the col-
and advancing the standards of of our products. Furthermore, it lective action of a global work-
ethical business practices, devel- gives us confidence to grow our force from the top down.”
ops a list of “the World’s Most business anywhere in the world.”
Ethical Companies.” Ethisphere The CEO of Ethisphere, DISCUSSION QUESTION
named 3M as one of the 2015 Timothy Erblich, stated, “The Do you think 3M’s recognition as
Most Ethical Companies, a recog- World’s Most Ethical Companies one of the world’s most ethical
nition the company has gained for embrace the correlation between companies gives the company a
the second straight year. ethical business practice and competitive advantage? Why or
“At 3M, living by our Code improved company performance. why not?
of Conduct is a team effort and These companies use ethics as
responsibility we uphold for our a means to further define their SOURCE: Company website, “3M Named as
a World’s Most Ethical Company for Second
customers, for our sharehold- industry leadership and under- Consecutive Year,” http://news.3m.com, March
ers, and for each other,” said Jim stand that creating an ethical 9, 2015.
Table 2.2
STRENGTHS WEAKNESSES
SWOT Analysis for
Google, Inc.
Expanding Liquidity Issues with Chinese Government
Operational Efficiency Dependence on Advertising Segment
Broad Range of Services Portfolio Losses at YouTube
OPPORTUNITIES THREATS
Growing Demand for Online Video Weak Economic Outlook

Growth in Internet Advertising Market Invalid Clicks
Inorganic Growth Microsoft–Yahoo! Deal
SOURCE: GlobalData.
especially those directly related to the HRM function: potential labor shortages, compet-
itor wage rates, government regulations affecting employment, and so on. For example,
as discussed in Chapter 1, U.S. companies are finding that more and more high school
graduates lack the basic skills needed to work, which is one source of the “human capital
shortage.”18 However, not recognizing this environmental threat, many companies have
encouraged the exit of older, more skilled workers while hiring less skilled younger
workers who require basic skills training.19
An analysis of a company’s internal strengths and weaknesses also requires input
from the HRM function. Today companies are increasingly realizing that their human
resources are one of their most important assets. In fact, one estimate is that over
79
one-third of the total growth in U.S. gross national product (GNP) between 1943 and
1990 was the result of increases in human capital. A company’s failure to consider the
strengths and weaknesses of its workforce may result in its choosing strategies it is not
capable of pursuing.20 However, some research has demonstrated that few companies
have achieved this level of linkage.21 For example, one company chose a strategy of
cost reduction through technological improvements. It built a plant designed around a
computer-integrated manufacturing system with statistical process controls. Although
this choice may seem like a good one, the company soon learned otherwise. It discov-
ered that its employees could not operate the new equipment because 25% of the work-
force was functionally illiterate.22
Thus, with an integrative linkage, strategic planners consider all the people-related
business issues before making a strategic choice. These issues are identified with regard
to the mission, goals, opportunities, threats, strengths, and weaknesses, leading the stra-
tegic planning team to make a more intelligent strategic choice. Although this process
does not guarantee success, companies that address these issues are more likely to make
choices that will ultimately succeed.
Recent research has supported the need to have HRM executives integrally involved
in strategy formulation. One study of U.S. petrochemical refineries found that the level
of HRM involvement was positively related to the refinery manager’s evaluation of the
effectiveness of the HRM function.23 A second study of manufacturing firms found that
HRM involvement was highest when top managers viewed employees as a strategic asset
and associated them with reduced turnover.24 However, both studies found that HRM
involvement was unrelated to operating unit financial performance.
Research has indicated that few companies have fully integrated HRM into the strat-
egy formulation process.25 As we’ve mentioned before, companies are beginning to
recognize that in an intensely competitive environment, managing human resources stra-
tegically can provide a competitive advantage. Thus, companies at the administrative
linkage level will either become more integrated or face extinction. In addition, com-
panies will move toward becoming integratively linked in an effort to manage human
resources strategically.
It is of utmost importance that all people-related business issues be considered dur-
ing strategy formulation. These issues are identified in the HRM function. Mechanisms
or structures for integrating the HRM function into strategy formulation may help the
strategic planning team make the most effective strategic choice. Once that strategic
choice is determined, HRM must take an active role in implementing it. This role will be
discussed in the next section.
Strategy Implementation
LO 2-5 After an organization has chosen its strategy, it has to execute that strategy—make it
Discuss the more come to life in its day-to-day workings. The strategy a company pursues dictates certain
popular typologies of HR needs. For a company to have a good strategy foundation, certain tasks must be
generic strategies and
the various HRM prac-
accomplished in pursuit of the company’s goals, individuals must possess certain skills
tices associated with to perform those tasks, and these individuals must be motivated to perform their skills
each. effectively.
The basic premise behind strategy implementation is that “an organization has a vari-
ety of structural forms and organizational processes to choose from when implement-
ing a given strategy,” and these choices make an economic difference.26 Five important
variables determine success in strategy implementation: organizational structure; task
Figure 2.6
Variables to
Organizational Be Considered
structure in Strategy
Implementation
Types
Task
of
design
information
Product
market Performance
strategy
Selection,
Reward training, and
systems development
of people
design; the selection, training, and development of people; reward systems; and types of
information and information systems.
As we see in Figure 2.6, HRM has primary responsibility for three of these five
implementation variables: task, people, and reward systems. In addition, HRM can
directly affect the two remaining variables: structure and information and decision pro-
cesses. First, for the strategy to be successfully implemented, the tasks must be designed
and grouped into jobs in a way that is efficient and effective.27 In Chapter 4 we will
examine how this can be done through the processes of job analysis and job design.
Second, the HRM function must ensure that the organization is staffed with people who
have the necessary knowledge, skill, and ability to perform their part in implementing
the strategy. This goal is achieved primarily through recruitment, selection and place-
ment, training, development, and career management—topics covered in Chapters 5,
6, 7, and 9. In addition, the HRM function must develop performance management
and reward systems that lead employees to work for and support the strategic plan.
The specific types of performance management systems are covered in Chapter 8, and
the many issues involved in developing reward systems are discussed in Chapters 11
through 13. In other words, the role of the HRM function becomes one of (1) ensuring
that the company has the proper number of employees with the levels and types of skills
required by the strategic plan28 and (2) developing “control” systems that ensure that
those employees are acting in ways that promote the achievement of the goals specified
in the strategic plan.29
In essence, this is what has been referred to as the “vertical alignment” of HR with
strategy. Vertical alignment means that the HR practices and processes are aimed at
addressing the strategic needs of the business. But the link between strategy and HR
practices is primarily through people. For instance, as IBM moved from being a manu-
facturer of personal computers to being a fully integrated service provider, the types of
people it needed changed significantly. Instead of employing thousands of workers in
manufacturing or assembly plants, IBM increasingly needed software engineers to help
write new “middleware” programs, and an army of consultants who could help their
corporate customers to implement these systems. In addition, as IBM increasingly dif-
ferentiated itself as being the “integrated solutions” provider (meaning it could sell the
Figure 2.7
Strategy Implementation
HRM practices
Recruitment Job analysis
Training Job design
Performance Selection
management Development
Labor Pay structure
relations Incentives
Employee Benefits
Strategic Human relations Firm
choice resource performance
needs Productivity
Skills Quality
Behaviors Profitability
Culture Human Human
resource resource
capability actions
Skills Behaviors
Abilities Results
Knowledge (Productivity,
absenteeism,
turnover)
Emergent strategies
hardware, software, consulting, and service for a company’s entire information technol-
ogy needs), employees needed a new mindset which emphasized cooperating across dif-
ferent business divisions rather than running independently. Thus, the change in strategy
required different kinds of skills, different kinds of employees, and different kinds of
behaviors.
How does the HRM function implement strategy? As Figure 2.7 shows, it is through
administering HRM practices: job analysis/design, recruitment, selection systems, train-
ing and development programs, performance management systems, reward systems, and
labor relations programs. The details of each of these HRM practices are the focus of the
rest of this book. However, at this point it is important to present a general overview of
the HRM practices and their role in strategy implementation. We then discuss the vari-
ous strategies companies pursue and the types of HRM systems congruent with those
strategies. First we focus on how the strategic types are implemented; then we discuss
the HRM practices associated with various directional strategies.
HRM PRACTICES
The HRM function can be thought of as having six menus of HRM practices, from which
companies can choose the ones most appropriate for implementing their strategy. Each of
these menus refers to a particular functional area of HRM: job analysis/design, recruitment/
selection, training and development, performance management, pay structure/incentives/
benefits, and labor–employee relations.30 These menus are presented in Table 2.3.
Table 2.3
Job Analysis and Design Menu of HRM
Few tasks ↔ Many tasks Practice Options
Simple tasks ↔ Complex tasks
Few skills required ↔ Many skills required
Specific job descriptions ↔ General job descriptions
Recruitment and Selection
External sources ↔ Internal sources
Limited socialization ↔ Extensive socialization
Assessment of specific skills ↔ Assessment of general skills
Narrow career paths ↔ Broad career paths
Training and Development
Focus on current job skills ↔ Focus on future job skills
Individual orientation ↔ Group orientation
Train few employees ↔ Train all employees
Spontaneous, unplanned ↔ Planned, systematic
Performance Management
Behavioral criteria ↔ Results criteria
Developmental orientation ↔ Administrative orientation
Short-term criteria ↔ Long-term criteria
Individual orientation ↔ Group orientation
Pay Structure, Incentives, and Benefits
Pay weighted toward salary and ↔ Pay weighted toward incentives
benefits
Short-term incentives ↔ Long-term incentives
Emphasis on internal equity ↔ Emphasis on external equity
Individual incentives ↔ Group incentives
Labor and Employee Relations
Collective bargaining ↔ Individual bargaining
Top-down decision making ↔ Participation in decision making
Formal due process ↔ No due process
View employees as expense ↔ View employees as assets
SOURCES: Adapted from R. S. Schuler and S. F. Jackson, “Linking Competitive Strategies with Human Resource
Management Practices,” Academy of Management Executive 1 (1987), pp. 207–19; and C. Fisher, L. Schoenfeldt, and
B. Shaw, Human Resource Management, 2nd ed. (Boston: Houghton Mifflin, 1992).
Job Analysis and Design

Companies produce a given product or service (or set of products or services), and
the manufacture of these products requires that a number of tasks be performed.
These tasks are grouped together to form jobs. Job analysis is the process of getting Job Analysis
detailed information about jobs. Job design addresses what tasks should be grouped The process of getting
into a particular job. The way that jobs are designed should have an important tie to detailed information
about jobs.
the strategy of an organization because the strategy requires either new and different
tasks or different ways of performing the same tasks. In addition, because many strat- Job Design
egies entail the introduction of new technologies, this affects the way that work is The process of defin-
ing the way work will
performed.31 be performed and
In general, jobs can vary from having a narrow range of tasks (most of which are the tasks that will be
simplified and require a limited range of skills) to having a broad array of complex tasks required in a given job.
requiring multiple skills. In the past, the narrow design of jobs has been used to increase
efficiency, while the broad design of jobs has been associated with efforts to increase
innovation. However, with the advent of total quality management methods and a variety
of employee involvement programs such as quality circles, many jobs are moving toward
the broader end of the spectrum.32
Employee Recruitment and Selection

Recruitment Recruitment is the process through which the organization seeks applicants for potential
The process of seeking employment. Selection refers to the process by which it attempts to identify applicants
applicants for potential with the necessary knowledge, skills, abilities, and other characteristics that will help the
employment.
company achieve its goals. Companies engaging in different strategies need different
Selection types and numbers of employees. Thus, the strategy a company is pursuing will have a
The process by which direct impact on the types of employees that it seeks to recruit and select.33
an organization
attempts to identify
applicants with the Employee Training and Development
necessary knowledge, A number of skills are instilled in employees through training and development. Training
skills, abilities, and
other characteristics
refers to a planned effort to facilitate the learning of job-related knowledge, skills, and
that will help it achieve behavior by employees. Development involves acquiring knowledge, skills, and behavior
its goals. that improve employees’ ability to meet the challenges of a variety of existing jobs or
jobs that do not yet exist. Changes in strategies often require changes in the types, levels,
Training
A planned effort to
and mixes of skills. Thus, the acquisition of strategy-related skills is an essential element
facilitate the learning of of the implementation of strategy. For example, many companies have recently empha-
job-related knowledge, sized quality in their products, engaging in total quality management programs. These
skills, and behavior by programs require extensive training of all employees in the TQM philosophy, methods,
employees. and often other skills that ensure quality.34
Development Through recruitment, selection, training, and development, companies can obtain a
The acquisition of pool of human resources capable of implementing a given strategy.35
knowledge, skills, and
behaviors that improve
an employee’s ability Performance Management
to meet changes in Performance management is used to ensure that employees’ activities and outcomes are
job requirements and congruent with the organization’s objectives. It entails specifying those activities and out-
in client and customer
demands.
comes that will result in the firm’s successfully implementing the strategy. For example,
companies that are “steady state” (not diversified) tend to have evaluation systems that call
Performance for subjective performance assessments of managers. This stems from the fact that those
Management above the first-level managers in the hierarchy have extensive knowledge about how the
The means through
which managers ensure
work should be performed. On the other hand, diversified companies are more likely to use
that employees’ activi- quantitative measures of performance to evaluate managers because top managers have less
ties and outputs are knowledge about how work should be performed by those below them in the hierarchy.36
congruent with the Similarly, executives who have extensive knowledge of the behaviors that lead to
organization’s goals. effective performance use performance management systems that focus on the behaviors
of their subordinate managers. However, when executives are unclear about the specific
behaviors that lead to effective performance, they tend to focus on evaluating the objec-
tive performance results of their subordinate managers.37
An example of how performance management can be aligned with strategy is pro-
vided in Figure 2.8. This comes from a firm in the health care industry whose strat-
egy consisted of five “strategic imperatives,” or things that the company was trying to
accomplish. In this company all individuals set performance objectives each year, and
each of their objectives have to be tied to at least one of the strategic imperatives. The
senior VP of HR used the firm’s technology system to examine the extent to which each
business unit or function was focused on each of the imperatives. The figure illustrates
the percentage of objectives that were tied to each imperative across the different units. It
Figure 2.8
Percentage of Objectives Identified in Individual Performance Plans That Are Tied to Each Strategic Imperative
Strategic
Imperative Business A Business B International Investment Finance Legal IT HR&S Enterprise
Achieve superior
10.5% 12.5% 2.7% 7.6% 3.1% 2.7% 11.4% 2.1% 10.0%
medical performance
Effectively serve our
24.7% 27.2% 36.7% 12.2% 10.3% 27.2% 18.9% 19.5% 23.7%
customers
Create great products
5.6% 6.1% 10.1% 9.8% 5.0% 10.1% 15.3% 8.9% 6.9%
and services
Create a winning
27.7% 29.7% 30.1% 29.9% 30.3% 33.7% 22.4% 39.4% 27.7%
environment
Establish a cost
31.5% 24.5% 20.5% 40.5% 51.3% 26.3% 32% 30.0% 31.7%
advantage
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
allows the company to determine if the mix of objectives is right enterprisewide as well
as within each business unit or function.
Pay Structure, Incentives, and Benefits

The pay system has an important role in implementing strategies. First, a high level of
pay and/or benefits relative to that of competitors can ensure that the company attracts
and retains high-quality employees, but this might have a negative impact on the com-
pany’s overall labor costs.38 Second, by tying pay to performance, the company can elicit
specific activities and levels of performance from employees.
In a study of how compensation practices are tied to strategies, researchers examined
33 high-tech and 72 traditional companies. They classified them by whether they were in
a growth stage (greater than 20% inflation-adjusted increases in annual sales) or a matu-
rity stage. They found that high-tech companies in the growth stage used compensation
systems that were highly geared toward incentive pay, with a lower percentage of total
pay devoted to salary and benefits. On the other hand, compensation systems among
mature companies (both high-tech and traditional) devoted a lower percentage of total
pay to incentives and a high percentage to benefits.39
Labor and Employee Relations

Whether companies are unionized or not, the general approach to relations with employ-
ees can strongly affect their potential for gaining competitive advantage.
Companies can choose to treat employees as an asset that requires investment of
resources or as an expense to be minimized.40 They have to make choices about how
much employees can and should participate in decision making, what rights employees
have, and what the company’s responsibility is to them. The approach a company takes
in making these decisions can result in it either successfully achieving its short- and
long-term goals or ceasing to exist.
Recent research has begun to examine how companies develop sets of HRM practices
that maximize performance and productivity. For example, one study of automobile assem-
bly plants around the world found that plants that exhibited both high productivity and high
quality used “HRM best practices,” such as heavy emphasis on recruitment and hiring,
compensation tied to performance, low levels of status differentiation, high levels of train-
ing for both new and experienced employees, and employee participation through structures
such as work teams and problem-solving groups.41 Another study found that HRM sys-
tems composed of selection testing, training, contingent pay, performance appraisal, atti-
tude surveys, employee participation, and information sharing resulted in higher levels of
productivity and corporate financial performance, as well as lower employee turnover.42
Finally, a recent study found that companies identified as some of the “best places to work”
had higher financial performances than a set of matched companies that did not make the
list.43 Similar results have also been observed in a number of other studies.44
In addition to the relationship between HR practices and performance in general, in
today’s fast-changing environment, businesses have to change quickly, requiring changes
in employees’ skills and behaviors. In one study the researchers found that the flexibility
of HR practices, employee skills, and employee behaviors were all positively related to
firm financial performance, but only the skill flexibility was related to cost efficiency.45
While these relationships are promising, the causal direction has not yet been proven.
For instance, while effective HR practices should help firms perform better, it is also
true that highly profitable firms can invest more in HR practices.46 The research seems
to indicate that while the relationship between practices and performance is consistently
positive, we should not go too far out on a limb arguing that increasing the use of HRM
practices will automatically result in increased profitability.47
STRATEGIC TYPES
As we previously discussed, companies can be classified by the generic strategies they
pursue. It is important to note that these generic “strategies” are not what we mean by
a strategic plan. They are merely similarities in the ways companies seek to compete in
their industries. Various typologies have been offered, but we focus on the two generic
strategies proposed by Porter: cost and differentiation.48
According to Michael Porter of Harvard, competitive advantage stems from a company’s
being able to create value in its production process. Value can be created in one of two
ways. First, value can be created by reducing costs. Second, value can be created by differ-
entiating a product or service in such a way that it allows the company to charge a premium
price relative to its competitors. This leads to two basic strategies. According to Porter,
the “overall cost leadership” strategy focuses on becoming the lowest cost producer in an
industry. This strategy is achieved by constructing efficient large-scale facilities, by reduc-
ing costs through capitalizing on the experience curve, and by controlling overhead costs
and costs in such areas as research and development, service, sales force, and advertising.
This strategy provides above-average returns within an industry, and it tends to bar other
firms’ entry into the industry because the firm can lower its prices below competitors’ costs.
The “differentiation” strategy, according to Porter, attempts to create the impression
that the company’s product or service is different from that of others in the industry. The
perceived differentiation can come from creating a brand image, from technology, from
offering unique features, or from unique customer service. If a company succeeds in dif-
ferentiating its product, it will achieve above-average returns, and the differentiation may
protect it from price sensitivity. For instance, Dell Computer Company built its reputa-
tion on providing the lowest cost computers through leveraging its supply chain and
direct selling model. However, recently they have seen share eroding as the consumer
market grows and HP has offered more differentiated, stylish-looking computers sold
through retail outlets where customers can touch and feel them. In addition, Apple has
differentiated itself through its own operating system that integrates well with peripheral
devices such as the iPad and iPhone. In both cases, these companies can charge a pre-
mium (albeit higher for Apple) over Dell’s pricing.49
HRM NEEDS IN STRATEGIC TYPES

While all of the strategic types require competent people in a generic sense, each of the
strategies also requires different types of employees with different types of behaviors
and attitudes. As we noted earlier, different strategies require employees with specific
skills and also require these employees to exhibit different “role behaviors.”50 Role Role Behaviors
behaviors are the behaviors required of an individual in his or her role as a jobholder in Behaviors that are
a social work environment. These role behaviors vary on a number of dimensions. Addi- required of an individ-
ual in his or her role as
tionally, different role behaviors are required by the different strategies. For example, a jobholder in a social
companies engaged in a cost strategy require employees to have a high concern for quan- work environment.
tity and a short-term focus, to be comfortable with stability, and to be risk averse. These
employees are expected to exhibit role behaviors that are relatively repetitive and per-
formed independently or autonomously.
Thus, companies engaged in cost strategies, because of the focus on efficient
production, tend to specifically define the skills they require and invest in training
employees in these skill areas. They also rely on behavioral performance manage-
ment systems with a large performance-based compensation component. These com-
panies promote internally and develop internally consistent pay systems with high
pay differentials between superiors and subordinates. They seek efficiency through
worker participation, soliciting employees’ ideas on how to achieve more efficient
production.
On the other hand, employees in companies with a differentiation strategy need
to be highly creative and cooperative; to have only a moderate concern for quantity,
a long-term focus, and a tolerance for ambiguity; and to be risk takers. Employees
in these companies are expected to exhibit role behaviors that include cooperat-
ing with others, developing new ideas, and taking a balanced approach to process
and results.
Thus differentiation companies will seek to generate more creativity through broadly
defined jobs with general job descriptions. They may recruit more from outside, engage
in limited socialization of newcomers, and provide broader career paths. Training and
development activities focus on cooperation. The compensation system is geared toward
external equity, as it is heavily driven by recruiting needs. These companies develop
results-based performance management system and divisional–corporate performance
evaluations to encourage risk taking on the part of managers.51
EVIDENCE-BASED HR
A study of HRM among steel minimills in the United States found that mills pursu-
ing different strategies used different systems of HRM. Mills seeking cost leader-
ship tended to use control-oriented HRM systems that were characterized by high
centralization, low participation, low training, low wages, low benefits, and highly
contingent pay, whereas differentiator mills used “commitment” HRM systems,
characterized as the opposite on each of those dimensions. A later study from the
same sample revealed that the mills with the commitment systems had higher pro-
ductivity, lower scrap rates, and lower employee turnover than those with the con-
trol systems.
SOURCE: J. Arthur, “The Link between Business Strategy and Industrial Relations Systems in American Steel Mini-
Mills,” Industrial and Labor Relations Review 45 (1992), pp. 488–506.
DIRECTIONAL STRATEGIES
LO 2-6 As discussed earlier in this chapter, strategic typologies are useful for classifying the ways
Describe the differ- different organizations seek to compete within an industry. However, it is also necessary
ent HRM issues and to understand how increasing size (growth) or decreasing it (downsizing) affects the
practices associated
with various directional
HRM function. For example, the top management team might decide that they need to
strategies. invest more in product development or to diversify as a means for growth. With these
types of strategies, it is more useful for the HRM function to aid in evaluating the feasibil-
ity of the various alternatives and to develop programs that support the strategic choice.
Companies have used four possible categories of directional strategies to meet objec-
tives.52 Strategies emphasizing market share or operating costs are considered “concentra-
tion” strategies. With this type of strategy, a company attempts to focus on what it does
best within its established markets and can be thought of as “sticking to its knitting.”
Strategies focusing on market development, product development, innovation, or joint
ventures make up the “internal growth” strategy. Companies with an internal growth
strategy channel their resources toward building on existing strengths. Those attempting
External Growth to integrate vertically or horizontally or to diversify are exhibiting an “external growth”
Strategy strategy, usually through mergers or acquisitions. This strategy attempts to expand a com-
An emphasis on pany’s resources or to strengthen its market position through acquiring or creating new
acquiring vendors and
suppliers or buying
businesses. Finally, a “divestment,” or downsizing, strategy is one made up of retrench-
businesses that allow ment, divestitures, or liquidation. These strategies are observed among companies facing
a company to expand serious economic difficulties and seeking to pare down their operations. The human
into new markets. resource implications of each of these strategies are quite different.
Concentration Strategies
Concentration Concentration strategies require that the company maintain the current skills that exist
Strategy in the organization. This requires that training programs provide a means of keeping
A strategy focusing those skills sharp among people in the organization and that compensation programs
on increasing mar-
ket share, reducing
focus on retaining people who have those skills. Appraisals in this strategy tend to be
costs, or creating and more behavioral because the environment is more certain, and the behaviors necessary
maintaining a market for effective performance tend to be established through extensive experience.
niche for products and
services. Internal Growth Strategies
Internal Growth Internal growth strategies present unique staffing problems. Growth requires that a com-
Strategy pany constantly hire, transfer, and promote individuals, and expansion into different mar-
A focus on new market kets may change the necessary skills that prospective employees must have. In addition,
and product develop-
ment, innovation, and
appraisals often consist of a combination of behaviors and results. The behavioral appraisal
joint ventures. emphasis stems from the knowledge of effective behaviors in a particular product market,
and the results appraisals focus on achieving growth goals. Compensation packages are
heavily weighted toward incentives for achieving growth goals. Training needs differ
depending on the way the company attempts to grow internally. For example, if the orga-
nization seeks to expand its markets, training will focus on knowledge of each market,
particularly when the company is expanding into international markets. On the other hand,
when the company is seeking innovation or product development, training will be of a
more technical nature, as well as focusing on interpersonal skills such as team building.
Joint ventures require extensive training in conflict resolution techniques because of the
problems associated with combining people from two distinct organizational cultures.
Mergers and Acquisitions

Increasingly we see both consolidation within industries and mergers across industries.
For example, Procter and Gamble’s acquisition of Gillette represented a consolidation, or
reduction in the number of firms within the industry. On the other hand, Citicorp’s merger
with Travelers Group to form Citigroup represented firms from different industries (pure
financial services and insurance) combining to change the dynamics within both. What-
ever the type, one thing is for sure—mergers and acquisitions are on the increase, and
HRM needs to be involved.53 In addition, these mergers more frequently consist of global
megamergers, in spite of some warnings that these might not be effective.
According to a report by the Conference Board, “people issues” may be one of the
major reasons that mergers do not always live up to expectations. Some companies
now heavily weigh firm cultures before embarking on a merger or acquisition. For
example, prior to acquiring ValueRx, executives at Express Scripts Inc. interviewed
senior executives and middle managers at the potential target firm in order to get a
sense of its culture.54 In spite of this, fewer than one-third of the HRM executives sur-
veyed said that they had a major influence in how mergers are planned, yet 80 percent
of them said that people issues have a significant impact after the deals are finalized.55
In addition to the desirability of HRM playing a role in evaluating a merger opportu-
nity, HRM certainly has a role in the actual implementation of a merger or acquisition.
Training in conflict resolution is also necessary when companies engage in an external
growth strategy. All the options for external growth consist of acquiring or developing
new businesses, and these businesses often have distinct cultures. Thus many HRM
programs face problems in integrating and standardizing practices across the compa-
ny’s businesses. The relative value of standardizing practices across businesses must be
weighed against the unique environmental requirements of each business and the extent
of desired integration of the two firms. For example, with regard to pay practices, a
company may desire a consistent internal wage structure to maintain employee percep-
tions of equity in the larger organization. In a recent new business developed by IBM,
the employees pressured the company to maintain the same wage structure as IBM’s
main operation. However, some businesses may function in environments where pay
practices are driven heavily by market forces. Requiring these businesses to adhere to
pay practices in other environments may result in an ineffective wage structure.
Downsizing
Of increasing importance to organizations in today’s competitive environment is HRM’s
role in downsizing or “rightsizing.” The number of organizations undergoing downsizing Downsizing
increased significantly from the third to the fourth quarter of 2008, and while this trend The planned elimina-
has slowed, layoffs are still significant (see Figure 2.9).56 In fact, some of these layoffs tion of large numbers of
personnel, designed to
are due to outright bankruptcies because firms simply did not have sustainable business enhance organizational
models. For instance the “Competing through Sustainability” box describes how rather effectiveness.
than laying off employees, Starbucks has begun offering to pay for their college degrees.
One would have great difficulty ignoring the massive “war for talent” that went on
during the late 1990s, particularly with the notable dot-com craze. Firms during this
time sought to become “employers of choice,” to establish “employment brands,” and
to develop “employee value propositions” as ways to ensure that they would be able to
attract and retain talented employees.
The current economic crisis means that one important question facing firms is, How
can we develop a reputation as an employer of choice, and engage employees to the
goals of the firm, while laying off a significant portion of our workforce? How firms
answer this question will determine how they can compete by meeting the stakeholder
needs of their employees.
In spite of the increasing frequency of downsizing, research reveals that it is far from
universally successful for achieving the goals of increased productivity and increased
Starbucks Employees Go to School
As the U.S. economy recovers to receive an online bachelor’s who participate
and the labor market tightens, degree from ASU. The catch? may stop the
employers have to do more Starbucks will only reimburse program and/or terminate their
to attract and retain talent. the cost of classes for which employment with Starbucks at
McDonald’s Corp. will raise employees receive passing any time with no penalty. As the
wages for many employees by grades and can only be used to market improves for job seekers,
more than 10%, Wal-Mart Stores pay for the last two years of a companies must take action to
Inc. is raising hourly pay to $10 bachelor’s degree. become an employer of choice
for 500,000 workers next year, Starbucks expects that by to retain their human talent.
and Starbucks Corp. will pay for 2025 this program will cost
its employees’ college tuition. $250 million and have helped DISCUSSION QUESTION
Starbucks’ tuition program is 25,000 employees receive their What traits help promote a
the next step in a partnership degrees. It hopes this program company as an employer of
with Arizona State University, in will help it to retain the 144,000 choice?
which it will reimburse employ- people it employs in the United SOURCE: I. Brat, “Starbucks to Pay Full Cost
ees who work at least 20 hours States while also giving back of Online Degree for Employees,” The Wall
a week for their tuition expenses to its employees. Individuals Street Journal, April 6, 2015, www.wsj.com.
Figure 2.9
Layoff Events and Separations 2009–2013
900,000 8,000
7,500
800,000 Layoff events 7,000
Separations 6,500
700,000
6,000
5,500
600,000
5,000
Layoff events
Separations
500,000 4,500
4,000
400,000 3,500
3,000
300,000
2,500
2,000
200,000
1,500
100,000 1,000
500
0 0
Jan–Mar
Apr–Jun
Jul–Sep
Oct–Dec
Jan–Mar
Apr–Jun
Jul–Sep
Oct–Dec
Jan–Mar
Apr–Jun
Jul–Sep
Oct–Dec
Jan–Mar
Apr–Jun
Jul–Sep
Oct–Dec
Jan–Mar
2009 2010 2011 2012 2013

SOURCE: www.bls.gov/news.release/mslo.nr0.htm.
90
Table 2.4
PERCENTAGE THAT ACHIEVED
Effects of
DESIRED OUTCOME DESIRED RESULT
Downsizing on
Desired Outcomes
Reduced expenses 46%
Increased profits 32
Improved cash flow 24
Increased profits 22
Increased return on investment 21
Increased competitive advantage 19
Reduced bureaucracy 17
Improved decision making 14
Increased customer satisfaction 14
Increased sales 13
Increased market share 12
Improved product quality 9
Technological advances 9
Increased innovation 7
Avoidance of a takeover 6
SOURCE: From Wall Street Journal by News Corporation; Dow Jones & Co, June 6, 1991. Reproduced with permission
of Dow Jones & Company via Copyright Clearance Center.
profitability. For example, Table 2.4 illustrates the results of a survey conducted by the
American Management Association indicating that only about one-third of the com-
panies that went through downsizings actually achieved their goal of increased profits.
Another survey by the AMA found that over two-thirds of the companies that downsize
repeat the effort a year later.57 Also, research by the consulting firm Mitchell & Com-
pany found that companies that downsized during the 1980s lagged the industry aver-
age stock price in 1991.58 Thus it is important to understand the best ways of managing
downsizings, particularly from the standpoint of HRM.
Downsizing presents a number of challenges and opportunities for HRM.59 In terms
of challenges, the HRM function must “surgically” reduce the workforce by cutting
only the workers who are less valuable in their performance. Achieving this is difficult
because the best workers are most able (and often willing) to find alternative employ-
ment and may leave voluntarily prior to any layoff. For example, in 1992 General
Motors and the United Auto Workers agreed to an early retirement program for indi-
viduals between the ages of 51 and 65 who had been employed for 10 or more years.
The program provided those who agreed to retire their full pension benefits, even if
they obtained employment elsewhere, and as much as $13,000 toward the purchase of a
GM car.60 As mentioned earlier in the chapter, this is part of GM’s labor cost problem.
Early retirement programs, although humane, essentially reduce the workforce with a
“grenade” approach. This type of reduction does not distinguish between good and poor
performers but rather eliminates an entire group of employees. In fact, recent research
indicates that when companies downsize by offering early retirement programs, they
usually end up rehiring to replace essential talent within a year. Often the company does
not achieve its cost-cutting goals because it spends 50 to 150% of the departing employ-
ee’s salary in hiring and retraining new workers.61
Another HRM challenge is to boost the morale of employees who remain after the
reduction; this is discussed in greater detail in Chapter 5. Survivors may feel guilt over
keeping their jobs when their friends have been laid off, or they may envy their friends
who have retired with attractive severance and pension benefits. Their reduced satisfac-
tion with and commitment to the organization may interfere with work performance.
Thus the HRM function must maintain open communication with remaining employees
to build their trust and commitment rather than withholding information.62 All employ-
ees should be informed of the purpose of the downsizing, the costs to be cut, the dura-
tion of the downsizing, and the strategies to be pursued. In addition, companies going
through downsizing often develop compensation programs that tie the individual’s com-
pensation to the company’s success. Employee ownership programs often result from
downsizing, and gainsharing plans such as the Scanlon plan (discussed in Chapter 12)
originated in companies facing economic difficulties.
In spite of these challenges, downsizing provides opportunities for HRM. First, it
often allows the company to “get rid of dead wood” and make way for fresh ideas. In
addition, downsizing is often a unique opportunity to change an organization’s culture. In
firms characterized by antagonistic labor–management relations, downsizing can force
the parties to cooperate and to develop new, positive relationships.63 Finally, downsizing
can demonstrate to top-management decision makers the value of the company’s human
resources to its ultimate success. The role of HRM is to effectively manage the process
in a way that makes this value undeniable. We discuss the implications of downsizing as
a labor force management strategy in Chapter 5.
STRATEGY EVALUATION AND CONTROL

A final component to the strategic management process is that of strategy evaluation
and control. Thus far we have focused on the planning and implementation of strategy.
However, it is extremely important for the firm to constantly monitor the effectiveness of
both the strategy and the implementation process. This monitoring makes it possible for
the company to identify problem areas and either revise existing structures and strategies
or devise new ones. In this process we see emergent strategies appear as well as the criti-
cal nature of human resources in competitive advantage.
The Role of Human Resources in Providing

Strategic Competitive Advantage
Thus far we have presented the strategic management process as including a step-by-step
procedure by which HRM issues are raised prior to deciding on a strategy and then HRM
practices are developed to implement that strategy. However, we must note that human
resources can provide a strategic competitive advantage in two additional ways: through
emergent strategies and through enhancing competitiveness.
EMERGENT STRATEGIES
Having discussed the process of strategic management, we also must distinguish between
intended strategies and emergent strategies. Most people think of strategies as being proac-
tive, rational decisions aimed toward some predetermined goal. The view of strategy we
have presented thus far in the chapter focuses on intended strategies. Intended strategies are
the result of the rational decision-making process used by top managers as they develop a
strategic plan. This is consistent with the definition of strategy as “the pattern or plan that
integrates an organization’s major goals, policies, and action sequences into a cohesive
whole.”64 The idea of emergent strategies is evidenced by the feedback loop in Figure 2.2.
Most strategies that companies espouse are intended strategies. For example, when
Howard Schultz founded Starbucks, he had the idea of creating a third place (between
work and home) where people could enjoy traditional Italian-style coffee. He knew that the
smell of the coffee and the deeper, darker, stronger taste would attract a new set of custom-
ers to enjoy coffee the way he thought it should be enjoyed. This worked, but as Starbucks
grew, customers began asking if they could have non-fat milk in their lattes, or if they could
get flavor shots in their coffees. Schultz swore that such things would essentially pollute the
coffee and refused to offer them. Finally, after repeated requests from his store managers
who kept hearing customers demanding such things, Schultz finally relented.65
Emergent strategies, on the other hand, consist of the strategies that evolve from the
grassroots of the organization and can be thought of as what organizations actually do,
as opposed to what they intend to do. Strategy can also be thought of as “a pattern in a
stream of decisions or actions.”66 For example, when Honda Motor Company first entered
the U.S. market with its 250-cc and 350-cc motorcycles in 1959, it believed that no mar-
ket existed for its smaller 50-cc bike. However, the sales on the larger motorcycles were
sluggish, and Japanese executives running errands around Los Angeles on Honda 50s
attracted a lot of attention, including that of a buyer with Sears, Roebuck. Honda found a
previously undiscovered market as well as a new distribution outlet (general retailers) that
it had not planned on. This emergent strategy gave Honda a 50% market share by 1964.67
The distinction between intended and emergent strategies has important implications
for human resource management.68 The new focus on strategic HRM has tended to focus
primarily on intended strategies. Thus HRM’s role has been seen as identifying for top
management the people-related business issues relevant to strategy formulation and then
developing HRM systems that aid in the implementation of the strategic plan.
However, most emergent strategies are identified by those lower in the organizational
hierarchy. It is often the rank-and-file employees who provide ideas for new markets, new
products, and new strategies. HRM plays an important role in facilitating communication
throughout the organization, and it is this communication that allows for effective emergent
strategies to make their way up to top management. For example, Starbucks’ Frappuccino
was a drink invented by one of the store employees in California; Starbucks leaders (includ-
ing Schultz) thought it was a terrible idea. They fought it in a number of meetings, but the
employee kept getting more and more information supporting her case for how much cus-
tomers seemed to like it. The leaders finally gave the go-ahead to begin producing it, and it
has become a $1 billion a year product, and one that has contributed to the Starbucks brand.69
ENHANCING FIRM COMPETITIVENESS

A related way in which human resources can be a source of competitive advantage is
through developing a human capital pool that gives the company the unique ability to
adapt to an ever-changing environment. Recently managers have become interested in
the idea of a “learning organization,” in which people continually expand their capacity
to achieve the results they desire.70 This requires the company to be in a constant state
of learning through monitoring the environment, assimilating information, making deci-
sions, and flexibly restructuring to compete in that environment. Companies that develop
such learning capability have a competitive advantage. Although certain organizational
information-processing systems can be an aid, ultimately the people (human capital)
who make up the company provide the raw materials in a learning organization.71
Thus, the role of human resources in competitive advantage should continue to
increase because of the fast-paced change characterizing today’s business environment.
It is becoming increasingly clear that even as U.S. automakers have improved the quality
of their cars to compete with the Japanese, these competitors have developed such flex-
ible and adaptable manufacturing systems that they can respond to customer needs more
quickly.72 This flexibility of the manufacturing process allows the emergent strategy to
come directly from the marketplace by determining and responding to the exact mix
of customer desires. It requires, however, that the company have people in place who
have the skills to similarly adapt quickly.73 As Howard Schultz says, “If people relate to
the company they work for, if they form an emotional tie to it and buy into its dreams,
they will pour their heart into making it better. When employees have self-esteem and
self-respect they can contribute so much more; to their company, to their family, to the
world.”74 This statement exemplifies the increasing importance of human resources in
developing and maintaining competitive advantage.75
A LOOK BACK
Southwest’s Strategic HRM
Southwest Airlines’ challenges face every company sooner or later. While firm suc-
cess can be sustained for a number of years, at some point competition begins to
take its toll. In addition, with changes in leadership (Herb Kelleher retired from the
CEO role and handed it off to Gary Kelly in 2004), it is difficult to maintain the same
strong culture. This has profound effects on how people must be managed to sus-
tain success amid a changing competitive landscape.
In spite of these challenges, Southwest’s performance remains strong. The air-
line made a record $1.1 billion in profits in 2014, almost twice as much as in 2013. In
addition the airline will continue to expand internationally, providing new opportuni-
ties for revenue growth.
QUESTIONS
1. What do you think has made Southwest Airlines so successful?
2. What do you think are the major challenges facing Southwest?
3. How would a strategic approach to HRM help Southwest successfully address
these challenges?
SUMMARY
A strategic approach to human resource management seeks practices that ensure that the company has motivated employ-
to proactively provide a competitive advantage through the ees with the necessary skills. Finally, the emerging strategic
company’s most important asset: its human resources. While role of the HRM function requires that HR professionals in
human resources are the most important asset, they are also the future develop business, professional–technical, change
usually the single largest controllable cost within the firm’s management, and integration competencies. As you will see
business model. The HRM function needs to be integrally more clearly in later chapters, this strategic approach requires
involved in the formulation of strategy to identify the people- more than simply developing a valid selection procedure or
related business issues the company faces. Once the strategy state-of-the-art performance management systems. Only
has been determined, HRM has a profound impact on the through these competencies can the HR professional take a
implementation of the plan by developing and aligning HRM strategic approach to human resource management.
KEY TERMS
Strategic human resource Goals, 77 Job analysis, 83
management (SHRM), 71 External analysis, 77 Job design, 83
Strategy formulation, 72 Internal analysis, 77 Recruitment, 84
Strategy implementation, 72 Strategic choice, 78 Selection, 84
Training, 84 Role behaviors, 87 Internal growth strategy, 88

Development, 84 External growth strategy, 88 Downsizing, 89
Performance management, 84 Concentration strategy, 88
1. Pick one of your university’s major sports teams (like What are examples of practices that were inconsistent with
football or basketball). How would you characterize that its strategy?
team’s generic strategy? How does the composition of 4. How can strategic management within the HRM depart-
the team members (in terms of size, speed, ability, and ment ensure that HRM plays an effective role in the com-
so on) relate to that strategy? What are the strengths and pany’s strategic management process?
weaknesses of the team? How do they dictate the team’s 5. What types of specific skills (such as knowledge of financial
generic strategy and its approach to a particular game? accounting methods) do you think HR professionals will
2. Do you think that it is easier to tie human resources to the need to have the business, professional-technical, change
strategic management process in large or in small organi- management, and integrative competencies necessary in the
zations? Why? future? Where can you develop each of these skills?
3. Consider one of the organizations you have been affiliated 6. What are some of the key environmental variables that you
with. What are some examples of human resource prac- see changing in the business world today? What impact will
tices that were consistent with that organization’s strategy? those changes have on the HRM function in organizations?
Think of a company you have worked for, or find an annual 2. Does the company use the HR practices recommended
report for a company you are interested in working for. in this chapter?
(Many companies post their annual reports online at their 3. What else should the company do to deal with the
website.) Then answer the following questions. challenges posed by the trends discussed in this
chapter?
QUESTIONS
1. How has the company been affected by the trends dis-
cussed in this chapter?
EXERCISING STRATEGY
Strategy and HRM at Delta Airlines
In 1994 top executives at Delta Air Lines faced a crucial strate- survive and thrive in such an environment? Determining the
gic decision. Delta, which had established an unrivaled reputa- strategy for doing so was the top executives’ challenge.
tion within the industry for having highly committed employees Chairman and chief executive officer Ron Allen embarked
who delivered the highest quality customer service, had lost upon the “Leadership 7.5” strategy, whose goal was to reduce
more than $10 per share for two straight years. A large por- the cost per available seat mile to 7.5 cents, comparable with
tion of its financial trouble was due to the $491 million acquisi- Southwest Airlines. Implementing this strategy required a
tion of Pan Am in 1991, which was followed by the Gulf War significant downsizing over the following three years, trim-
(driving up fuel costs) and the early 1990s recession (causing ming 11,458 people from its 69,555-employee workforce
people to fly less). Its cost per available seat mile (the cost to (the latter number representing an 8% reduction from two
fly one passenger one mile) was 9.26 cents, among the highest years earlier). Many experienced customer service represen-
in the industry. In addition, it was threatened by new discount tatives were laid off and replaced with lower paid, inexperi-
competitors with significantly lower costs—in particular, Valu- enced, part-time workers. Cleaning service of planes as well
jet, which flew out of Delta’s Atlanta hub. How could Delta as baggage handling were outsourced, resulting in layoffs of
long-term Delta employees. The numbers of maintenance to implement the cost cutting differently to reduce the cost
workers and flight attendants were reduced substantially. structure but preserve its source of differentiation.
The results of the strategy were mixed as financial perfor- The present state of Delta provides further support to
mance improved but operational performance plummeted. these conclusions. With the family atmosphere dissolved and
Since it began its cost cutting, its stock price more than dou- the bond between management and rank-and-file employees
bled in just over two years and its debt was upgraded. On the broken, employees have begun to seek other ways to gain
other hand, customer complaints about dirty airplanes rose voice and security. By fall 2001 Delta had two union orga-
from 219 in 1993 to 358 in 1994 and 634 in 1995. On-time nizing drives under way with both the flight attendants and
performance was so bad that passengers joked that Delta the mechanics. In addition, labor costs have been driven up
stands for “Doesn’t Ever Leave The Airport.” Delta slipped as a result of the union activity. The pilots signed a lucrative
from fourth to seventh among the top 10 carriers in baggage five-year contract that will place them at the highest pay in
handling. Employee morale hit an all-time low, and unions the industry. In an effort to head off the organizing drive, the
were beginning to make headway toward organizing some of mechanics were recently given raises to similarly put them
Delta’s employee groups. In 1996 CEO Allen was quoted as at the industry top. Now the flight attendants are seeking
saying, “This has tested our people. There have been some industry-leading pay regardless of, but certainly encouraged
morale problems. But so be it. You go back to the question by, the union drive.76
of survival, and it makes the decision very easy.” The Delta Air Lines story provides a perfect example of
Shortly after, employees began donning cynical “so be the perils that can await firms that fail to adequately address
it” buttons. Delta’s board saw union organizers stirring blue- human resource issues in the formulation and implementa-
collar discontent, employee morale destroyed, the customer tion of strategy.
service reputation in near shambles, and senior managers QUESTIONS
exiting the company in droves. Less than one year later, 1. How does the experience of Delta Air Lines illustrate
Allen was fired despite Delta’s financial turnaround. His the interdependence between strategic decisions of “how
firing was “not because the company was going broke, but to compete” and “with what to compete”? Consider this
because its spirit was broken.” with regard to both strategy formulation and strategy
Delta’s Leadership 7.5 strategy destroyed the firm’s implementation.
core competence of a highly experienced, highly skilled, 2. If you were in charge of HRM for Delta Air Lines now,
and highly committed workforce that delivered the highest what would be your major priorities?
quality customer service in the industry. HRM might have
SOURCES: M. Brannigan and E. De Lisser, “Cost Cutting at Delta Raises the
affected the strategy by pointing out the negative impact Stock Price but Lowers the Service,” The Wall Street Journal, June 20, 1996,
that this strategy would have on the firm. Given the strat- pp. A1, A8; M. Brannigan and J. White, “So Be It: Why Delta Air Lines Decided
egy and competitive environment, Delta might have sought It Was Time for CEO to Take Off,” The Wall Street Journal, May 30, 1997, p. A1.
MANAGING PEOPLE
Is Dell Too Big for Michael Dell?
He’s back in charge—and he may have the tough- As recently as last November, Dell insisted to Business-
est job in the computer business. Welcome back, Week that Rollins’s job was safe. Now, in an interview, he
Michael. Don’t get too comfortable. insists the decision to push Rollins out started with him. “I
By returning to the top job at Dell Inc., replacing depart- recommended to our board that I become the CEO,” Dell
ing chief executive Kevin Rollins, founder Michael S. Dell says. For years, Dell and Rollins were held up as a prime
takes on perhaps the toughest job in the computer industry. example of the company’s “two-in-a-box” management struc-
Since mid-2005 the PC maker has battled problems with ture, in which two leaders worked together in lockstep. When
customer service, quality, and the effectiveness of its direct- Rollins was president, Michael Dell was CEO; when Rollins
sales model. Lately, rivals Hewlett-Packard Co. and Apple was promoted to CEO in 2004, Michael remained chairman.
Inc. have been gaining in sales and market share. On Janu- But financial performance has been deteriorating for a while
ary 31, the day Rollins’s departure was announced, the Round now, and Michael Dell apparently ran out of patience in light
Rock (Texas) company disclosed that its fourth-quarter of the latest disappointment. “People are looking forward to a
earnings and sales would fall short of analyst estimates. It’s change,” said an analyst at one of Dell’s largest institutional
also under scrutiny by the Securities & Exchange Commis- shareholders. Indeed, the company’s share price jumped 3.6%
sion and a U.S. attorney for accounting irregularities. in the couple of hours after the shift was announced.
But does Michael Dell have what it takes to turn the Apple are gaining.) “Dell’s troubles seem to be bleeding
company around? It’s been years since he shouldered day- into its corporate business, which, up until now, had been a
to-day operational responsibility on his own. Since the early stronghold,” the report said. Dell has also lost the top spot
1990s, Dell has always had a strong No. 2; back then, the in the worldwide PC market-share rankings. In the fourth
company had less than $3 billion in yearly sales. Today it is quarter, Hewlett-Packard’s worldwide market share grew to
a $60 billion company. But Dell says he has a clear plan. He 18.1%, while Dell’s share dropped to 14.7%, according to
believes the company’s supply chain and manufacturing can market researcher IDC.
be improved. “I think you’re going to see a more streamlined Dell also has several slots to fill in the executive suite;
organization, with a much clearer strategy.” Rollins is only the latest departure among key managers.
But none of the paths to improve performance will be But for the first time in years, the tough choices will be
easy. Dell doesn’t have the innovation DNA of an Apple or solely in the lap of the man who started the company in his
even an HP, should it want to overhaul its utilitarian prod- University of Texas dorm room back in 1984. “I’m not hir-
ucts and services. Any effort to crank up R&D would crimp ing a COO or a CEO,” Dell says, “I’m going to be the CEO
margins. Trying to win over more consumers, the fastest- for the next several years.” He adds: “We’re going to fix this
growing part of the market, may well require a move away business.”
from its direct-sales model into retail. That could prove
costly as well. Dell himself says he doesn’t anticipate leav- QUESTIONS
ing the direct-sales model behind: “It’s a significant strength 1. How does the case describe Dell’s transformed strategy
of the company.” Nor does a big acquisition seem to be an over the years in terms of where to compete, how to
option, given that Dell has never done one in the past. compete, and with what to compete?
2. What are the major people issues that exist as Michael
Slots to fill Dell retakes the reins at Dell?
But standing in place also looks hazardous, since Dell may 3. How would HR help in addressing the issues that Dell
now be slipping in its core corporate business, too. Accord- faces?
ing to a January 30 study done by Goldman, Sachs & Co.,
SOURCE: From L. Lee and P. Burrows, “Is Dell Too Big for Michael Dell?”
Dell is losing share in business spending for PCs. (Hewlett- BusinessWeek, April 4, 2007. Used with permission of Bloomberg L. P.
Packard is also losing share of spending, while Lenovo and Copyright © 2013. All rights reserved.
Radio Flyer Rolls Forward
The mid-2000s were a difficult time for Radio Flyer, a private employees to join him for breakfasts, during which he recalls
business famous for its little red wagons. After spending hun- the incident as a way to reinforce the company’s commitment
dreds of thousands of dollars to develop what they hoped was to innovation and learning.
a hit, managers realized their idea wouldn’t fly, so they killed The story of Radio Flyer’s need to outsource manufac-
it. And in the same year, management decided the company turing has what some might see as a less-happy ending.
could no longer afford to build wagons in the United States. Looking at the numbers, management determined that
First, the development flop: Thomas Schlegel, vice it would have to close its factory in Chicago and lay off
president for product development, thought he had a winner about half of its workforce. Manufacturing moved to a fac-
with an idea for a collapsible wagon to be called Fold 2 Go tory in China. Pasin describes the effort as “an incredibly
Wagon. It would be a fun product that parents could fold up difficult time.”
and toss into the back of a minivan for a trip to the park or The company’s effort with its remaining U.S. employees
other outings. The problem was, a collapsing toy that chil- focused on building morale. These efforts include creating
dren sit inside is difficult to make both functional and safe. ideas for employees to have fun and pursue their passions,
The costs were excessive. with events such as the Radio Flyer Olympics, during which
When Schlegel ended the project, he feared his reputa- employees compete in silly contests like tricycle races. More
tion might suffer as well. But CEO Robert Pasin assured seriously, teams of employees tackle issues that they care
Schlegel that failure was acceptable as long as the company about. The wellness committee put together a cash benefit
could learn from it. The value placed on learning became that pays employees up to $300 for participating in health-
something that Schlegel capitalized on as his team applied related activities such as weight-loss counseling or run-
what they learned to the development of a new success, ning races. Another committee brought together employees
the Twist Trike and a new model of its wagons called the concerned about the environment. They assembled a cam-
Ultimate Family Wagon. Furthermore, Pasin expanded that paign aimed at persuading employees to reduce their carbon
one experience into a teaching opportunity. He invites new footprint.
In caring for the U.S. employees, Radio Flyer hasn’t for- large corporation? Why or why not? How could HRM
gotten the ones in China. The company tries to maintain help to smooth the transition?
similar levels of benefits and engagement among the four 3. What additional developments described in this chapter
dozen employees in its China office. could help Radio Flyer live out the high value it places
on learning and innovation?
QUESTIONS
1. How could a human resource manager help Radio Flyer SOURCES: Company website, www.radioflyer.com, accessed May 24, 2015;
“Best Places to Work 2015 in Chicago: #7 Radio Flyer,” Crain’s Chicago
get the maximum benefit from the motivational efforts Business, www.chicagobusiness.com, accessed May 24, 2015; J. Scanlon,
described in this case? “Radio Flyer Learns from a Crash,” Bloomberg Businessweek,
2. Do you think outsourcing would be harder on employ- www.businessweek.com, accessed May 24, 2015.
ees in a small company such as Radio Flyer than in a
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The Legal Environment:
Equal Employment
Opportunity and Safety
3
C H A P T E R
LEARNING OBJECTIVES
LO 3-1 Identify the three branches of government and the role each plays in
influencing the legal environment of human resource management. page 102
LO 3-2 List the major federal laws that require equal employment opportunity
and the protections provided by each of these laws. page 103
LO 3-3 Discuss the roles, responsibilities, and requirements of the federal agencies
responsible for enforcing equal employment opportunity laws. page 111
LO 3-4 Identify the three theories of discrimination under Title VII of the Civil Rights
Act and apply these theories to different discrimination situations. page 113
LO 3-5 Identify behavior that constitutes sexual harassment, and list things
that an organization can do to eliminate or minimize it. page 125
LO 3-6 Discuss the legal issues involved with preferential

treatment programs. page 128
LO 3-7 Identify the major provisions of the Occupational Safety and Health Act
(1970) and the rights of employees that are guaranteed by this act. page 130
100
>>>
Sexism at Kleiner Perkins?
Silicon Valley firms are notorious for their masculine me off e-mail threads. He would not invite me to
cultures, and how they treat women has long been a meetings.”
sensitive issue. In fact, a 2014 Babson College study On the other hand, the firm paints a picture of a
revealed that women comprise only 6% of venture woman scorned. An attorney hired to examine her
capitalists. A recent discrimination case against ven- claims said that she was “not truthful about the rela-
ture capital firm Kleiner Perkins Caufield & Byers illus- tionship with Ajit Nazre” and suggested that the affair
trates this problem. was consensual and that she had wanted a deeper
Ellen Pao filed a $16 million discrimination suit relationship.
against the firm, alleging sex discrimination and During the trial Ms. Pao testified that for Valen-
retaliation. She alleged that the firm’s leaders tine’s Day another male partner gave her a book
failed to promote her and provide her with choice of erotic poems. She told some of the partners that
assignments following an affair with one of the the firm would benefit from better human resources
firm’s partners, Ajit Nazre, in 2006. She said that after policy and training.
the affair ended, Mr. Nazre made life difficult, alleg- SOURCE: J. Elder, “Kleiner Accuser Testifies on Sexism,” The Wall Street
ing, “He would cut me out of e-mails, take Journal, March 9, 2015, www.wsj.com.
Introduction
In the opening chapter, we discussed the environment of the HRM function, and we
noted that several environmental factors affect an organization’s HRM function. One
is the legal environment, particularly the laws affecting the management of people. As
the troubles at Kleiner Perkins suggests, legal issues can cause serious problems for a
company’s success and survival. In this chapter, we first present an overview of the U.S.
legal system, noting the different legislative bodies, regulatory agencies, and judicial
bodies that determine the legality of certain HRM practices. We then discuss the major
laws and executive orders that govern these practices.
One point to make clear at the outset is that managers often want a list of “dos and
don’ts” that will keep them out of legal trouble. They rely on rules such as “Don’t ever
ask a female applicant if she is married” without understanding the “why” behind these
rules. Clearly, certain practices are illegal or inadvisable, and this chapter will provide
some valuable tips for avoiding discrimination lawsuits. However, such lists are not com-
patible with a strategic approach to HRM and are certainly not the route to developing a
competitive advantage. They are simply mechanical reactions to the situations. Our goal
is to provide an understanding of how the legislative, regulatory, and judicial systems
work to define equal employment opportunity law. Armed with this understanding, a
manager is better prepared to manage people within the limits imposed by the legal sys-
tem. Doing so effectively is a source of competitive advantage. Doing so ineffectively
results in competitive disadvantage. Rather than viewing the legal system as a constraint,
firms that embrace the concept of diversity can often find that they are able to leverage
the differences among people as a tremendous competitive tool.
101
102 CHAPTER 3 The Legal Environment: Equal Employment Opportunity and Safety
The Legal System in the United States

LO 3-1 The foundation for the U.S. legal system is set forth in the U.S. Constitution, which
Identify the three affects HRM in two ways. First, it delineates a citizen’s constitutional rights, on which the
branches of govern- government cannot impinge.1 Most individuals are aware of the Bill of Rights, the first 10
ment and the role each
plays in influencing
amendments to the Constitution; but other amendments, such as the Fourteenth Amend-
the legal environment ment, also influence HRM practices. The Fourteenth Amendment, called the equal pro-
of human resource tection clause, states that all individuals are entitled to equal protection under the law.
management. Second, the Constitution established three major governing bodies: the legislative,
executive, and judicial branches. The Constitution explicitly defines the roles and respon-
sibilities of each of these branches. Each branch has its own areas of authority, but these
areas have often overlapped, and the borders between the branches are often blurred.
LEGISLATIVE BRANCH
The legislative branch of the federal government consists of the House of Represen-
tatives and the Senate. These bodies develop laws that govern many HRM activities.
Most of the laws stem from a perceived societal need. For example, during the civil
rights movement of the early 1960s, the legislative branch moved to ensure that various
minority groups received equal opportunities in many areas of life. One of these areas
was employment, and thus Congress enacted Title VII of the Civil Rights Act. Similar
perceived societal needs have brought about labor laws such as the Occupational Safety
and Health Act, the Employee Retirement Income Security Act, the Age Discrimination
in Employment Act, and, more recently, the Americans with Disabilities Act of 1990
and the Civil Rights Act of 1991.
EXECUTIVE BRANCH
The executive branch consists of the president of the United States and the many regula-
tory agencies the president oversees. Although the legislative branch passes the laws, the
executive branch affects these laws in many ways. First, the president can propose bills
to Congress that, if passed, would become laws. Second, the president has the power to
veto any law passed by Congress, thus ensuring that few laws are passed without presi-
dential approval—which allows the president to influence how laws are written.
Third, the regulatory agencies, under the authority of the president, have responsi-
bility for enforcing the laws. Thus, a president can influence what types of violations
are pursued. For example, many laws affecting employment discrimination are enforced
by the Equal Employment Opportunity Commission under the Department of Justice.
During President Jimmy Carter’s administration, the Department of Justice brought a
lawsuit against Birmingham, Alabama’s, fire department for not having enough black
firefighters. This suit resulted in a consent decree that required blacks to receive prefer-
ential treatment in hiring and promotion decisions. Two years later, during Ronald Rea-
gan’s administration, the Department of Justice sided with white firefighters in a lawsuit
against the city of Birmingham, alleging that the preferential treatment required by the
consent decree discriminated against white firefighters.2
Fourth, the president can issue executive orders, which sometimes regulate the activi-
ties of organizations that have contracts with the federal government. For example, Exec-
utive Order 11246, signed by President Lyndon Johnson, required all federal contractors
and subcontractors to engage in affirmative action programs designed to hire and pro-
mote women and minorities within their organizations. Fifth, the president can influence
the Supreme Court to interpret laws in certain ways. When particularly sensitive cases
CHAPTER 3 The Legal Environment: Equal Employment Opportunity and Safety 103
come before the Court, the attorney general, representing the executive branch, argues
for certain preferred outcomes. For example, one court case involved a white female
schoolteacher who was laid off from her job in favor of retaining a black schoolteacher
with equal seniority and performance with the reason given as “diversity.” The white
woman filed a lawsuit in federal court and the (first) Bush administration filed a brief
on her behalf, arguing that diversity was not a legitimate reason to use race in decision
making. She won in federal court, and the school district appealed. The Clinton adminis-
tration, having been elected in the meantime, filed a brief on behalf of the school district,
arguing that diversity was a legitimate defense.
Finally, the president appoints all the judges in the federal judicial system, subject to
approval from the legislative branch. This affects the interpretation of many laws.
JUDICIAL BRANCH
The judicial branch consists of the federal court system, which is made up of three levels. The
first level consists of the U.S. District Courts and quasi-judicial administrative agencies.
The district courts hear cases involving alleged violations of federal laws. The quasi-judicial
agencies, such as the National Labor Relations Board (or NLRB, which is actually an arm
of the executive branch, but serves a judicial function), hear cases regarding their particular
jurisdictions (in the NLRB’s case, disputes between unions and management). If neither
party to a suit is satisfied with the decision of the court at this level, the parties can appeal
the decision to the U.S. Courts of Appeals. These courts were originally set up to ease the
Supreme Court’s caseload, so appeals generally go from the federal trial level to one of
the 13 appellate courts before they can be heard by the highest level, the Supreme Court.
The Supreme Court must grant certiorari before hearing an appealed case. However, this is
not usually granted unless two appellate courts have come to differing decisions on the same
point of law or if the case deals with an important interpretation of constitutional law.
The Supreme Court serves as the court of final appeal. Decisions made by the Supreme
Court are binding; they can be overturned only through legislation. For example, Con-
gress, dissatisfied with the Supreme Court’s decisions in certain cases such as Wards
Cove Packing v. Atonio, overturned those decisions through the Civil Rights Act of 1991.3
Having described the legal system that affects the management of HR, we now
explore some laws that regulate HRM activities, particularly equal employment opportu-
nity laws. We first discuss the major laws that mandate equal employment opportunity in
the United States. Then we examine the agencies involved in enforcing these laws. This
leads us into an examination of the four theories of discrimination, with a discussion Equal Employment
of some relevant court cases. Finally, we explore some equal employment opportunity Opportunity (EEO)
issues facing today’s managers. The government’s
attempt to ensure that
While laws are generally written to protect workers, sometimes workers do not want all individuals have an
those protections. The “Competing through Globalization” box discusses how Uber equal opportunity for
faces a variety of regulatory challenges across different nations. employment, regardless
of race, color, religion,
sex, age, disability, or
Equal Employment Opportunity national origin.
Equal employment opportunity (EEO) refers to the government’s attempt to ensure that all LO 3-2
individuals have an equal chance for employment, regardless of race, color, religion, sex, List the major federal
laws that require equal
age, disability, or national origin. To accomplish this, the federal government has used
employment opportu-
constitutional amendments, legislation, and executive orders, as well as the court deci- nity and the protections
sions that interpret these laws. (However, equal employment laws are not the same in all provided by each of
countries.) The major EEO laws we discuss are summarized in Table 3.1. these laws.
Uber Faces Challenges in the EU
Founded in 2009, Uber is a “nondiscriminatory” open mar- the doors to the
car-sharing service that allows kets to new businesses. possibilities offered
customers to hail and pay for Mark McGann, Uber’s head by new technology but it needs
rides using their smartphones. of public policy for Europe, the to happen within a framework
It has expanded quickly and Middle East, and Africa, says that brings current legislation
globally, now operating in that the EU “is supposed to be a together.” The EU’s transporta-
19 EU countries with plans single market,” but “what we’re tion commission plans to launch
to be in 26 of the 28 by the finding is that we’re getting a study of taxi-type services
summer of 2015. However, treated in completely different in the EU to better inform any
Uber’s expansion has not been ways in different countries, and future decisions.
smooth sailing. even within individual countries.”
Uber has filed separate Incumbent taxi operator groups DISCUSSION QUESTION
complaints with the European have been their biggest oppo- What are some of the implica-
Commission against France, nents, filing lawsuits and holding tions of globalization for incum-
Germany, and Spain all in the protests—some of which have bent and expanding businesses?
past year. Although each mem- turned violent—against this dis- SOURCE: T. Fairless, “Uber Files Com-
ber of the EU manages its own ruptive new entrant. plaints against European Governments over
transportation policies, the EU An EU spokesman com- Bans,” The Wall Street Journal, April 1, 2015,
www.wsj.com.
treaties require them to provide mented that “we don’t close
CONSTITUTIONAL AMENDMENTS
Thirteenth Amendment
The Thirteenth Amendment of the Constitution abolished slavery in the United States.
Though one might be hard-pressed to cite an example of race-based slavery in the
United States today, the Thirteenth Amendment has been applied in cases where the dis-
crimination involved the “badges” (symbols) and “incidents” of slavery.
Fourteenth Amendment
The Fourteenth Amendment forbids the states from taking life, liberty, or property with-
out due process of law and prevents the states from denying equal protection of the laws.
Passed immediately after the Civil War, this amendment originally applied only to dis-
crimination against blacks. It was soon broadened to protect other groups such as aliens
and Asian-Americans, and more recently it has been applied to the protection of whites
in allegations of reverse discrimination. In Bakke v. California Board of Regents, Alan
Bakke alleged that he had been discriminated against in the selection of entrants to the
University of California at Davis medical school.4 The university had set aside 16 of the
available 100 places for “disadvantaged” applicants who were members of racial minor-
ity groups. Under this quota system, Bakke was able to compete for only 84 positions,
whereas a minority applicant was able to compete for all 100. The court ruled in favor
of Bakke, noting that this quota system had violated white individuals’ right to equal
protection under the law.
One important point regarding the Fourteenth Amendment is that it is applicable only
to “state actions.” This means that only the decisions or actions of the government or
104
Table 3.1
Summary of Major EEO Laws and Regulations
ENFORCEMENT
ACT REQUIREMENTS COVERS AGENCY
Thirteenth Amendment Abolished slavery All individuals Court system

Fourteenth Amendment Provides equal protection State actions (e.g., deci- Court system
for all citizens and requires sions of government
due process in state action organizations)
Civil Rights Acts (CRAs) Grants all citizens the right All individuals Court system
of 1866 and 1871 (as to make, perform, modify,
amended) and terminate contracts and
enjoy all benefits, terms, and
conditions of the contractual
relationship
Equal Pay Act of 1963 Requires that men and Employers engaged in EEOC
women performing equal interstate commerce
jobs receive equal pay
Title VII of CRA Forbids discrimination based Employers with 15 or more EEOC
on race, color, religion, sex, employees working 20 or
or national origin more weeks per year; labor
unions; and employment
agencies
Age Discrimination in Prohibits discrimination in Employers with 15 or more EEOC
Employment Act of employment against indi- employees working 20 or
1967 viduals 40 years of age and more weeks per year; labor
older unions; employment agen-
cies; federal government
Rehabilitation Act of Requires affirmative action Government agencies; fed- OFCCP
1973 in the employment of indi- eral contractors and sub-
viduals with disabilities contractors with contracts
greater than $2,500
Americans with Disabili- Prohibits discrimination Employers with more than EEOC
ties Act of 1990 against individuals with 15 employees
disabilities
Pregnancy Discrimina- Prohibits discrimination Employers with more than EEOC
tion Act on the basis of pregnancy, 15 employees
childbirth, or related medical
conditions
Executive Order 11246 Requires affirmative action Federal contractors and OFCCP
in hiring women and subcontractors with con-
minorities tracts greater than $10,000
Civil Rights Act of 1991 Prohibits discrimination Same as Title VII, plus applies EEOC
(same as Title VII) Section 1981 to employment
discrimination cases
of private groups whose activities are deemed state actions can be construed as viola-
tions of the Fourteenth Amendment. Thus, one could file a claim under the Fourteenth
Amendment if one were fired from a state university (a government organization) but
not if one were fired by a private employer.
CONGRESSIONAL LEGISLATION
The Reconstruction Civil Rights Acts (1866 and 1871)
The Thirteenth Amendment eradicated slavery in the United States, and the Recon-
struction Civil Rights Acts were attempts to further this goal. The Civil Rights Act
passed in 1866 was later broken into two statutes. Section 1982 granted all persons the
same property rights as white citizens. Section 1981 granted other rights, including
the right to enter into and enforce contracts. Courts have interpreted Section 1981 as
granting individuals the right to make and enforce employment contracts. The Civil
Rights Act of 1871 granted all citizens the right to sue in federal court if they felt they
had been deprived of some civil right. Although these laws might seem outdated, they
are still used because they allow the plaintiff to recover both compensatory and puni-
tive damages.
In fact, these laws came to the forefront in a Supreme Court case: Patterson v.
McClean Credit Union.5 The plaintiff had filed a discrimination complaint under Sec-
tion 1981 for racial harassment. After being hired by McClean Credit Union, Patterson
failed to receive any promotions or pay raises while she was employed there. She
was also told that “blacks work slower than whites.” Thus, she had grounds to prove
discrimination and filed suit under Section 1981, arguing that she had been dis-
criminated against in the making and enforcement of an employment contract. The
Supreme Court ruled that this situation did not fall under Section 1981 because it did
not involve the making and enforcement of contracts. However, the Civil Rights Act
of 1991 amended this act to include the making, performance, modification, and ter-
mination of contracts, as well as all benefits, privileges, terms, and conditions of the
contractual relationship.
The Equal Pay Act of 1963

The Equal Pay Act, an amendment to the Fair Labor Standards Act, requires that men
and women in the same organization who are doing equal work must be paid equally.
The act defines equal in terms of skill, effort, responsibility, and working conditions.
However, the act allows for reasons why men and women performing the same job might
be paid differently. If the pay differences are the result of differences in seniority, merit,
quantity or quality of production, or any factor other than sex (such as shift differentials
or training programs), then differences are legally allowable.
Title VII of the Civil Rights Act of 1964

This is the major legislation regulating equal employment opportunity in the United
States. It was a direct result of the civil rights movement of the early 1960s, led by
such individuals as Dr. Martin Luther King Jr. It was Dr. King’s philosophy that people
should “not be judged by the color of their skin but by the content of their character.”
To ensure that employment opportunities would be based on character or ability rather
than on race, Congress wrote and passed Title VII, which President Lyndon Johnson
signed into law.
Title VII states that it is illegal for an employer to “(1) fail or refuse to hire or dis-
charge any individual, or otherwise discriminate against any individual with respect to
his compensation, terms, conditions, or privileges of employment because of such indi-
vidual’s race, color, religion, sex, or national origin, or (2) to limit, segregate, or classify
his employees or applicants for employment in any way that would deprive or tend to
deprive any individual of employment opportunities or otherwise adversely affect his
status as an employee because of such individual’s race, color, religion, sex, or national
origin.” The act applies to organizations with 15 or more employees working 20 or more
weeks a year that are involved in interstate commerce, as well as state and local govern-
ments, employment agencies, and labor organizations.
Age Discrimination in Employment Act (ADEA)

Passed in 1967 and amended in 1986, this act prohibits discrimination against employ-
ees over the age of 40. The act almost exactly mirrors Title VII in terms of its substantive
provisions and the procedures to be followed in pursuing a case.6 As with Title VII, the
EEOC is responsible for enforcing this act.
The ADEA was designed to protect older employees when a firm reduces its work-
force through layoffs. By targeting older employees, who tend to have higher pay, a
firm can substantially cut labor costs. Recently, firms have often offered early retirement
incentives, a possible violation of the act because of the focus on older employees. Early
retirement incentives require employees to sign an agreement waiving their rights to sue
under the ADEA. Courts have tended to uphold the use of early retirement incentives
and waivers as long as the individuals were not coerced into signing the agreements,
the agreements were presented in a way that the employees could understand, and the
employees were given enough time to make a decision.7
However, age discrimination complaints make up a large percentage of the com-
plaints filed with the Equal Employment Opportunity Commission, and the number of
complaints continues to grow whenever the economy is slow. For example, as we see
in Figure 3.1, the cases increased during the early 1990s when many firms were down-
sizing, but the number of cases decreased as the economy expanded. The number of
charges increased again as the economy began slowing again in 2000 and again with the
recession in 2008. This often stems from firms seeking to lay off older (and thus higher
paid) employees when they are downsizing. These cases can be costly; most cases are
settled out of court, but such settlements run from $50,000 to $400,000 per employee.8
In one case, Schering-Plough fired 35-year employee Fred Maiorino after he twice failed
to accept an early retirement offer made to all sales representatives. After hearing tes-
timony that Maiorino’s boss had plastered his file with negative paperwork aimed at
Figure 3.1
Age Discrimination Complaints, 1991–2014
25,000 24,582
23,264 23,465 22,857
22,778
21,396
20,588
19,573 19,809 19,618 19,921 19,585
20,000 19,124 19,103
17,550 17,416 17,405 17,837
16,008 16,548
15,719 15,785 15,191
15,000 14,141
10,000
5,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
SOURCE: Equal Employment Opportunity Commission, at http://eeoc.gov/stats/adea.html.

firing him, rather than trying to help him improve his performance, the jurors unani-
mously decided he had been discriminated against because of his age. They awarded him
$435,000 in compensatory damages and $8 million in punitive damages.9
The Vocational Rehabilitation Act of 1973

This act covers executive agencies and contractors and subcontractors that receive more
than $2,500 annually from the federal government. It requires them to engage in affir-
mative action for individuals with disabilities. Congress designed this act to encourage
employers to actively recruit qualified individuals with disabilities and to make reason-
able accommodations to allow them to become active members of the labor market. The
Employment Standards Administration of the Department of Labor enforces this act.
Vietnam Era Veteran’s Readjustment Act of 1974

Similar to the Rehabilitation Act, this act requires federal contractors and subcontractors
to take affirmative action toward employing Vietnam veterans (those serving between
August 5, 1964, and May 7, 1975). The Office of Federal Contract Compliance Pro-
grams (OFCCP), discussed later in this chapter, has authority to enforce this act.
Pregnancy Discrimination Act

The Pregnancy Discrimination Act is an amendment to Title VII of the Civil Rights Act.
It makes illegal discrimination on the basis of pregnancy, childbirth, or related medical
conditions as a form of unlawful sex discrimination. An employer cannot refuse to hire a
pregnant woman because of her pregnancy, a pregnancy-related condition, or the preju-
dices of co-workers, clients, or customers. For instance, in a recent court case, the retail
store Motherhood Maternity, a Philadelphia-based maternity clothes retailer, settled
a pregnancy discrimination and retaliation lawsuit brought by the Equal Employment
Opportunity Commission (EEOC). The EEOC had charged that the company refused
to hire qualified female applicants because they were pregnant. As a result of the settle-
ment, Motherhood Maternity agreed to a three-year consent decree requiring them to
pay plaintiffs $375,000, adopt and distribute an antidiscrimination policy specifically
prohibiting discrimination on the basis of pregnancy, train its Florida employees on the
new policy, post a notice of resolution of the lawsuit, and provide twice a year reports to
the EEOC on any pregnancy discrimination complaints.10
In addition, regarding pregnancy and maternity leave, employers may not single out
pregnancy-related conditions for special procedures to determine an employee’s ability
to work, and if an employee is temporarily unable to perform during her pregnancy, the
employer must treat her the same as any temporarily disabled employees. The act also
requires that any health insurance must cover expenses for pregnancy-related conditions
on the same basis as costs for other medical conditions. Finally, pregnancy-related ben-
efits cannot be limited to married employees, and if an employer provides any benefits
to workers on leave, they must also provide the same benefits for those on leave for
pregnancy-related conditions.
Recently the EEOC filed suit against HCS Medical Staffing, Inc., for allegedly dis-
criminating against a pregnant employee and then firing her while she was on maternity
leave. According to the EEOC’s suit, owner Charles Sisson engaged in escalating nega-
tive comments about the upcoming maternity leave of HCS bookkeeper Roxy Leger. He
allegedly insisted that Leger’s pregnancy was a joke, described her maternity leave as
“vacation,” and insisted that maternity leave should be no longer than two days. Sisson
then allegedly terminated Leger, who had no prior negative comments on her work per-
formance, seven days after she gave birth by caesarean section.11
Civil Rights Act of 1991

The Civil Rights Act of 1991 (CRA 1991) amends Title VII of the Civil Rights Act of
1964, Section 1981 of the Civil Rights Act of 1866, the Americans with Disabilities Act,
and the Age Discrimination in Employment Act of 1967. One major change in EEO law
under CRA 1991 has been the addition of compensatory and punitive damages in cases
of discrimination under Title VII and the Americans with Disabilities Act. Before CRA
1991, Title VII limited damage claims to equitable relief such as back pay, lost benefits,
front pay in some cases, and attorneys’ fees and costs. CRA 1991 allows compensatory
and punitive damages when intentional or reckless discrimination is proven. Compensa-
tory damages include such things as future pecuniary loss, emotional pain, suffering, and
loss of enjoyment of life. Punitive damages are meant to discourage employers from dis-
criminating by providing for payments to the plaintiff beyond the actual damages suffered.
Recognizing that one or a few discrimination cases could put an organization out of
business, thus adversely affecting many innocent employees, Congress has put limits on
the amount of punitive damages. Table 3.2 depicts these limits. As can be seen, damages
range from $50,000 to $300,000 per violation, depending on the size of the organization.
Punitive damages are available only if the employer intentionally discriminated against
the plaintiff(s) or if the employer discriminated with malice or reckless indifference to
the employee’s federally protected rights. These damages are excluded for an employ-
ment practice held to be unlawful because of its disparate impact.12
The addition of damages to CRA 1991 has had two immediate effects. First, by
increasing the potential payoff for a successful discrimination suit, it has increased the
number of suits filed against businesses. Second, organizations are now more likely to
grant all employees an equal opportunity for employment, regardless of their race, sex,
religion, or national origin. Many organizations have felt the need to make the composi-
tion of their workforce mirror the general population to avoid costly lawsuits. This act
adds a financial incentive for doing so.
Americans with Disabilities Act (ADA) of 1990

One of the most far-reaching acts concerning the management of human resources is the Americans with
Americans with Disabilities Act. This act protects individuals with disabilities from being Disabilities Act
discriminated against in the workplace. It prohibits discrimination based on disability in (ADA) of 1990
all employment practices such as job application procedures, hiring, firing, promotions, A 1990 act prohibiting
individuals with dis-
compensation, and training—in addition to other employment activities such as advertis- abilities from being
ing, recruitment, tenure, layoff, leave, and fringe benefits. Because this act is so new, we discriminated against in
will cover its various stipulations individually. the workplace.
Table 3.2
EMPLOYER SIZE DAMAGE LIMIT
Maximum Punitive
Damages Allowed
14 to 100 employees $ 50,000 under the Civil Rights
101 to 200 employees 100,000 Act of 1991
201 to 500 employees 200,000
More than 500 employees 300,000
The ADA defines a disability as a physical or mental impairment that substan-

tially limits one or more major life activities, a record of having such an impairment,
or being regarded as having such an impairment. The first part of the definition refers
to individuals who have serious disabilities—such as epilepsy, blindness, deafness, or
paralysis—that affect their ability to perform major life activities such as walking, see-
ing, performing manual tasks, learning, caring for oneself, and working. The second
part refers to individuals who have a history of disability, such as someone who has had
cancer but is currently in remission, someone with a history of mental illness, and some-
one with a history of heart disease. The third part of the definition, “being regarded as
having a disability,” refers, for example, to an individual who is severely disfigured and
is denied employment because an employer fears negative reactions from others.13
Thus the ADA covers specific physiological disabilities such as cosmetic disfigure-
ment and anatomical loss affecting the neurological, musculoskeletal, sensory, respira-
tory, cardiovascular, reproductive, digestive, genitourinary, hemic, or lymphatic systems.
In addition, it covers mental and psychological disorders such as mental retardation,
organic brain syndrome, emotional or mental illness, and learning disabilities. However,
conditions such as obesity, substance abuse, eye and hair color, and lefthandedness are
not covered.14
In addition, the Americans with Disabilities Act Amendments Act (ADAAA), effec-
tive January 1, 2009, broadened the scope of who is considered to be an individual
with a disability. It states that the definition of disability should be broadly construed
and that the “question of whether an individual’s impairment is a disability under the
ADA should not demand extensive analysis.” The Supreme Court had interpreted the
term “substantially limited” in a major life activity to require the individual to be “sig-
nificantly restricted,” but the ADAAA states that this is too high a standard and directs
the EEOC to revise its regulations to set a lower standard. Also, regarding the term
“regarded as disabled,” previously employers could avoid liability by showing that the
impairment did not substantially limit a major life activity. However, the ADAAA states
that an employee can prove he or she was subjected to an illegal act “because of an actual
or perceived physical or mental impairment whether or not the impairment limits or is
perceived to limit a major life activity.” In fact, in response to the ADAAA, the EEOC
has clarified and somewhat redefined “disability.” According to their most recent guide-
lines, a disability is defined along three so-called “prongs”: a physical or mental impair-
ment that “substantially limits one or more major life activity,” a record or past history
of such an impairment; and/or being “regarded as” having a disability by an employer
whether you have one or not, usually in terms of hiring, firing, or demotion. In essence,
a person is considered disabled not only if he or she cannot DO something, but just
because he or she has a medical condition whether or not it impairs functioning.15
EXECUTIVE ORDERS
Executive orders are directives issued and amended unilaterally by the president. These
orders do not require congressional approval, yet they have the force of law. Two execu-
tive orders directly affect HRM.
Executive Order 11246

President Johnson issued this executive order, which prohibits discrimination based on
race, color, religion, sex, and national origin. Unlike Title VII, this order applies only to
federal contractors and subcontractors. Employers receiving more than $10,000 from the
federal government must take affirmative action to ensure against discrimination, and
those with contracts greater than $50,000 must develop a written affirmative action plan
for each of their establishments within 120 days of the beginning of the contract. The
Office of Federal Contract Compliance Programs enforces this executive order.
Executive Order 11478

President Richard M. Nixon issued this order, which requires the federal government to
base all its employment policies on merit and fitness, and specifies that race, color, sex,
religion, and national origin should not be considered. (The U.S. Office of Personnel
Management is in charge of this.) The order also extends to all contractors and subcon-
tractors doing $10,000 worth of business with the federal government. (The relevant
government agencies have the responsibility to ensure that the contractors and subcon-
tractors comply with the order.)
Enforcement of Equal Employment LO 3-3

Discuss the roles,
Opportunity responsibilities, and
requirements of the
As discussed previously, the executive branch of the federal government bears most of federal agencies
the responsibility for enforcing all EEO laws passed by the legislative branch. In addi- responsible for enforc-
ing equal employment
tion, the executive branch must enforce the executive orders issued by the president. The opportunity laws.
two agencies responsible for the enforcement of these laws and executive orders are the
Equal Employment Opportunity Commission and the Office of Federal Contract Compli- Equal Employment
ance Programs, respectively. Opportunity
Commission (EEOC)
The government com-
EQUAL EMPLOYMENT OPPORTUNITY COMMISSION (EEOC) mission to ensure that
all individuals have an
An independent federal agency, the EEOC is responsible for enforcing most of the EEO equal opportunity for
laws, such as Title VII, the Equal Pay Act, and the Americans with Disabilities Act. The employment, regard-
EEOC has three major responsibilities: investigating and resolving discrimination com- less of race, color,
plaints, gathering information, and issuing guidelines. religion, sex, age,
disability, or national
origin.
Investigation and Resolution
Individuals who feel they have been discriminated against must file a complaint with
the EEOC or a similar state agency within 180 days of the incident. Failure to file a
complaint within the 180 days results in the case’s being dismissed immediately, with
certain exceptions, such as the enactment of a seniority system that has an intentionally
discriminatory purpose. For instance, the recent Lilly Ledbetter Fair Pay Act signed by
President Obama was crafted in direct response to the 180-day window. Ledbetter had
been an area manager at the Goodyear Tire and Rubber plant in Alabama from 1979
to 1998, during which time she received lower raises than the males. The differences
were such that by the end of her career she was making $6,700 less per year than her
male counterparts, and because pension payments were related to the salary at the time
of retirement, she received smaller pension payments. When she filed the lawsuit, the
Supreme Court ruled that the illegal acts were the pay raise decisions themselves (which
fell far outside the 180-day window); Ledbetter wanted to argue that every time she
received a pension check lower than her peers it served as an act of discrimination. Thus,
Congress passed the act specifying that an “illegal act” occurs when (1) a discriminatory
compensation decision is adopted; (2) an employee becomes subject to the decision; or
(3) an employee is affected by it application, including each time compensation is paid.
Once the complaint is filed, the EEOC takes responsibility for investigating the claim
of discrimination. The complainant must give the EEOC 60 days to investigate the com-
plaint. If the EEOC either does not believe the complaint to be valid or fails to complete
the investigation, the complainant may sue in federal court. If the EEOC determines that
discrimination has taken place, its representatives will attempt to provide a reconcilia-
tion between the two parties without burdening the court system with a lawsuit. Some-
times the EEOC enters into a consent decree with the discriminating organization. This
decree is an agreement between the agency and the organization that the organization
will cease certain discriminatory practices and possibly institute additional affirmative
action practices to rectify its history of discrimination.
If the EEOC cannot come to an agreement with the organization, it has two options.
First, it can issue a “right to sue” letter to the alleged victim, which certifies that the
agency has investigated and found validity in the victim’s allegations. Second, although
less likely, the agency may aid the alleged victim in bringing suit in federal court.
Information Gathering
The EEOC also plays a role in monitoring the hiring practices of organizations. Each
year organizations with 100 or more employees must file a report (EEO-1) with the
EEOC that provides the number of women and minorities employed in nine different job
categories. The EEOC computer analyzes these reports to identify patterns of discrimi-
nation that can then be attacked through class-action suits.
Issuance of Guidelines
A third responsibility of the EEOC is to issue guidelines that help employers determine
when their decisions are violations of the laws enforced by the EEOC. These guide-
lines are not laws themselves, but the courts give great deference to them when hearing
employment discrimination cases.
For example, the Uniform Guidelines on Employee Selection Procedures is a set of
guidelines issued by the EEOC, the Department of Labor, the Department of Justice,
and the U.S. Civil Service Commission.16 This document provides guidance on the ways
an organization should develop and administer selection systems so as not to violate
Title VII. The courts often refer to the Uniform Guidelines to determine whether a com-
pany has engaged in discriminatory conduct or to determine the validity of the proce-
dures it used to validate a selection system. Another example: Since the passage of the
ADA, employers have been somewhat confused about the act’s implications for their hir-
ing procedures. Therefore, the EEOC issued guidelines in the Federal Register that pro-
vided more detailed information regarding what the agency will consider legal and illegal
employment practices concerning disabled individuals. Although companies are well
advised to follow these guidelines, it is possible that courts will interpret the ADA differ-
ently from the EEOC. Thus, through the issuance of guidelines the EEOC gives employ-
ers directions for making employment decisions that do not conflict with existing laws.
OFFICE OF FEDERAL CONTRACT COMPLIANCE PROGRAMS (OFCCP)

The OFCCP is the agency responsible for enforcing the executive orders that cover com-
panies doing business with the federal government. Businesses with contracts for more
than $50,000 cannot discriminate in employment based on race, color, religion, national
origin, or sex, and they must have a written affirmative action plan on file.
These plans have three basic components.17 First, the utilization analysis compares the Utilization Analysis
race, sex, and ethnic composition of the employer’s workforce with that of the available A comparison of the
race, sex, and ethnic
labor supply. For each job group, the employer must identify the percentage of its work-
composition of an
force with that characteristic (e.g., female) and identify the percentage of workers in the employer’s workforce
relevant labor market with that characteristic. If the percentage in the employer’s work- with that of the avail-
force is much less than the percentage in the comparison group, then that minority group able labor supply.
is considered to be “underutilized.”
Second, the employer must develop specific goals and timetables for achieving bal- Goals and
ance in the workforce concerning these characteristics (particularly where underutiliza- Timetables
The part of a writ-
tion exists). Goals and timetables specify the percentage of women and minorities that the
ten affirmative action
employer seeks to have in each job group and the date by which that percentage is to be plan that specifies the
attained. These are not to be viewed as quotas, which entail setting aside a specific num- percentage of women
ber of positions to be filled only by members of the protected class. Goals and timetables and minorities that an
are much more flexible, requiring only that the employer have specific goals and take employer seeks to have
in each job group and
steps to achieve those goals. In fact, one study that examined companies with the goal of
the date by which that
increasing black employment found that only 10% of them actually achieved their goals. percentage is to be
Although this may sound discouragingly low, it is important to note that these companies attained.
increased their black employment more than companies that set no such goals.18
Third, employers with federal contracts must develop a list of action steps they will Action Steps
take toward attaining their goals to reduce underutilization. The company’s CEO must The written affirmative
plan that specifies what
make it clear to the entire organization that the company is committed to reducing unde-
an employer plans to
rutilization, and all management levels must be involved in the planning process. For do to reduce under-
example, organizations can communicate job openings to women and minorities through utilization of protected
publishing the company’s affirmative action policy, recruiting at predominantly female groups.
or minority schools, participating in programs designed to increase employment oppor-
tunities for underemployed groups, and removing unnecessary barriers to employment.
Organizations must also take affirmative steps toward hiring Vietnam veterans and indi-
viduals with disabilities.
The OFCCP annually audits government contractors to ensure that they actively pur-
sue the goals in their plans. These audits consist of (1) examining the company’s affirma-
tive action plan and (2) conducting on-site visits to examine how individual employees
perceive the company’s affirmative action policies. If the OFCCP finds that the contrac-
tors or subcontractors are not complying with the executive order, then its representa-
tives may notify the EEOC (if there is evidence that Title VII has been violated), advise
the Department of Justice to institute criminal proceedings, request that the Secretary of
Labor cancel or suspend any current contracts, and forbid the firm from bidding on future
contracts. This last penalty, called debarment, is the OFCCP’s most potent weapon.
Having discussed the major laws defining equal employment opportunity and the
agencies that enforce these laws, we now address the various types of discrimination and
the ways these forms of discrimination have been interpreted by the courts in a number
of cases.
Types of Discrimination LO 3-4

Identify the three theo-
How would you know if you had been discriminated against? Assume that you have ries of discrimination
applied for a job and were not hired. How do you know if the organization decided not to under Title VII of the
hire you because you are unqualified, because you are less qualified than the individual Civil Rights Act and
ultimately hired, or simply because the person in charge of the hiring decision “didn’t apply these theories to
like your type”? Discrimination is a multifaceted issue. It is often not easy to determine different discrimination
situations.
the extent to which unfair discrimination affects an employer’s decisions.
Legal scholars have identified three theories of discrimination: disparate treatment,

disparate impact, and reasonable accommodation. In addition, there is protection for
those participating in discrimination cases or opposing discriminatory actions. In the act,
these theories are stated in very general terms. However, the court system has defined
and delineated these theories through the cases brought before it. A comparison of the
theories of discrimination is given in Table 3.3.
DISPARATE TREATMENT
Disparate Treatment Disparate treatment exists when individuals in similar situations are treated differently
A theory of discrimina- and the different treatment is based on the individual’s race, color, religion, sex, national
tion based on different origin, age, or disability status. If two people with the same qualifications apply for a job
treatments given to
individuals because and the employer decides whom to hire based on one individual’s race, the individual
of their race, color, not hired is a victim of disparate treatment. In the disparate treatment case the plaintiff
religion, sex, national must prove that there was a discriminatory motive—that is, that the employer intended
origin, age, or disability to discriminate.
status. Whenever individuals are treated differently because of their race, sex, or the like, there is
disparate treatment. For example, if a company fails to hire women with school-age children
(claiming the women will be frequently absent) but hires men with school-age children, the
applicants are being treated differently based on sex. Another example would be an employer
who checks the references and investigates the conviction records of minority applicants but
Table 3.3
Comparison of Discrimination Theories
TYPES OF REASONABLE
DISCRIMINATION DISPARATE TREATMENT DISPARATE IMPACT ACCOMMODATION
Show intent? Yes No Yes

Prima facie case Individual is member of a Statistical disparity in the Individual has a belief or
protected group, was quali- effects of a facially neutral disability, provided the
fied for the job, and was employment practice employer with notice
turned down for the job, (request to accommo-
and the job remained open date), and was adversely
affected by a failure to
be accommodated
Employer’s defense Produce a legitimate, non- Prove that the employment Job-relatedness and
discriminatory reason for practice bears a mani- business necessity,
the employment decision fest relationship with job undue hardship, or
or show bona fide occupa- performance direct threat to health or
tional qualification (BFOQ) safety
Plaintiff’s rebuttal Reason offered was Alternative procedures
merely a “pretext” for exist that meet the
discrimination employer’s goal without
having disparate impact
Monetary damages Compensatory and punitive Equitable relief (e.g., back Compensatory and
damages pay) punitive damages (if
discrimination was
intentional or employer
failed to show good faith
efforts to accommodate)
does not do so for white applicants. Why are managers advised not to ask about marital
status? Because in most cases, a manager will either ask only the female applicants or, if
the manager asks both males and females, he or she will make different assumptions about
females (such as “She will have to move if her husband gets a job elsewhere”) and males
(such as “He’s very stable”). In all these examples, notice that (1) people are being treated
differently and (2) there is an actual intent to treat them differently.19
For instance, The Timken Company agreed to a $120,000 settlement over a sex
and disability discrimination suit. In 2007, Carmen Halloran applied for a full-time
position at The Timken Company, after having worked at the facility as a part-time
process associate for four years. The EEOC alleged that the company refused to hire
Halloran because managers believed that Halloran, who is the mother of a disabled
child, would be unable to work full-time and care for her disabled child. They also
alleged that this decision was based on an unfounded gender stereotype that the mother
of a disabled child would necessarily be the primary caregiver because they did hire
men with disabled children. “The EEOC is committed to fighting discrimination in
the workplace,” said Lynette A. Barnes, regional attorney for the EEOC’s Charlotte
District Office. “Employers must be careful not to apply stereotypes against women
based on perceptions that they must always be the primary caregivers and therefore are
unreliable employees.”20
To understand how disparate treatment is applied in the law, let’s look at how an
actual court case, filed under disparate treatment, would proceed.
The Plaintiff’s Burden

As in any legal case, the plaintiff has the burden of proving that the defendant has com-
mitted an illegal act. This is the idea of a “prima facie” case. In a disparate treatment
case, the plaintiff meets the prima facie burden by showing four things:
1. The plaintiff belongs to a protected group.
2. The plaintiff applied for and was qualified for the job.
3. Despite possessing the qualifications, the plaintiff was rejected.
4. After the plaintiff was rejected, the position remained open and the employer con-
tinued to seek applicants with similar qualifications, or the position was filled by
someone with similar qualifications.
Although these four elements may seem easy to prove, it is important to note that
what the court is trying to do is rule out the most obvious reasons for rejecting the plain-
tiff’s claim (for example, the plaintiff did not apply or was not qualified, or the position
was already filled or had been eliminated). If these alternative explanations are ruled
out, the court assumes that the hiring decision was based on a discriminatory motive.
The Defendant’s Rebuttal

Once the plaintiff has made the prima facie case for discrimination, the burden shifts to
the defendant. The burden is different depending on whether the prima facie case pres-
ents only circumstantial evidence (there is no direct evidence of discrimination such as a
formal policy to discriminate, but rather discriminatory intent must be inferred) or direct
evidence (a formal policy of discrimination for some perceived legitimate reason). In
cases of circumstantial evidence, the defendant simply must produce a legitimate, non-
discriminatory reason, such as that, although the plaintiff was qualified, the individual
hired was more qualified.
However, in cases where direct evidence exists, such as a formal policy of hiring only
women for waitress jobs because the business is aimed at catering to male customers,
then the defendant is more likely to offer a different defense. This defense argues that for
Bona Fide this job, a factor such as sex or religion was a bona fide occupational qualification
Occupational (BFOQ). For example, if one were hiring an individual to hand out towels in a women’s
Qualification locker room, being a woman might be a BFOQ. However, there are very few cases in
(BFOQ)
A job qualification which sex qualifies as a BFOQ, and in these cases it must be a necessary, rather than
based on sex, religion, simply a preferred characteristic of the job.
and so on, that an UAW v. Johnson Controls, Inc., illustrates the difficulty in using a BFOQ as a
employer asserts is a defense.21 Johnson Controls, a manufacturer of car batteries, had instituted a “fetal pro-
necessary qualification tection” policy that excluded women of childbearing age from a number of jobs in which
for the job.
they would be exposed to lead, which can cause birth defects in children. The company
argued that sex was a BFOQ essential to maintaining a safe workplace. The Supreme
Court did not uphold the company’s policy, arguing that BFOQs are limited to policies
that are directly related to a worker’s ability to do the job.
Interestingly, some factors are by no means off-limits when it comes to discrimina-
tion. For instance, a recent survey by Newsweek of 202 hiring managers revealed that
almost 60% said that qualified, yet unattractive, applicants face a harder time getting
hired. In addition, two-thirds believe that managers hesitate before hiring qualified, but
overweight, candidates.22
The Plaintiff’s Rebuttal

If the defendant provides a legitimate, nondiscriminatory reason for its employment
decision, the burden shifts back to the plaintiff. The plaintiff must now show that the
reason offered by the defendant was not in fact the reason for its decision but merely a
“pretext” or excuse for its actual discriminatory decision. This could entail providing
evidence that white applicants with very similar qualifications to the plaintiff have often
been hired while black applicants with very similar qualifications were all rejected. To
illustrate disparate treatment, let’s look at the first major case dealing with disparate
treatment, McDonnell Douglas Corp. v. Green.
McDonnell Douglas Corp. v. Green. This Supreme Court case was the first to
delineate the four criteria for a prima facie case of discrimination. From 1956 to
1964, Green had been an employee at McDonnell Douglas, a manufacturing plant in
St. Louis, Missouri, that employed about 30,000 people. In 1964 he was laid off during
a general workforce reduction. While unemployed, he participated in some activities
that the company undoubtedly frowned upon: a “lock-in,” where he and others placed
a chain and padlock on the front door of a building to prevent the employees from
leaving; and a “stall-in,” where a group of employees stalled their cars at the gates of
the plant so that no one could enter or leave the parking lot. About three weeks after
the lock-in, McDonnell Douglas advertised for qualified mechanics, Green’s trade, and
he reapplied. When the company rejected his application, he sued, arguing that the
company didn’t hire him because of his race and because of his persistent involvement
in the civil rights movement.
In making his prima facie case, Green had no problem showing that he was a member
of a protected group, that he had applied for and was qualified for the job (having already
worked in the job), that he was rejected, and that the company continued to advertise the
position. The company’s defense was that the plaintiff was not hired because he partici-
pated in the lock-in and the stall-in. In other words, the company was merely refusing to
hire a troublemaker.
The plaintiff responded that the company’s stated reason for not hiring him was a
pretext for discrimination. He pointed out that white employees who had participated in
the same activities (the lock-in and stall-in) were rehired, whereas he was not. The court
found in favor of the plaintiff.
This case illustrates how similarly situated individuals (white and black) can be
treated differently (whites were hired back whereas blacks were not) with the differ-
ences in treatment based on race. As we discuss later, most plaintiffs bring cases of
sexual harassment under this theory of discrimination, sexual harassment being a situa-
tion where individuals are treated differently because of their sex.
Mixed-Motive Cases
In a mixed-motive case, the defendant acknowledges that some discriminatory motive
existed but argues that the same hiring decision would have been reached even with-
out the discriminatory motive. In Hopkins v. Price Waterhouse, Ann Hopkins was an
accountant who had applied for partnership in her firm. Although she had brought in a
large amount of business and had received high praise from her clients, she was turned
down for a partnership on two separate occasions. In her performance reviews, she had
been told to adopt more feminine dress and speech and received many other comments
that suggested gender-based stereotypes. In court, the company admitted that a sex-
based stereotype existed but argued that it would have come to the same decision (not
promoted Hopkins) even if the stereotype had not existed.
One of the main questions that came out of this case was, Who has the burden of
proof? Does the plaintiff have to prove that a different decision would have been made
(that Hopkins would have been promoted) in the absence of the discriminatory motive?
Or does the defendant have to prove that the same decision would have been made?
According to CRA 1991, if the plaintiff demonstrates that race, sex, color, religion,
or national origin was a motivating factor for any employment practice, the prima facie
burden has been met, and the burden of proof is on the employer to demonstrate that the
same decision would have been made even if the discriminatory motive had not been
present. If the employer can do this, the plaintiff cannot collect compensatory or punitive
damages. However, the court may order the employer to quit using the discriminatory
motive in its future employment decisions.
DISPARATE IMPACT
The second type of discrimination is called disparate impact. It occurs when a facially Disparate Impact
neutral employment practice disproportionately excludes a protected group from employ- A theory of discrimina-
tion based on facially
ment opportunities. A facially neutral employment practice is one that lacks obvious dis-
neutral employment
criminatory content yet affects one group to a greater extent than other groups, such as an practices that dispro-
employment test. Although the Supreme Court inferred disparate impact from Title VII in portionately exclude
the Griggs v. Duke Power case, it has since been codified into the Civil Rights Act of 1991. a protected group
There is an important distinction between disparate impact and disparate treatment from employment
opportunities.
discrimination. For there to be discrimination under disparate treatment, there has to be
intentional discrimination. Under disparate impact, intent is irrelevant. The important
criterion is that the consequences of the employment practice are discriminatory.
For example, if, for some practical reason, you hired individuals based on their height,
you may not have intended to discriminate against anyone, and yet using height would
have a disproportionate impact on certain protected groups. Women tend to be shorter
than men, so fewer women will be hired. Certain ethnic groups, such as those of Asian
ancestry, also tend to be shorter than those of European ancestry. Thus, your facially
neutral employment practice will have a disparate impact on certain protected groups.
This is not to imply that simply because a selection practice has disparate impact, it
is necessarily illegal. Some characteristics (such as height) are not equally distributed
across race and gender groups; however, the important question is whether the charac-
teristic is related to successful performance on the job. To help you understand how dis-
parate impact works, let’s look at a court proceeding involving a disparate impact claim.
The Plaintiff’s Burden

In a disparate impact case, the plaintiff must make the prima facie case by showing that
the employment practice in question disproportionately affects a protected group relative
to the majority group. To illustrate this theory, let’s assume that you are a manager who
has 60 positions to fill. Your applicant pool has 80 white and 40 black applicants. You
use a test that selects 48 of the white and 12 of the black applicants. Is this a disparate
impact? Two alternative quantitative analyses are often used to determine whether a test
has adverse impact.
Four-Fifths Rule The four-fifths rule states that a test has disparate impact if the hiring rate for the
A rule that states that minority group is less than four-fifths (or 80%) of the hiring rate for the majority group.
an employment test has Applying this analysis to the preceding example, we would first calculate the hiring rates
disparate impact if the
hiring rate for a minority for each group:
group is less than four-
fifths, or 80 percent, of Whites 5 48/80 5 60%
the hiring rate for the Blacks 5 12/40 5 30%
majority group.
Then we would compare the hiring rate of the minority group (30%) with that of the
majority group (60%). Using the four-fifths rule, we would determine that the test has
adverse impact if the hiring rate of the minority group is less than 80% of the hiring rate
of the majority group. Because it is less (i.e., 30%/60% 5 50%, which is less than 80%),
we would conclude that the test has adverse impact. The four-fifths rule is used as a rule
of thumb by the EEOC in determining adverse impact.
Standard Deviation The standard deviation rule uses actual probability distributions to determine adverse
Rule impact. This analysis uses the difference between the expected representation (or hiring
A rule used to analyze rates) for minority groups and the actual representation (or hiring rate) to determine
employment tests to
determine disparate whether the difference between these two values is greater than would occur by chance.
impact; it uses the dif- Thus, in our example, 33% (40 of 120) of the applicants were blacks, so one would
ference between the expect 33% (20 of 60) of those hired to be black. However, only 12 black applicants were
expected representa- hired. To determine if the difference between the expected representation and the actual
tion for minority groups representation is greater than we would expect by chance, we calculate the standard
and the actual repre-
sentation to determine deviation (which, you might remember from your statistics class, is the standard devia-
whether the difference tion in a binomial distribution):
between the two is
greater than would Number of Number of
occur by chance.
minority applicants nonminority applicants
Number hired 3 3
Number of total applicants Number of total applicants
or in this case:
40 80
60 3 3 5 3.6
120 120
If the difference between the actual representation and the expected representation
(20 2 12 5 8 in this case) of blacks is greater than 2 standard deviations (2 3 3.6 5 7.2
in this case), we would conclude that the test had adverse impact against blacks, because
we would expect this result less than 1 time in 20 if the test were equally difficult for
both whites and blacks.
The Wards Cove Packing Co. v. Atonio case involved an interesting use of statistics.
The plaintiffs showed that the jobs in the cannery (lower paying jobs) were filled primar-
ily with minority applicants (in this case, American Eskimos). However, only a small
percentage of the noncannery jobs (those with higher pay) were filled by nonminorities.
The plaintiffs argued that this statistical disparity in the racial makeup of the cannery
and noncannery jobs was proof of discrimination. The federal district, appellate, and
Supreme Courts all found for the defendant, stating that this disparity was not proof of
discrimination.
Once the plaintiff has demonstrated adverse impact, he or she has met the burden of a
prima facie case of discrimination.23
Defendant’s Rebuttal
According to CRA 1991, once the plaintiff has made a prima facie case, the burden of
proof shifts to the defendant, who must show that the employment practice is a “business
necessity.” This is accomplished by showing that the practice bears a relationship with
some legitimate employer goal. With respect to job selection, this relationship is dem-
onstrated by showing the job relatedness of the test, usually by reporting a validity study
of some type, to be discussed in Chapter 6. For now, suffice it to say that the employer
shows that the test scores are significantly correlated with measures of job performance.
Measures of job performance used in validation studies can include such things as
objective measures of output, supervisor ratings of job performance, and success in
training.24 Normally, performance appraisal ratings are used, but these ratings must be
valid for the court to accept the validation results. For example, in Albermarle Paper
v. Moody, the employer demonstrated that the selection battery predicted performance
(measured with supervisors’ overall rankings of employees) in only some of the 13 occu-
pational groups in which it was used. In this case, the court was especially critical of the
supervisory ratings used as the measure of job performance. The court stated, “There
is no way of knowing precisely what criteria of job performance the supervisors were
considering.”25
Plaintiff’s Rebuttal
If the employer shows that the employment practice is the result of some business neces-
sity, the plaintiff’s last resort is to argue that other employment practices could sufficiently
meet the employer’s goal without adverse impact. Thus, if a plaintiff can demonstrate that
selection tests other than the one used by the employer exist, do not have adverse impact,
and correlate with job performance as highly as the employer’s test, then the defendant can
be found guilty of discrimination. Many cases deal with standardized tests of cognitive
ability, so it is important to examine alternatives to these tests that have less adverse impact
while still meeting the employer’s goal. At least two separate studies reviewing alterna-
tive selection devices such as interviews, biographical data, assessment centers, and work
sample tests have concluded that none of them met both criteria.26 It seems that when the
employment practice in question is a standardized test of cognitive ability, plaintiffs will
have a difficult time rebutting the defendant’s rebuttal.
Griggs v. Duke Power. To illustrate how this process works, let’s look at the Griggs v.
Duke Power case.27 Following the passage of Title VII, Duke Power instituted a new sys-
tem for making selection and promotion decisions. The system required either a high school
diploma or a passing score on two professionally developed tests (the Wonderlic Personnel
Test and the Bennett Mechanical Comprehension Test). A passing score was set so that it
would be equal to the national median for high school graduates who had taken the tests.
The plaintiffs met their prima facie burden showing that both the high school
diploma requirement and the test battery had adverse impacts on blacks. According to
the 1960 census, 34% of white males had high school diplomas, compared with only
12% of black males. Similarly, 58% of white males passed the test battery, whereas
only 6% of blacks passed.
Duke Power was unable to defend its use of these employment practices. A com-
pany vice president testified that the company had not studied the relationship between
these employment practices and the employees’ ability to perform the job. In addition,
employees already on the job who did not have high school diplomas and had never
taken the tests were performing satisfactorily. Thus, Duke Power lost the case.
It is interesting to note that the court recognized that the company had not intended to
discriminate, mentioning that the company was making special efforts to help underedu-
cated employees through financing two-thirds of the cost of tuition for high school train-
ing. This illustrates the importance of the consequences, as opposed to the motivation, in
determining discrimination under the disparate impact theory.
PATTERN AND PRACTICE

In showing class action pattern and practice lawsuits, the plaintiffs attempt to show
three things. First, they show some statistical disparities between the composition of
some group within the company compared to some other relevant group. For instance,
in a recent discrimination case brought against Walmart (Dukes v. Walmart), described
how the plaintiff’s lawyers pointed to two comparative statistics as evidence of discrim-
ination. First, they compared the female representation in the non-managerial (63.4%)
vs the managerial (33.6%) employee groups. They also compared the female repre-
sentation in the managerial group (again, 33.6%) with that in their top 20 competitors
(56.5%). They also calculated that hourly female workers were paid, on average, $1,100
less than men and salaried women received $14,500 less. However, Walmart disputes
the list of comparison companies, arguing that if a broader group is used, reflecting
Walmart’s wide geographic footprint and variety of products offered, it does not dif-
fer from that group. It also claims that if it had claimed its highest-level hourly-wage
supervisors as “managers” on its EEO-1 forms, as many of the comparison companies
do, the entire disparity disappears. They also note that of the applicants for managerial
positions, only 15% are female, and that of those promoted, 18% are female. Finally,
regarding pay, Walmart’s experts suggested that the plaintiff’s pay comparisons did
not account for crucial factors such as the number of hours worked or whether the
work was night-shift work, which pays more. Their analyses suggested that when pay
was compared at the department level, where pay decisions are determined, 92.8% of
all stores showed no statistically significant pay disparities, and that of the remainder,
5.2% showed disparities favoring men while 2.0% showed disparities favoring women.
Second, the plaintiff tries to show that there are individual acts of intentional dis-
crimination that suggest that the statistical disparity is a function of the larger cul-
ture. In the Dukes case, the plaintiffs argued that at Monday morning meetings of
high-level Sam’s Club executives, female store employees were referred to as “Janie
Q’s,” and that this continued even after a woman executive complained that she found
the term demeaning.
Finally, the plaintiff usually tries to make the case that the promotion and/or pay
procedures leave too much discretion to managers, providing the avenue through which
their unconscious biases can play a part. In the Dukes case the plaintiffs brought in
expert witnesses to argue that the performance management processes were extremely
subjective, and that male managers have subconscious tendencies to favor male over
female employees.
REASONABLE ACCOMMODATION
Reasonable accommodation presents a relatively new theory of discrimination. It began Reasonable
with regard to religious discrimination, but has recently been both expanded and popu- Accommodation
Making facilities read-
larized with the passage of the ADA. Reasonable accommodation differs from these
ily accessible to and
two theories in that rather than simply requiring an employer to refrain from some usable by individuals
action, reasonable accommodation places a special obligation on an employer to affir- with disabilities.
matively do something to accommodate an individual’s disability or religion. This
theory is violated when an employer fails to make reasonable accommodation, where
that is required, to a qualified person with a disability or to a person’s religious observa-
tion and/or practices.
Religion and Accommodation

Often individuals with strong religious beliefs find that some observations and practices
of their religion come into direct conflict with their work duties. For example, some reli-
gions forbid individuals from working on the sabbath day when the employer schedules
them for work. Others might have beliefs that preclude them from shaving, which might
conflict with a company’s dress code. Although Title VII forbids discrimination on the
basis of religion just like race or sex, religion also receives special treatment requiring
employers to exercise an affirmative duty to accommodate individuals’ religious beliefs
and practices. As Figure 3.2 shows, the number of religious discrimination charges has
consistently dropped over the past few years.
In cases of religious discrimination, an employee’s burden is to demonstrate that he or
she has a legitimate religious belief and provided the employer with notice of the need
to accommodate the religious practice, and that adverse consequences occurred due to
the employer’s failure to accommodate. In such cases, the employer’s major defense is to
assert that to accommodate the employee would require an undue hardship.
Examples of reasonably accommodating a person’s religious obligations might
include redesigning work schedules (most often accommodating those who cannot work
on their sabbath), providing alternative testing dates for applicants, not requiring union
membership and/or allowing payment of “charitable contributions” in lieu of union dues,
or altering certain dress or grooming requirements. Note that although an employer is
required to make a reasonable accommodation, it need not be the one that is requested
by the employee.28
In one case, Walmart agreed to settle with a former employee who alleged that he was
forced to quit in 1993 after refusing to work on Sunday. Walmart agreed to pay the for-
mer employee unspecified damages, to instruct managers on employees’ rights to have
their religious beliefs accommodated, and to prepare a computer-based manual describ-
ing employees’ rights and religious harassment.29
Figure 3.2
Religious Discrimination Complaints, 1991–2014
4,500
4,151
4,000
3,790 3,811
3,721
3,549
3,500 3,386
3,273
3,000 2,880
2,572 2,532 2,541

2,500 2,466
2,340
2,127
2,000 1,939
1,786 1,811
1,709
1,546 1,581 1,564
1,500 1,388 1,449
1,192
1,000
500
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
SOURCE: www.eeoc.gov/stats/religion.html.
Following the attack of 9/11, a number of cases sprang up with regard to discrimi-
nation against Muslims, partly accounting for the significant increase in religious
discrimination complaints in 2002. In one case, the EEOC and Electrolux Group set-
tled a religious accommodation case brought by Muslim workers from Somalia. The
Islamic faith requires Muslims to offer five prayers a day, with two of these prayers
offered within restricted time periods (early morning and sunset). Muslim employ-
ees alleged that they were disciplined for using an unscheduled break traditionally
offered to line employees on an as-needed basis to observe their sunset prayer. Elec-
trolux worked with the EEOC to respect the needs of its Muslim workers without
creating a business hardship by affording them with an opportunity to observe their
sunset prayer.30
Religion and accommodation also bring up the question as to what to do when dif-
ferent rights collide. For instance, John Nemecek had been a respected business profes-
sor at Spring Arbor University for 15 years. Spring Arbor is an evangelical college in
Michigan which began to take issue with some of his behavior. After he began wearing
earrings and makeup and asking friends to call him “Julie” he found himself demoted
and fired because his womanly appearance violated “Christian behavior.” In 2004 a doc-
tor diagnosed Prof. Nemecek with a “gender-identity disorder,” in which one’s sexual
identity differs from one’s body. Soon after, the school began taking away some of his
responsibilities, and then issued him a contract revoking his dean’s post, reassigning
him to a non-tenure-track role in which he would work from home, teaching online. It
also required him to not wear any makeup or female clothing or to display any outward
signs of femininity when visiting campus. Gayle Beebe, the university’s president, said
“We felt through a job reassignment we could give him the space to work on this issue.”
Prof. Nemecek signed the contract but then violated it by showing up on campus with
earrings and makeup on four separate occasions. The professor filed his complaint with
the EEOC and the university then declined to renew his contract. Prof. Nemecek, whose
Baptist church also asked him to leave the congregation, says of the university, “Essen-
tially, they’re saying they can define who is a Christian. I don’t agree that our biology
determines our gender.”31
Disability and Accommodation

As previously discussed, the ADA made discrimination against individuals with dis-
abilities illegal. However, the act itself states that the employer is obligated not just to
refrain from discriminating, but to take affirmative steps to accommodate individuals
who are protected under the act.
Under disability claims, the plaintiff must show that she or he is a qualified applicant
with a disability and that adverse action was taken by a covered entity. The employer’s
defense then depends on whether the decision was made without regard to the disability
or in light of the disability. For example, if the employer argues that the plaintiff is not
qualified, then it has met the burden, and the question of reasonable accommodation
becomes irrelevant.
If, however, the decision was made “in light of” the disability, then the question
becomes one of whether the person could perform adequately with a reasonable accom-
modation. This leads to three potential defenses. First, the employer could allege job-
relatedness or business necessity through demonstrating, for example, that it is using a
test that assesses ability to perform essential job functions. However, then the question
arises of whether the applicant could perform the essential job functions with a reason-
able accommodation. Second, the employer could claim an undue hardship to accom-
modate the individual. In essence, this argues that the accommodation necessary is an
action requiring significant difficulty or expense. Finally, the employer could argue that
the individual with the disability might pose a direct threat to his own or others’ health
or safety in the workplace. This requires examining the duration of the risk, the nature
and severity of potential harm, the probability of the harm occurring, and the imminence
of the potential harm. For instance, Walmart was sued by one of its employees who was
a fitting room attendant with cerebral palsy and confined to a wheelchair. The employee
requested to use a grabber and a shopping cart to help her pick up and hold clothes.
However, she was prevented from using both by the manager, who then implemented
progressive discipline ending in the attendant’s termination.32
What are some examples of reasonable accommodation with regard to disabili-
ties? First is providing readily accessible facilities such as ramps and/or elevators for
disabled individuals to enter the workplace. Second, job restructuring might include
eliminating marginal tasks, shifting these tasks to other employees, redesigning job
procedures, or altering work schedules. Third, an employer might reassign a disabled
employee to a job with essential job functions he or she could perform. Fourth, an
employer might accommodate applicants for employment who must take tests through
providing alternative testing formats, providing readers, or providing additional time
for taking the test. Fifth, readers, interpreters, or technology to offer reading assistance
might be given to a disabled employee. Sixth, an employer could allow employees to
provide their own accommodation such as bringing a guide dog to work.33 Note that
most accommodations are inexpensive. A study by Sears Roebuck & Co. found that
69% of all accommodations cost nothing, 29% cost less than $1,000, and only 3% cost
more than $1,000.34
EVIDENCE-BASED HR
As information technology becomes more and more ubiquitous in the workplace,
some have begun to explore the implications for people with disabilities. Researchers
at the Employment and Disability Institute at Cornell University recently reviewed the
accessibility of 10 job boards and 31 corporate e-recruiting websites using Bobby 3.2,
a software program designed to check for errors that cause accessibility concerns.
They found that none of the job boards and only a small minority of the e-recruiting
sites met the Bobby standards.
In phase 2 of the study, they surveyed 813 HR professionals who were members
of the Society for Human Resource Management (SHRM). Between 16 and 46% of
the HR professionals were familiar with six of the most common assistive technolo-
gies to adapt computers for disabled individuals (screen magnifiers, speech recogni-
tions software, video captioning, Braille readers/displays, screen readers, guidelines
for web design). In addition, only 1 in 10 said they knew that their firm had evaluated
the websites for accessibility to people with disabilities.
This study indicates that while firms may not have any intention of discriminating
against people with disabilities, the rapid expansion of information technology com-
bined with an inattention to and/or lack of education regarding accessibility issues
may accidentally lead them to do so.
SOURCE: S. Bruyere, S. Erickson, and S. VanLooy, “Information Technology and the Workplace: Implications for
Persons with Disabilities,” Disability Studies Quarterly 25, no. 2 (Spring 2005), at www.dsq-sds.org.
Retaliation for Participation and Opposition

Suppose you overhear a supervisor in your workplace telling someone that he refuses to hire
women because he knows they are just not cut out for the job. Believing this to be illegal
discrimination, you face a dilemma. Should you come forward and report this statement?
Or if someone else files a lawsuit for gender discrimination, should you testify on behalf
of the plaintiff? What happens if your employer threatens to fire you if you do anything?
Title VII of the Civil Rights Act of 1964 protects you. It states that employers cannot
retaliate against employees for either “opposing” a perceived illegal employment prac-
tice or “participating in a proceeding” related to an alleged illegal employment practice.
Opposition refers to expressing to someone through proper channels that you believe
that an illegal employment act has taken place or is taking place. Participation refers to
actually testifying in an investigation, hearing, or court proceeding regarding an illegal
employment act. Clearly, the purpose of this provision is to protect employees from
employers’ threats and other forms of intimidation aimed at discouraging the employees
from bringing to light acts they believe to be illegal.
Recently the EEOC filed suit against Dillard’s, a major department store chain, for fir-
ing a business manager as retaliation for filing a discrimination charge. In 2008, Shontel
Mayfield filed a charge with the EEOC in which she alleged that Dillard’s management had
discriminated against her because of her race. She had begun working for Dillard’s in July
2001, and earned a promotion to business manager of the Estee Lauder counter in 2006.
However, in September 2008, Mayfield complied with a Jefferson County, Texas, manda-
tory evacuation order and evacuated the area in advance of Hurricane Ike. She returned
to Jefferson County consistent with the directives of the county’s “disaster declarations.”
After Mayfield returned to work she was told that she was being fired for the stated reason
INTEGRITY IN ACTION
Satyam Founder Convicted of Fraud
In a story that rocked the world of firm had created over 7,500 fake he did not
business in India, Ramalinga Raju, invoices over a five-year period in do it to profit
founder of outsourcing company order to show faster-than-reality himself, but to help boost the
Satyam Computer Services Ltd., revenue growth. Mr. Raju then company’s share price.
was found guilty of fraud. He and created counterfeit accounts
nine others were convicted of a showing money from the fake DISCUSSION QUESTION
$1 billion accounting scandal that orders as well as fake interest How can companies assure their
not only destroyed his company paid on the fake cash balances. shareholders that business prac-
but also tarnished the reputation Mr. Raju did not deny the tices are legal and ethical?
of Indian companies. allegation but suggested that SOURCE: D. A. Thoppil and E. Bellman,
The Securities and Exchange his actions were only to benefit “Satyam Founder Gets Prison for Fraud,” The
Board of India alleged that the the shareholders. He said that Wall Street Journal, April 9, 2015, www.wsj.com.
of “excessive absenteeism.” On her termination paperwork, she was accused of having

“failed to maintain verbal communication concerning her absences with either the store
manager or the operations manager.” Yet telephone records showed that Mayfield placed
numerous calls to Dillard’s “disaster recovery” number, as well as to the cellular tele-
phones of the store manager and the operations manager during the evacuation period.35
These cases can be extremely costly for companies because they are alleging acts of
intentional discrimination, and therefore plaintiffs are entitled to punitive damages. For
example, a 41-year-old former Allstate employee who claimed that a company official
told her that the company wanted a “younger and cuter” image was awarded $2.8 million
in damages by an Oregon jury. The jury concluded that the employee was forced out of
the company for opposing age discrimination against other employees.36
In one case, Target Corporation agreed to pay $775,000 to a group of black workers
who charged that at one store, the company condoned a racially hostile work environ-
ment exemplified by inappropriate comments and verbal berating based on race. When
one of the black employees objected to this treatment, he was allegedly retaliated against,
forcing him to resign.37
This does not mean that employees have an unlimited right to talk about how racist or
sexist their employers are. The courts tend to frown on employees whose activities result
in a poor public image for the company unless those employees had attempted to use the
organization’s internal channels—approaching one’s manager, raising the issue with the
HRM department, and so on—before going public.
It is important to note that deciding when an employee has done something wrong is
often difficult to both know and prove. The “Integrity In Action” box describes how the
CEO of an Indian company, Satyam, was found guilty of fraud.
Current Issues Regarding Diversity LO 3-5
and Equal Employment Opportunity Identify behavior that

constitutes sexual
harassment, and list
Because of recent changes in the labor market, most organizations’ demographic compo- things that an organiza-
sitions are becoming increasingly diverse. A study by the Hudson Institute projected that tion can do to eliminate
85% of the new entrants into the U.S. labor force over the next decade will be females or minimize it.
125
Figure 3.3 8,000

7,944 7,809 7,571 7,256 6,862
Sexual Harassment
Charges, 2010–2014
4,000
16.2 16.1 17.8 17.6 17.5
0
2010 2011 2012 2013 2014
Number of charges
% filed by men
SOURCE: “U.S. Equal Employment Opportunity Commission, “Charges Alleging Sexual Harassment FY 2010-FY2014,”
www.eeoc.gov, accessed May 24, 2015.
and minorities.38 Integrating these groups into organizations made up predominantly of

able-bodied white males will bring attention to important issues like sexual harassment,
affirmative action, and the “reasonable accommodation” of employees with disabilities.
SEXUAL HARASSMENT
Clarence Thomas’s Supreme Court confirmation hearings in 1991 brought the issue
of sexual harassment into increased prominence. Anita Hill, one of Thomas’s former
employees, alleged that he had sexually harassed her while she was working under his
supervision at the Department of Education and the Equal Employment Opportunity
Commission. Although the allegations were never substantiated, the hearing made many
people more aware of how often employees are sexually harassed in the workplace and,
combined with other events, resulted in a tremendous increase in the number of sexual
harassment complaints being filed with the EEOC, as we see in Figure 3.3. In addi-
tion, after President Clinton took office and faced a sexual harassment lawsuit by Paula
Corbin Jones for his alleged proposition to her in a Little Rock hotel room, the number of
sexual harassment complaints took another jump from 1993 to 1994—again, potentially
due to the tremendous amount of publicity regarding sexual harassment. However, the
number of cases filed has actually decreased substantially since 2000.
Sexual harassment refers to unwelcome sexual advances (see Table 3.4). It can take
place in two basic ways. “Quid pro quo” harassment occurs when some kind of benefit
(or punishment) is made contingent on the employee’s submitting (or not submitting) to
sexual advances. For example, a male manager tells his female secretary that if she has
Table 3.4
EEOC Definition of Sexual Harassment
Unwelcome sexual advances, requests for sexual favors, and other verbal or physical contact of a sexual nature
constitute sexual harassment when
1. Submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s
employment,
2. Submission to or rejection of such conduct by an individual is used as the basis for employment decisions
affecting such individual, or
3. Such conduct has the purpose or effect of unreasonably interfering with an individual’s work performance or
creating an intimidating, hostile, or offensive working environment.
SOURCE: EEOC guideline based on the Civil Rights Act of 1964, Title VII.
sex with him, he will help her get promoted, or he threatens to fire her if she fails to do
so; these are clearly cases of quid pro quo sexual harassment.
The Bundy v. Jackson case illustrates quid pro quo sexual harassment.39 Sandra
Bundy was a personnel clerk with the District of Columbia Department of Corrections.
She received repeated sexual propositions from Delbert Jackson, who was at the time a
fellow employee (although he later became the director of the agency). She later began
to receive propositions from two of her supervisors: Arthur Burton and James Gainey.
When she raised the issue to their supervisor, Lawrence Swain, he dismissed her com-
plaints, telling her that “any man in his right mind would want to rape you,” and asked
her to begin a sexual relationship with him. When Bundy became eligible for a promo-
tion, she was passed over because of her “inadequate work performance,” although she
had never been told that her work performance was unsatisfactory. The U.S. Court of
Appeals found that Bundy had been discriminated against because of her sex, thereby
extending the idea of discrimination to sexual harassment.
A more subtle, and possibly more pervasive, form of sexual harassment is “hostile
working environment.” This occurs when someone’s behavior in the workplace creates
an environment that makes it difficult for someone of a particular sex to work. Many
plaintiffs in sexual harassment lawsuits have alleged that men ran their fingers through
the plaintiffs’ hair, made suggestive remarks, and physically assaulted them by touch-
ing their intimate body parts. Other examples include having pictures of naked women
posted in the workplace, using offensive sexually explicit language, or using sex-related
jokes or innuendoes in conversations.40
Note that these types of behaviors are actionable under Title VII because they treat
individuals differently based on their sex. In addition, although most harassment cases
involve male-on-female harassment, any individual can be harassed. For example, male
employees at Jenny Craig alleged that they were sexually harassed, and a federal jury
found that a male employee had been sexually harassed by his male boss.41
In addition, Ron Clark Ford of Amarillo, Texas, agreed to pay $140,000 to six
male plaintiffs who alleged that they and others were subjected to a sexually hostile
work environment and different treatment because of their gender by male managers.
Evidence gathered showed that the men were subjected to lewd, inappropriate comments
of a sexual nature, and had their genitals and buttocks grabbed against their will by their
male managers. The defendants argued that the conduct was “harmless horseplay.”42
Finally, Babies ’R’ Us agreed to pay $205,000 to resolve a same-sex suit. The lawsuit
alleged that Andres Vasquez was subjected to a sexually hostile working environment
and was the target of unwelcome and derogatory comments as well as behavior that
mocked him because he did not conform to societal stereotypes of how a male should
appear or behave.
Sexual harassment charge filings with the EEOC by men have increased to 16.4% of
all filings in 2010, from 10% of filings in 1994. While the commission does not track
same-sex, male-on-male charges, anecdotal evidence shows that most harassment alle-
gations by men are against other men.43
There are three critical issues in these cases. First, the plaintiff cannot have “invited
or incited” the advances. Often the plaintiff’s sexual history, whether she or he wears
provocative clothing, and whether she or he engages in sexually explicit conversations
are used to prove or disprove that the advance was unwelcome. However, in the absence
of substantial evidence that the plaintiff invited the behavior, courts usually lean toward
assuming that sexual advances do not belong in the workplace and thus are unwelcome.
In Meritor Savings Bank v. Vinson, Michelle Vinson claimed that during the four years
she worked at a bank she was continually harassed by the bank’s vice president, who
repeatedly asked her to have sex with him (she eventually agreed) and sexually assaulted
her.44 The Supreme Court ruled that the victim’s voluntary participation in sexual rela-
tions was not the major issue, saying that the focus of the case was on whether the vice
president’s advances were unwelcome.
A second critical issue is that the harassment must have been severe enough to alter
the terms, conditions, and privileges of employment. Although it has not yet been con-
sistently applied, many courts have used the “reasonable woman” standard in determin-
ing the severity or pervasiveness of the harassment. This consists of assessing whether
a reasonable woman, faced with the same situation, would have reacted similarly. The
reasonable woman standard recognizes that behavior that might be considered appropri-
ate by a man (like off-color jokes) might not be considered appropriate by a woman.
The third issue is that the courts must determine whether the organization is liable for
the actions of its employees. In doing so, the court usually examines two things. First,
did the employer know about, or should he or she have known about, the harassment?
Second, did the employer act to stop the behavior? If the employer knew about it and the
behavior did not stop, the court usually decides that the employer did not act appropri-
ately to stop it.
Sexual harassment suits can be quite costly for companies. For instance, Aaron’s Inc.,
the furniture rental company, faced a sexual harassment suit filed by a female employee
who claimed that her manager groped her, exposed himself to her, and sexually assaulted
her. She contacted a company harassment hotline but was never called back. She also
alleged that she was denied a promotion for complaining about the alleged assault. In
2011 a jury awarded the employee $95 million, a significant sum given that Aaron’s
profits had been $118 million the previous year.45
To ensure a workplace free from sexual harassment, organizations can follow some
important steps. First, the organization can develop a policy statement that makes it very
clear that sexual harassment will not be tolerated in the workplace. Second, all employ-
ees, new and old, can be trained to identify inappropriate workplace behavior. Third, the
organization can develop a mechanism for reporting sexual harassment that encourages
people to speak out. Fourth, management can prepare to take prompt disciplinary action
against those who commit sexual harassment as well as appropriate action to protect the
victims of sexual harassment.46 The “Competing through Technology” box describes
how e-mails helped to demonstrate how a leader was behaving inappropriately and pos-
sibly illegally at search firm Korn/Ferry.
LO 3-6 AFFIRMATIVE ACTION AND REVERSE DISCRIMINATION

Discuss the legal issues Few would disagree that having a diverse workforce in terms of race and gender is a desir-
involved with preferen-
able goal, if all individuals have the necessary qualifications. In fact, many organizations
tial treatment programs.
today are concerned with developing and managing diversity. To eliminate discrimina-
tion in the workplace, many organizations have affirmative action programs to increase
minority representation. Affirmative action was originally conceived as a way of taking
extra effort to attract and retain minority employees. This was normally done by exten-
sively recruiting minorities on college campuses, advertising in minority-oriented pub-
lications, and providing educational and training opportunities to minorities.47 However,
over the years, many organizations have resorted to quotalike hiring to ensure that their
workforce composition mirrors that of the labor market. Sometimes these organizations
act voluntarily; in other cases, the quotas are imposed by the courts or by the EEOC.
Whatever the impetus for these hiring practices, many white and/or male individuals
have fought against them, alleging what is called reverse discrimination.
Better Watch What You E-mail at Work
The world’s largest execu- to teach him “how to lawfully 20 different call
tive search firm, Korn/Ferry, behave in the workplace.” girls and escorts.”
has found itself entangled in However, the company denies In addition, Korn/Ferry says
a messy legal dispute over its all the allegations. “Mr. Damon’s Mr. Damon used his company
dismissal of a top executive, complaint is an attempt to deflect e-mail ”to receive and distribute
but e-mail may reveal an even the real reason for his termina- photographs of nude and semi-
messier set of details. Robert tion,” said Michael Distefano, nude women.”
Damon, the company’s for- Korn/Ferry’s chief marketing
mer executive chairman of the officer. “He was terminated with DISCUSSION QUESTION
Americas, says that he lost over cause of inappropriate personal In this era of mobile technol-
$1.7 million in deferred com- behavior, flagrant violations of ogy and social media, should
pensation when he was fired company policies, and material the fired senior executive have
in retaliation for complaining breaches of his own employment understood the implications
to the board of directors about arrangements.” of using his company e-mail
how CEO Gary Burnison treated While the case has yet to be account for inappropriate
a number of female colleagues. resolved, technology may point behavior?
An outside investigator to a particular outcome. In a SOURCES: J. S. Lublin, “Korn/Ferry Says It
who explored the allegations court filing, Korn/Ferry alleges Fired Former Executive for Allegedly Soliciting
of Mr. Burnison’s treatment of Mr. Damon used his company Escorts,” The Wall Street Journal, April 9, 2015,
www.wsj.com; J. S. Lublin, “Former Korn/Ferry
women did suggest to the e-mail “to solicit and arrange Executive Alleges Retaliation,” The Wall Street
directors that they hire a coach for meetings with at least Journal, April 1, 2015, www.wsj.com.
An example of an imposed quota program is found at the fire department in Birmingham,

Alabama. Having admitted a history of discriminating against blacks, the department
entered into a consent decree with the EEOC to hold 50% of positions at all levels in the
fire department open for minorities even though minorities made up only 28% of the rel-
evant labor market. The result was that some white applicants were denied employment or
promotion in favor of black applicants who scored lower on a selection battery. The federal
court found that the city’s use of the inflexible hiring formula violated federal civil rights
law and the constitutional guarantee of equal protection. The appellate court agreed, and
the Supreme Court refused to hear the case, thus making the decision final.
Ricci v. DeStefano represents another recent case that has been appealed to the
Supreme Court regarding the potential for reverse discrimination based on a situation in
New Haven, Connecticut. In this case a professional consulting firm developed a fire-
fighter test specifically eliminating questions that had adverse impact against minority
members (based on pilot study testing). However, when the test was given, no blacks
made the promotion list, so the city simply ignored the test and promoted no one. White
and Hispanic firefighters who would have been on the promotion list sued, stating that
the failure to use the test results discriminated against them because of their race. The
district and appellate courts ruled that because no blacks were promoted either (because
there were no promotions), there had been no discrimination.
The entire issue of affirmative action should evoke considerable attention and debate
over the next few years. Although most individuals support the idea of diversity, few
argue for the kinds of quotas that have to some extent resulted from the present legal
climate. In fact, one recent survey revealed that only 16% of the respondents favored
129
affirmative action with quotas, 46% favored it without quotas, and 28% opposed all affir-
mative action programs. One study found that people favor affirmative action when it
is operationalized as recruitment, training, and attention to applicant qualifications but
oppose it when it consists of discrimination, quotas, and preferential treatment.48
OUTCOMES OF THE AMERICANS WITH DISABILITIES ACT

The ADA was passed with the laudable goals of providing employment opportunities for
the truly disabled who, in the absence of legislation, were unable to find employment.
Certainly, some individuals with disabilities have found employment as a result of its
passage. However, as often occurs with legislation, the impact is not necessarily what
was intended. First, there has been increased litigation. The EEOC reports that more
than 200,000 complaints have been filed since passage of the act. Approximately 50%
of the complaints filed have been found to be without reasonable cause. For example, in
one case a company fired an employee for stealing from other employees and bringing a
loaded gun to work. The fired employee sued for reinstatement under the ADA, claiming
that he was the victim of a mental illness and thus should be considered disabled.49
A second problem is that the kinds of cases being filed are not what Congress
intended to protect. Although the act was passed because of the belief that discrimina-
tion against individuals with disabilities occurred in the failure to hire them, 52.2% of
the claims deal with firings, 28.9% with failure to make reasonable accommodation, and
12.5% with harassment. Only 9.4% of the complaints allege a failure to hire or rehire.50
In addition, although the act was passed to protect people with major disabilities such
as blindness, deafness, lost limbs, or paralysis, these disabilities combined account for a
small minority of the disabilities claimed. As we see in Table 3.5, the biggest disability
category is “other,” meaning that the plaintiff claims a disability that is not one of the
35 types of impairment listed in the EEOC charge data system. The second largest cat-
egory is “being regarded as disabled” accounting for 13.4% of all charges, followed by
“back impairment” claims at 8.8%. As an example, recently a fired employee sued IBM
asking for $5 million in damages for violation of the Americans with Disabilities Act.
The employee had been fired for spending hours at work visiting adult chat rooms on
his computer. He alleged that his addiction to sex and the Internet stemmed from trauma
experienced by seeing a friend killed in 1969 during an Army patrol in Vietnam.51
Finally, the act does not appear to have had its anticipated impact on the employ-
ment of Americans with disabilities. According to the National Organization on Dis-
ability, almost 20 years after the act was passed, 22 million of the 54 million disabled
Americans are unemployed.52
For these reasons, Congress has explored the possibility of amending the act to more
narrowly define the term disability.53 The debate continues regarding the effectiveness
of the ADA.
LO 3-7 Employee Safety

Identify the major
provisions of the Occu-
In March 2005, officials at the BP refinery in Texas City, Texas, were aware of the fact
pational Safety and that some repairs needed to be done on some of the equipment in an octane-boosting
Health Act (1970) and processing unit. On March 23, knowing that some of the key alarms were not working,
the rights of employees managers authorized a start-up of the unit. The start-up resulted in the deadliest petro-
that are guaranteed by chemical accident in 15 years, killing 15 people and injuring an additional 170.54
this act.
Employee safety has become a great concern across a number of industries. The
“Competing through Sustainability” box describes how Heineken has made safety one
component of its global sustainability efforts.
Table 3.5
Sample of Complaints Filed under the ADA
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Number of complaints 15,864 16,470 15,964 15,377 15,576 14,893 15,575 17,734 19,453 21,451 25,165 25,742 26,379 25,957 25,369
% dealing with*
Asthma 2.0% 1.6% 1.6% 1.6% 1.5% 1.6% 1.7% 1.0% 1.7% 1.6% 1.7% 1.9% 1.6% 1.5% 1.4%
Back impairment 10.2 9.3 9.5 8.6 8.0 8.4 8.1 8.3 9.3 9.9 9.7 8.2 8.9 8.7 8.8
Cancer 2.7 2.8 2.9 2.9 2.8 2.7 3.2 3.3 3.6 3.7 3.9 4.4 4.4 4.7 4.4
Diabetes 4.1 4.3 4.7 4.8 4.7 4.5 4.8 5.1 5.6 5.5 5.4 4.6 4.2 4.7 5.0
Hearing 3.1 2.9 3.2 3.1 3.4 3.2 3.3 3.0 3.3 3.3 3.1 3.2 3.4 3.4 3.7
Vision 2.3 2.3 2.6 2.6 2.5 2.3 2.3 2.5 2.6 2.2 2.3 2.5 2.4 2.4 2.2
Heart 3.3 3.6 4.0 3.7 3.5 3.3 3.4 3.7 3.8 3.8 4.2 4.0 3.7 4.0 3.9
Regarded as disabled 13.7 12.8 13.7 16.8 18.2 17.4 17.2 17.7 16.7 14.1 12.8 13.0 13.1 13.8 13.4
Drug addiction 0.6 0.5 0.6 0.6 0.5 0.3 0.5 0.5 0.7 0.6 0.5 .5 .5 0.4 0.3
Anxiety 3.4 3.4 4.1 3.5 2.4 2.2 2.2 2.8 4.5 5.3 5.3 4.5 5.1 5.5 5.8
Depression 6.5 6.1 6.7 6.3 2.9 5.4 6.6 5.5 6.1 6.5 6.3 6.6 6.8 6.3 6.4
Other 22.2 22.3 23.7 18.1 12.3 14.7 15.7 16.4 20.2 24.4 26.3 29.8 30.3 29.0 32.1
*Not all complaints are listed.

SOURCE: EEOC, “ADA Charge Data by Impairment/Bases—Receipts,” www.eeoc.gov, accessed May 26, 2015.
131
Global Beverage Giant Focuses on Safety and Sustainability
Heineken recently released company developed a “Dance Brewing a Better
its 2014 Sustainability Report, More, Drink Less” campaign to World commitments
touting its sustainability perfor- promote responsible drinking demonstrate that sustainabil-
mance in a number of areas. and added “Safety First” as a ity is increasingly integrated
For instance, the company measured behavior in all of its within our approach to doing
has reduced its water usage performance reviews. business.”
to 3.9 hectoliters for every Sean O’Neill, Heineken’s
hectoliter of beer produced, chief corporate relations officer, DISCUSSION QUESTION
reduced its carbon emissions said, “Around the world 81,000 What other sustainability efforts
and electricity usage since 2008 of our colleagues are engaged could Heineken undertake in an
by 30% and 20%, respectively, every day in building a success- effort to reduce its environmen-
and invested over 25 million ful, sustainable and responsible tal impact?
euros (more than $25 million business. Our strong 2014 SOURCE: Company website, “2014 Sustain-
U.S. dollars) in community devel- financial results coupled with ability Highlights,” www.theheinekencompany.
opment projects. In addition, the the positive delivery of our com, accessed May 24, 2015.
Like equal employment opportunity, employee safety is regulated by both the federal and
state governments. However, to fully maximize the safety and health of workers, employers
need to go well beyond the letter of the law and embrace its spirit. With this in mind, we first
spell out the specific protections guaranteed by federal legislation and then discuss various
kinds of safety awareness programs that attempt to reinforce these standards.
Occupational Safety
and Health Act THE OCCUPATIONAL SAFETY AND HEALTH ACT (OSHA)
(OSHA) Although concern for worker safety would seem to be a universal societal goal, the
The law that authorizes
Occupational Safety and Health Act (OSHA)—the most comprehensive legislation
the federal govern-
ment to establish and regarding worker safety—did not emerge in this country until the early 1970s. At that
enforce occupational time, there were roughly 15,000 work-related fatalities every year.
safety and health stan- OSHA authorized the federal government to establish and enforce occupational
dards for all places of safety and health standards for all places of employment engaging in interstate com-
employment engaging
merce. The responsibility for inspecting employers, applying the standards, and levying
in interstate commerce.
fines was assigned to the Department of Labor. The Department of Health was assigned
responsibility for conducting research to determine the criteria for specific operations or
occupations and for training employers to comply with the act. Much of this research is
conducted by the National Institute for Occupational Safety and Health (NIOSH).
Employee Rights under OSHA

General Duty Clause
The provision of the The main provision of OSHA states that each employer has a general duty to furnish each
Occupational Safety employee a place of employment free from recognized hazards that cause or are likely to
and Health Act that cause death or serious physical harm. This is referred to as the general duty clause. Some
states that an employer specific rights granted to workers under this act are listed in Table 3.6. The Department of
has an overall obliga- Labor recognizes many specific types of hazards, and employers are required to comply
tion to furnish employ-
ees with a place of with all the occupational safety and health standards published by NIOSH.
employment free from A recent example is the development of OSHA standards for occupational exposure
recognized hazards. to blood-borne pathogens such as the AIDS virus. These standards identify 24 affected
132
Table 3.6
Employees have the right to Rights Granted to
1. Request an inspection. Workers under the
2. Have a representative present at an inspection. Occupational Safety
3. Have dangerous substances identified. and Health Act
4. Be promptly informed about exposure to hazards and be given access to accurate
records regarding exposures.
5. Have employer violations posted at the work site.
industrial sectors, encompassing 500,000 establishments and 5.6 million

workers. Among other features, these standards require employers to
develop an exposure control plan (ECP). An ECP must include a list of
jobs whose incumbents might be exposed to blood, methods for imple-
menting precautions in these jobs, postexposure follow-up plans, and pro-
cedures for evaluating incidents in which workers are accidentally infected.
Although NIOSH publishes numerous standards, regulators clearly
cannot anticipate all possible hazards that could occur in the work-
place. Thus, the general duty clause requires employers to be con-
stantly alert for potential sources of harm in the workplace (as defined
by the standards of a reasonably prudent person) and to correct them.
For example, managers at Amoco’s Joliet, Illinois, plant realized that
over the years some employees had created undocumented shortcuts
and built them into their process for handling flammable materials.
These changes appeared to be labor saving but created a problem:
workers did not have uniform procedures for dealing with flammable
products. This became an urgent issue because many of the experi-
enced workers were reaching retirement age, and the plant was in dan-
ger of losing critical technical expertise. To solve this problem, the
plant adopted a training program that met all the standards required by
OSHA. That is, it conducted a needs analysis highlighting each task
new employees had to learn and then documented these processes in © OSHA, www.osha.gov
written guidelines. New employees were given hands-on training with the new proce- OSHA is responsible
dures and were then certified in writing by their supervisor. A computer tracking sys- for inspecting
tem was installed to monitor who was handling flammable materials, and this system businesses, applying
immediately identified anyone who was not certified. The plant met requirements for safety and health
both ISO 9000 standards and OSHA regulations and continues to use the same model standards, and
for safety training in other areas of the plant.55 levying fines for
violations. OSHA
regulations prohibit
OSHA Inspections notifying employers
OSHA inspections are conducted by specially trained agents of the Department of Labor of inspections in
called compliance officers. These inspections usually follow a tight “script.” Typically, advance.
the compliance officer shows up unannounced. For obvious reasons, OSHA’s regula-
tions prohibit advance notice of inspections. The officer, after presenting credentials,
tells the employer the reasons for the inspection and describes, in a general way, the
procedures necessary to conduct the investigation.
An OSHA inspection has four major components. First, the compliance officer
reviews the employer’s records of deaths, injuries, and illnesses. OSHA requires this
kind of record keeping from all firms with 11 or more full- or part-time employees. Sec-
ond, the officer, typically accompanied by a representative of the employer (and perhaps
by a representative of the employees), conducts a “walkaround” tour of the employer’s

premises. On this tour, the officer notes any conditions that may violate specific pub-
lished standards or the less specific general duty clause. The third component of the
inspection, employee interviews, may take place during the tour. At this time, any person
who is aware of a violation can bring it to the attention of the officer. Finally, in a closing
conference the compliance officer discusses the findings with the employer, noting any
violations. The employer is given a reasonable time frame in which to correct these vio-
lations. If any violation represents imminent danger (that is, could cause serious injury
or death before being eliminated through the normal enforcement procedures), the offi-
cer may, through the Department of Labor, seek a restraining order from a U.S. district
court. Such an order compels the employer to correct the problem immediately.
Citations and Penalties

If a compliance officer believes that a violation has occurred, he or she issues a citation to
the employer that specifies the exact practice or situation that violates the act. The employer
is required to post this citation in a prominent place near the location of the violation—
even if the employer intends to contest it. Nonserious violations may be assessed up to
$7,000 for each incident, but this may be adjusted downward if the employer has no prior
history of violations or if the employer has made a good-faith effort to comply with the act.
Serious violations of the act or willful, repeated violations may be fined up to $70,000 per
incident. Fines for safety violations are never levied against the employees themselves. The
assumption is that safety is primarily the responsibility of the employer, who needs to work
with employees to ensure that they use safe working procedures.
In addition to these civil penalties, criminal penalties may also be assessed for willful
violations that kill an employee. Fines can go as high as $20,000, and the employer or
agents of the employer can be imprisoned. Criminal charges can also be brought against
anyone who falsifies records that are subject to OSHA inspection or anyone who gives
advance notice of an OSHA inspection without permission from the Department of Labor.
The Effect of OSHA

OSHA has been unquestionably successful in raising the level of awareness of occupa-
tional safety. Table 3.7 presents recent data on occupational injuries and illnesses. Yet
legislation alone cannot solve all the problems of work site safety.56 Many industrial
accidents are a product of unsafe behaviors, not unsafe working conditions. Because the
act does not directly regulate employee behavior, little behavior change can be expected
unless employees are convinced of the standards’ importance.57 This has been recog-
nized by labor leaders. For example, Lynn Williams, president of the United Steelwork-
ers of America, noted, “We can’t count on government. We can’t count on employers.
We must rely on ourselves to bring about the safety and health of our workers.”58
Because conforming to the statute alone does not necessarily guarantee safety, many
employers go beyond the letter of the law. In the next section we examine various kinds
of employer-initiated safety awareness programs that comply with OSHA requirements
and, in some cases, exceed them.
Safety Awareness
Programs SAFETY AWARENESS PROGRAMS
Employer programs that Safety awareness programs go beyond compliance with OSHA and attempt to instill sym-
attempt to instill symbolic and substantive changes in the organization’s emphasis on safety. These programs
bolic and substantive
changes in the organi- typically focus either on specific jobs and job elements or on specific types of injuries or
zation’s emphasis on disabilities. A safety awareness program has three primary components: identifying and
safety. communicating hazards, reinforcing safe practices, and promoting safety internationally.
Table 3.7
NONFATAL INJURIES AND ILLNESSES,
Some of the Most
PRIVATE INDUSTRY FATAL WORK-RELATED INJURIES
Recent Statistics
Provided by the
Total recordable cases: Total fatal injuries (all sectors): Bureau of Labor
3,007,300 in 2013 4,585 in 2013 Statistics Regarding
Cases involving days away from work: Roadway incidents (all sectors): Workplace Illnesses
917,100 in 2013 1,099 in 2013 and Injuries
Median days away from work: Falls, slips, trips (all sectors):
8 in 2013 724 in 2013
Cases involving sprains, strains, tears: Homicides (all sectors):
327,060 in 2013 404 in 2013
Cases involving injuries to the back:
170,450 in 2013
Cases involving falls, slips, trips:
229,190 in 2013
SOURCE: www.bls.gov.
Identifying and Communicating Job Hazards

Employees, supervisors, and other knowledgeable sources need to sit down and discuss
potential problems related to safety. The job hazard analysis technique is one means of Job Hazard Analysis
accomplishing this.59 With this technique, each job is broken down into basic elements, Technique
A breakdown of each
and each of these is rated for its potential for harm or injury. If there is consensus that
job into basic elements,
some job element has high hazard potential, this element is isolated and potential tech- each of which is rated
nological or behavioral changes are considered. for its potential for harm
Another means of isolating unsafe job elements is to study past accidents. The technic or injury.
of operations review (TOR) is an analysis methodology that helps managers determine
which specific element of a job led to a past accident.60 The first step in a TOR analysis Technic of
is to establish the facts surrounding the incident. To accomplish this, all members of the Operations Review
work group involved in the accident give their initial impressions of what happened. The (TOR)
Method of determin-
group must then, through group discussion, reach a consensus on the single, systematic ing safety problems
failure that most contributed to the incident as well as two or three major secondary fac- via an analysis of past
tors that contributed to it. accidents.
An analysis of jobs at Burger King, for example, revealed that certain jobs required
employees to walk across wet or slippery surfaces, which led to many falls. Specific
corrective action was taken based on analysis of where people were falling and what
conditions led to these falls. Now Burger King provides mats at critical locations and has
generally upgraded its floor maintenance. The company also makes slip-resistant shoes
available to employees in certain job categories.61
Communication of an employee’s risk should take advantage of several media. Direct
verbal supervisory contact is important for its saliency and immediacy. Written memos
are important because they help establish a “paper trail” that can later document a his-
tory of concern regarding the job hazard. Posters, especially those placed near the haz-
ard, serve as a constant reminder, reinforcing other messages.
In communicating risk, it is important to recognize two distinct audiences. Sometimes
relatively young or inexperienced workers need special attention. Research by the National
Safety Council indicates that 40% of all accidents happen to individuals in the 20-to-29 age
group and that 48% of all accidents happen to workers during their first year on the job.62
The employer’s primary concern with respect to this group is to inform them. However, the
employer must not overlook experienced workers. Here the key concern is to remind them.
Research indicates that long-term exposure to and familiarity with a specific threat lead
to complacency.63 Experienced employees need retraining to jar them from complacency
about the real dangers associated with their work. This is especially the case if the hazard
in question poses a greater threat to older employees. For example, falling off a ladder is a
greater threat to older workers than to younger ones. More than 20% of such falls lead to a
fatality for workers in the 55-to-65 age group, compared with just 10% for all other work-
ers.64 While most of this discussion has focused on workplace safety, increasingly technol-
ogy has enabled and encouraged workers to work at home off the clock.
Reinforcing Safe Practices

One common technique for reinforcing safe practices is implementing a safety incen-
tive program to reward workers for their support and commitment to safety goals.
Initially, programs are set up to focus on improving short-term monthly or quarterly
goals or to encourage safety suggestions. These short-term goals are later expanded to
include more wide-ranging, long-term goals. Prizes are typically distributed in highly
public forums (like annual meetings or events). These prizes usually consist of mer-
chandise rather than cash because merchandise represents a lasting symbol of achieve-
ment. A good deal of evidence suggests that such programs are effective in reducing
injuries and their cost.65
Whereas the safety awareness programs just described focus primarily on the
job, other programs focus on specific injuries or disabilities. Lower back disability
(LBD), for example, is a major problem that afflicts many employees. LBD accounts
for approximately 25% of all workdays lost, costing firms nearly $30 billion a year.66
Human resource managers can take many steps to prevent LBD and rehabilitate those
who are already afflicted. Eye injuries are another target of safety awareness programs.
The National Society to Prevent Blindness estimates that 1,000 eye injuries occur every
day in occupational settings.67 A 10-step program to reduce eye injuries is outlined in
Table 3.8. Similar guidelines can be found for everything from chemical burns to elec-
trocution to injuries caused by boiler explosions.68
Promoting Safety Internationally

Given the increasing focus on international management, organizations also need to con-
sider how to best ensure the safety of people regardless of the nation in which they operate.
Cultural differences may make this more difficult than it seems. For example, a recent study
examined the impact of one standardized corporationwide safety policy on employees in
Table 3.8
A 10-Step Program 1. Conduct an eye hazard job analysis.
for Reducing Eye- 2. Test all employees’ vision to establish a baseline.
Related Injuries 3. Select protective eyewear designed for specific operations.
4. Establish a 100% behavioral compliance program for eyewear.
5. Ensure that eyewear is properly fitted.
6. Train employees in emergency procedures.
7. Conduct ongoing education programs regarding eye care.
8. Continually review accident prevention strategies.
9. Provide management support.
10. Establish written policies detailing sanctions and rewards for specific results.
SOURCE: From T. W. Turrif, “NSPB Suggests 10-Step Program to Prevent Eye Injury,” Occupational Health and Safety
60 (1991), pp. 62–66. Copyright © Media Inc. Reprinted with permission.
three different countries: the United States, France, and Argentina. The results of this study
indicated that the same policy was interpreted differently because of cultural differences.
The individualistic, control-oriented culture of the United States stressed the role of top
management in ensuring safety in a top-down fashion. However, this policy failed to work
in Argentina, where the collectivist culture made employees feel that safety was everyone’s
joint concern; therefore, programs needed to be defined from the bottom up.69
At the beginning of this section we discussed a horrific accident at BP’s Texas City
refinery. After examining the causes of the explosion, the U.S. Chemical Safety and Hazard
Investigation Board asked BP to set up an independent panel that would focus on oversee-
ing radical changes in BP’s safety procedures. This panel was tasked with investigating
the safety culture at BP along with the procedures for inspecting equipment and reporting
near-miss accidents. The panel’s charter is not just to oversee the Texas City refinery, but
also to look at the safety practices in refineries that BP has acquired over the years.70
A LOOK BACK
Did Kleiner Perkins Discriminate?
Ellen Pao lost her discrimination case against Kleiner Perkins. While her allegations
carried credibility, the firm successfully argued that the decisions it took with regard
to her were based on poor performance and poor relationships with co-workers.
A number of witnesses described her as passive-aggressive, generally ineffective,
and disloyal. In the trial Ms. Pao was accused of being both too aggressive and too
timid. “You have this needle that you have to thread, and sometimes it feels like
there’s no hole in the needle,” she said. “From what I’ve heard from women, they
do feel like there’s no way to win. They can’t be aggressive and get this opportunity
without being treated like they’ve done something wrong.”
QUESTIONS
1. Do you think that all discrimination is overt and obvious, or does it often hap-
pen due to implicit mindsets? Explain.
2. How can firms ensure that all employees have a fair chance at promotions and
pay raises, and that these decisions are not determined by implicit discrimination?
SOURCE: J. Elder, “Ellen Pao Says Gender Issues Won’t ‘Go Away’ after Kleiner Trial,” The Wall Street Journal, April
6, 2015, www.wsj.com.
SUMMARY
Viewing employees as a source of competitive advantage legal constraints imposed by the government. Given the
results in dealing with them in ways that are ethical and multimillion-dollar settlements resulting from violations of
legal as well as providing a safe workplace. An organiza- EEO laws (and the moral requirement to treat people fairly
tion’s legal environment—especially the laws regarding regardless of their sex or race) as well as the penalties for
equal employment opportunity and safety—has a particu- violating OSHA, HR and line managers need a good under-
larly strong effect on its HRM function. HRM is concerned standing of the legal requirements and prohibitions in order
with the management of people, and government is con- to manage their businesses in ways that are sound, both
cerned with protecting individuals. One of HRM’s major financially and ethically. Organizations that do so effectively
challenges, therefore, is to perform its function within the will definitely have a competitive advantage.
KEY TERMS
Equal employment opportunity Action steps, 113 Occupational Safety and Health Act
(EEO), 103 Disparate treatment, 114 (OSHA), 132
Americans with Disabilities Act Bona fide occupational qualification General duty clause, 132
(ADA) of 1990, 109 (BFOQ), 116 Safety awareness programs, 134
Equal Employment Opportunity Disparate impact, 117 Job hazard analysis technique, 135
Commission (EEOC), 111 Four-fifths rule, 118 Technic of operations review
Utilization analysis, 113 Standard deviation rule, 118 (TOR), 135
Goals and timetables, 113 Reasonable accommodation, 121
1. Disparate impact theory was originally created by the court adverse impact against blacks and Hispanics. Given the
in the Griggs case before finally being codified by Con- validity and adverse impact, and considering that race
gress 20 years later in the Civil Rights Act of 1991. Given norming is illegal under CRA 1991, what would you say
the system of law in the United States, from what branch of in response to a recommendation that such tests be used
government should theories of discrimination develop? for hiring?
2. Disparate impact analysis (the four-fifths rule, standard 5. How might the ADA’s reasonable accommodation
deviation analysis) is used in employment discrimination requirement affect workers such as law enforcement offi-
cases. The National Assessment of Education Progress cers and firefighters?
conducted by the U.S. Department of Education found 6. The reasonable woman standard recognizes that women
that among 21- to 25-year-olds (a) 60% of whites, 40% have different ideas than men of what constitutes appro-
of Hispanics, and 25% of blacks could locate information priate behavior. What are the implications of this distinc-
in a news article or almanac; (b) 25% of whites, 7% of tion? Do you think it is a good or bad idea to make this
Hispanics, and 3% of blacks could decipher a bus sched- distinction?
ule; and (c) 44% of whites, 20% of Hispanics, and 8% of 7. Employers’ major complaint about the ADA is that the
blacks could correctly determine the change they were costs of making reasonable accommodations will reduce
due from the purchase of a two-item restaurant meal. Do their ability to compete with businesses (especially for-
these tasks (locating information in a news article, deci- eign ones) that do not face these requirements. Is this a
phering a bus schedule, and determining correct change) legitimate concern? How should employers and society
have adverse impact? What are the implications? weigh the costs and benefits of the ADA?
3. Many companies have dress codes that require men to 8. Many have suggested that OSHA penalties are too weak and
wear suits and women to wear dresses. Is this discrimina- misdirected (aimed at employers rather than employees) to
tory according to disparate treatment theory? Why? have any significant impact on employee safety. Do you
4. Cognitive ability tests seem to be the most valid selection think that OSHA-related sanctions need to be strengthened,
devices available for hiring employees, yet they also have or are existing penalties sufficient? Defend your answer.
Take the following self-assessment quiz. For each statement, 4. The best way to discourage sexual harassment is to have
circle T if the statement is true or F if the statement is false. a policy that discourages employees from dating each
other. T F
WHAT DO YOU KNOW ABOUT SEXUAL HARASSMENT? 5. Sexual harassment is not a form of sex discrimi-
1. A man cannot be the victim of sexual harassment. nation. T F
T F 6. After receiving a sexual harassment complaint, the
2. The harasser can only be the victim’s manager or a employer should let the situation cool off before investi-
manager in another work area. T F gating the complaint. T F
3. Sexual harassment charges can be filed only by the per- 7. Sexual harassment is illegal only if it results in the vic-
son who directly experiences the harassment. T F tim being laid off or receiving lower pay. T F
EXERCISING STRATEGY
Home Depot’s Bumpy Road to Equality
Home Depot is the largest home products firm selling home advantage. However, the company has taken steps to broaden
repair products and equipment for the “do-it-yourselfer.” and strengthen its own nondiscrimination policy by adding
Founded 20 years ago, it now boasts 100,000 employees sexual orientation to the written policy. In addition, com-
and more than 900 warehouse stores nationwide. The pany president and CEO Bob Nardelli announced in the fall
company’s strategy for growth has focused mostly on one of 2001 that Home Depot would take special steps to pro-
task: build more stores. In fact, an unwritten goal of Home tect benefits for its more than 500 employees who serve in
Depot executives was to position a store within 30 minutes the Army reserves and had been activated. “We will make
of every customer in the United States. They’ve almost up any difference between their Home Depot pay and their
made it. In addition, Home Depot has tried hard to imple- military pay if it’s lower,” said Nardelli. “When they come
ment a strategy of providing superior service to its custom- home [from duty], their jobs and their orange aprons are
ers. The company has prided itself on hiring people who waiting for them.”
are knowledgeable about home repair and who can teach In settling the gender discrimination suit the company
customers how to do home repairs on their own. This strat- agreed to pay $65 million to women who had been steered
egy, along with blanketing the country with stores, has to cashiers’ jobs and had been denied promotions. In addi-
led to the firm’s substantial advantage over competitors, tion, the company promised that every applicant would get
including the now-defunct Home Quarters (HQ) and still- a “fair shot.” Home Depot’s solution to this has been to
standing Lowe’s. leverage technology to make better hiring decisions that
But Home Depot has run into some legal problems. ensure the company is able to maximize diversity.
During the company’s growth, a statistical anomaly has Home Depot instituted its Job Preference Program, an
emerged. About 70% of the merchandise employees (those automated hiring and promotion system, across its 900 stores
directly involved in selling lumber, electrical supplies, hard- at a cost of $10 million. It has set up kiosks where potential
ware, and so forth) are men, whereas about 70% of opera- applicants can log on to a computer, complete an application,
tions employees (cashiers, accountants, back office staff, and undergo a set of prescreening tests. This process weeds
and so forth) are women. Because of this difference, several out unqualified applicants. Then the system prints out test
years ago a lawsuit was filed on behalf of 17,000 current and scores along with structured interview questions and exam-
former employees as well as up to 200,000 rejected appli- ples of good and bad answers for the managers interviewing
cants. Home Depot explained the disparity by noting that those who make it through the prescreening. In addition, the
most female job applicants have experience as cashiers, so Home Depot system is used for promotions. Employees are
they are placed in cashier positions; most male applicants asked to constantly update their skills and career aspirations
express an interest in or aptitude for home repair work such so they can be considered for promotions at nearby stores.
as carpentry or plumbing. However, attorneys argued that The system has been an unarguable success. Managers
Home Depot was reinforcing gender stereotyping by hiring love it because they are able to get high-quality applicants
in this manner. without having to sift through mounds of résumés. In addi-
More recently, five former Home Depot employees sued tion, the system seems to have accomplished its main pur-
the company, charging that it had discriminated against Afri- pose. The number of female managers has increased 30%
can American workers at two stores in southeast Florida. and the number of minority managers by 28% since the
The five alleged that they were paid less than white workers, introduction of the system. In fact, David Borgen, the co-
passed over for promotion, and given critical performance counsel for the plaintiffs in the original lawsuit, states, “No
reviews based on race. “The company takes exception to one can say it can’t be done anymore, because Home Depot
the charges and believes they are without merit,” said Home is doing it bigger and better than anyone I know.”
Depot spokesman Jerry Shields. The company has faced
other racial discrimination suits as well, including one filed QUESTIONS
by the Michigan Department of Civil Rights. 1. If Home Depot was correct in that it was not discrimi-
To avoid such lawsuits in the future, Home Depot nating, but simply filling positions consistent with those
could resort to hiring and promoting by quota, ensuring an who applied for them (and very few women were apply-
equal distribution of employees across all job categories— ing for customer service positions), given your reading of
something that the company has wanted to avoid because this chapter, was the firm guilty of discrimination? If so,
it believes such action would undermine its competitive under what theory?
2. How does this case illustrate the application of new tech- BusinessWeek Online, June 5, 2001, at www.businessweek.com; “HRC Lauds
Home Depot for Adding Sexual Orientation to Its Non-discrimination Policy,”
nology to solving issues that have never been tied to tech-
Human Rights Campaign, May 14, 2001, at www.hrc.org; “Former Home Depot
nology? Can you think of other ways technology might be Employees File Racial Discrimination Lawsuit,” Diversity at Work, June 2000, at
used to address diversity/EEO/affirmative action issues? www.diversityatwork.com; “Michigan Officials File Discrimination Suit against
Home Depot,” Diversity at Work, February 2000, at www.diversityatwork.com;
SOURCES: “Home Depot Says Thanks to America’s Military; Extends
M. Boot, “For Plaintiffs’ Lawyers, There’s No Place Like Home Depot,” The
Associates/Reservists’ Benefits, Announces Military Discount,” company press
Wall Street Journal, interactive edition, February 12, 1997.
release, October 9, 2001; S. Jaffe, “New Tricks in Home Depot’s Toolbox?”
MANAGING PEOPLE
Brown v. Board of Education: A Bittersweet Birthday
May 17 marks the 50th anniversary of Brown v. Board Another important trend is in housing, which in turn
of Education, the landmark Supreme Court ruling that helps determine the characteristics of school districts. Resi-
declared racially segregated “separate but equal” schools dential integration is improving, albeit at a glacial pace.
unconstitutional. The case is widely regarded as one of the There’s still high housing segregation in major metropolitan
court’s most important decisions of the 20th century, but the areas, but it has fallen four percentage points, to 65%, on
birthday celebration will be something of a bittersweet occa- an index developed by the Mumford Center. Some of the
sion. There’s no question that African Americans have made gains are happening in fast-growing new suburbs where race
major strides since—economically, socially, and education- lines aren’t so fixed. A few big cities have improved, too.
ally. But starting in the late 1980s, political backlash brought In Dallas, for example, black–white residential segregration
racial progress to a halt. Since then, schools have slowly fell from 78% in 1980 to 59% in 2000.
been resegregating, and the achievement gap between white Why haven’t schools continued to desegregate,
and minority schoolchildren has been widening again. Can too? The increased racial mixing in housing hasn’t been
the United States ever achieve the great promise of integra- nearly large enough to offset the sheer increase in the ranks of
tion? Some key questions follow. minority schoolchildren. While the number of white elemen-
What did the court strike down in 1954? Throughout tary school kids remained flat, at 15.3 million, between 1990
the South and in border states such as Delaware, black and and 2000, the number of black children climbed by 800,000,
white children were officially assigned to separate schools. to 4.6 million, while Hispanic kids jumped by 1.7 million, to
In Topeka, Kansas, the lead city in the famous case, there 4.3 million. The result: Minorities now comprise 40% of public
were 18 elementary schools for whites and just 4 for blacks, school kids, vs. 32% in 1990. And as the nonwhite population
forcing many African American children to travel a long has expanded, so have minority neighborhoods—and schools.
way to school. The idea that black schools were “equal” to So minorities have lost ground? Yes, in some respects.
those for whites was a cruel fiction, condemning most black By age 17, black students are still more than three years
kids to a grossly inferior education. behind their white counterparts in reading and math. And
Surely we’ve come a long way since then? Yes, whites are twice as likely to graduate from college. Taken as
though change took a long time. Over 99% of Southern black a whole, U.S. schools have been resegregating for 15 years
children were still in segregated schools in 1963. The 1960s or so, according to studies by the Harvard University Civil
civil rights movement eventually brought aggressive federal Rights Project. “We’re celebrating [Brown] at a time when
policies such as busing and court orders that forced exten- schools in all regions are becoming increasingly segre-
sive integration, especially in the South. So by 1988, 44% gated,” says project co-director Gary Orfield.
of Southern black children were attending schools where a What role has the political backlash against integra-
majority of students were white, up from 2% in 1964. “We tion played? The courts and politicians have been pull-
cut school desegregation almost in half between 1968 and ing back from integration goals for quite a while. In 1974,
1990,” says John Logan, director of the Lewis Mumford the Supreme Court ruled that heavily black Detroit didn’t
Center for Comparative Urban and Regional Research at have to integrate its schools with the surrounding white sub-
State University of New York at Albany. urbs. Then, in the 1980s, the growing backlash against bus-
What’s the picture today? There have been some real ing and race-based school assignment led politicians and the
gains. The share of blacks graduating from high school courts to all but give up on those remedies, too.
has nearly quadrupled since Brown, to 88% today, while So what are the goals now? The approach has shifted
the share of those ages 25 to 29 with a college degree has dramatically. Instead of trying to force integration, the
increased more than sixfold, to 18%. United States has moved toward equalizing education. In a
growing number of states, the courts have been siding with County schools veteran and interim director of the nonprofit
lawsuits that seek equal or “adequate” funding for minority Wake Education Partnership.
and low-income schools.
Could this serve as a national model? For that to
The No Child Left Behind Act goes even further. It says
happen in many cities, school districts would have to merge
that all children will receive a “highly qualified” teacher by
with the surrounding suburbs. Wake County did this, but
2006 and will achieve proficiency in math and reading by
that was back in the 1970s and part of a long-term plan to
2014. It specifically requires schools to meet these goals
bring about racial integration. In the metro Boston area, by
for racial subgroups. Paradoxically, it sounds like separate
contrast, students are balkanized into dozens of tiny dis-
but equal again. Both the equal-funding suits and No Child
tricts, many of which are economically homogeneous. The
Left Behind aim to improve all schools, whatever their racial
result: Some 70% of white students attend schools that are
composition. Integration is no longer the explicit goal.
over 90% white and overwhelmingly middle-class. Mean-
Can schools equalize without integrating? It’s pos- while, 97% of the schools that are over 90% minority are
sible in some cases, but probably not for the United States also high-poverty. Similar patterns exist in most major cit-
as a whole. The Education Trust, a nonprofit group in Wash- ies, but most affluent white suburbs aren’t likely to swallow
ington, D.C., has identified a number of nearly all-black, a move like Wake County’s.
low-income schools that have achieved exceptional test How important is funding equality within states? It’s
results. But such success requires outstanding leadership, critical, especially if segregation by income and race per-
good teachers, and a fervent commitment to high standards. sists. Massachusetts, for instance, has nearly tripled state aid
These qualities are far more difficult to achieve in large to schools since 1993, with over 90% of the money going to
urban schools with many poor kids—the kind most black and the poorest towns. That has helped make Massachusetts a
Hispanic students attend. The average minority student goes to national leader in raising academic achievement.
a school in which two-thirds of the students are low-income. By Nationally, though, there are still huge inequities in
contrast, whites attend schools that are just 30% low-income. school spending, with the poorest districts receiving less
So are black–white achievement gaps as much about money than the richest—even though low-income children
poverty as race? Yes, which is why closing them is dif- are more expensive to educate. Fixing these imbalances
ficult with or without racial integration. Studies show that would be costly. Even in Massachusetts, a lower court judge
middle-class students tend to have higher expectations, more ruled on April 26 that the system still shortchanges stu-
engaged parents, and better teachers. Poor children, by con- dents in the poorest towns. Nationally, it would cost more
trast, often come to school with far more personal problems. than $50 billion a year in extra funding to correct inequi-
Yet poor schools are more likely to get inferior teachers, such ties enough to meet the goals of No Child, figures Anthony
as those who didn’t major in the subject they teach. Many poor P. Carnevale, a vice president at Educational Testing Service.
schools also lose as many as 20% of their teachers each year,
If, somehow, the United States could achieve more
while most middle-class suburban schools have more stable
economic integration, would racial integration still
teaching staffs. “Research suggests that when low-income
be necessary? Proficiency on tests isn’t the only aim.
students attend middle-class schools, they do substantially
As the Supreme Court said last year in a landmark deci-
better,” says Richard Kahlenberg, senior fellow at the Century
sion on affirmative action in higher education: “Effective
Foundation, a public policy think tank in New York City.
participation by members of all racial and ethnic groups
Is it possible to achieve more economic integra- in the civic life of our nation is essential if the dream of
tion? There are a few shining examples, but they take one nation, indivisible, is to be realized.” It’s hard to see
enormous political commitment. One example that how students attending largely segregated schools, no mat-
education-system reformers love to highlight is Wake County, ter how proficient, could be adequately prepared for life in
N.C., whose 110,000-student school district includes Raleigh. an increasingly diverse country. In this sense, integrating
In 2000, it adopted a plan to ensure that low-income stu- America’s educational system remains an essential, though
dents make up no more than 40% of any student body. It also still elusive, goal.
capped those achieving under grade level at 25%. Moreover,
it used magnet schools offering specialized programs, such as QUESTIONS
one for gifted children, to help attract middle-income children 1. While segregation of public schools has been outlawed,
to low-income areas. the article notes that schools are not necessarily “deseg-
Already, 91% of the county’s third- to eighth-graders regating” (i.e., there are still predominantly minority
work at grade level in math and reading, up from 84% in and predominantly nonminority schools). If students
1999. More impressive, 75% of low-income kids are reading are to work in increasingly diverse workforces, is the
at grade level, up from just 56% in 1999, as are 78% of black current system failing them? Why or why not?
children, up from 61%. “The academic payoff has been 2. The black–white gap continues to exist with regard
pretty incredible,” says Walter C. Sherlin, a 28-year Wake to reading, math, and graduation rates. What are the
implications of this on organizations’ selection systems organizations do to leverage diversity as a source of

(i.e., disparate impact)? competitive advantage?
3. Given the lack of a “diverse” educational experience SOURCE: From W. Symonds, “A Bittersweet Birthday,” BusinessWeek, May
for a large percentage of black children, and the gap 17, 2004. Used with permission of Bloomberg L. P. Copyright © 2013. All
between them and their white counterparts, what must rights reserved.
Company Fails Fair-Employment Test
Companies have to comply with federal as well as state manager told her not to bother; she was being fired. When
and local laws. One company that didn’t was Professional Lockwood asked why, the manager said “it just wasn’t
Neurological Services (PNS), which was cited by the working out.”
Chicago Commission on Human Relations when it dis- She went to the Chicago Human Relations Commis-
criminated against an employee because she is a parent. sion for help. The commission investigated and could find
Chicago is one of a few cities that prohibit this type of no evidence of performance-related problems that would
discrimination. justify her dismissal. Instead, the commission found that
The difficulties began with employee Dena Lockwood Lockwood was a victim of “blatant” discrimination against
as soon as she was interviewing for a sales position with employees with children and awarded her $213,000 plus
PNS. The interviewer noticed that Lockwood made a refer- attorney’s fees—a hefty fine for a company with fewer
ence to her children, and he asked her if her responsibili- than 50 employees. PNS stated that it would appeal the
ties as a parent would “prevent her from working 70 hours decision.
a week.” Lockwood said no, but the job offer she received
QUESTIONS
suggests that the interviewer had his doubts. According to
1. Why do you think “parental discrimination” was the
Lockwood’s later complaint, female sales reps without chil-
grounds for this complaint instead of a federally pro-
dren routinely were paid a $45,000 base salary plus a 10%
tected class? Could you make a case for discrimination
commission. Lockwood was offered $25,000 plus the 10%
on the basis of sex? Why or why not?
commission. Lockwood negotiated and eventually accepted
2. How could Professional Neurological Services have
$45,000 plus 5%, with a promise to increase the commission
avoided this problem?
rate to 10% when she reached sales of $300,000. She was
3. Imagine that the company has called you in to help it
also offered five vacation days a year; when she objected,
hold down human resources costs, including costs of
she was told not to worry.
lawsuits such as this one. What advice would you give?
Lockwood worked hard and eventually reached her
How can the company avoid discrimination and still
sales goal. Then the company raised the requirement for
build an efficient workforce?
the higher commission rate, and the situation took a turn
SOURCES: Courtney Rubin, “Single Mother Wins $200,000 in Job Bias
for the worse. Lockwood’s daughter woke up one morn- Case,” Inc., January 25, 2010, www.inc.com; and Ameet Sachdev, “She Took
ing with pink-eye, a highly contagious ailment. Lockwood a Day Off to Care for Sick Child, Got Fired,” Chicago Tribune, January 24,
called in to reschedule a meeting for that day, but her 2010, NewsBank, http://infoweb.newsbank.com.
NOTES
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Supreme Court and Circuit Court Decisions for Hostile Environment 70. Cummins and Herrick, “Investigators Fault BP.”
The Analysis and
Design of Work
4
C H A P T E R
LEARNING OBJECTIVES
LO 4-1 Analyze an organization’s structure and work-flow process, identifying the

output, activities, and inputs in the production of a product or service. page 147
LO 4-2 Understand the importance of job analysis in strategic

human resource management. page 161
LO 4-3 Choose the right job analysis technique for a variety

of human resource activities. page 165
LO 4-4 Identify the tasks performed and the skills required in a given job. page 167
LO 4-5 Understand the different approaches to job design. page 167
LO 4-6 Comprehend the trade-offs among the various

approaches to designing jobs. page 175
144
>>>
Organizational Structure Contributes to GM’s Major Recall
Organizations exist in order to allow people to the organization were reluctant to take responsibility
accomplish goals and missions that would far for problems or pass bad news up the organization
outstrip what could ever be done by a single person chart. An external investigation of the incident con-
working alone. Large complex missions have to ducted by the U.S. Attorney General’s Office revealed
be broken down into smaller parts that can be that many people were aware of the problem as far
executed by individuals whose contributions can back as 2001, but these individuals either said nothing
then be integrated together. Unfortunately, when the or pointed the finger of blame at other units, and so
structure created by this process is ineffective, this no one actually did anything to solve the problem. In
means that organizations can also do more harm fact, when the U.S. Attorney General’s Office asked a
than could ever be done by a single person working worker who knew about the problem if “fixing the prob-
alone. Nowhere was this more evident than in the lem was part of your job description,” the person simply
2014 recall of 2.7 million General Motor (GM) vehicles answered “No.” The report from the Attorney General’s
due to failures in the ignition system, which resulted Office specifically noted that “no single person owned
in deaths and injuries to more than 500 customers, any decision related to the ignition switch problem.”
and financial losses of over $400 million. The ignition switch problem was one of the first
There were two specific problems associated with to fall on the desk of GM’s new CEO, Mary Barra,
GM’s structure that helped contribute to the ignition who vowed to fix the structural problems that con-
system disaster. First, the structure created functional tributed to this costly incident. Barra note that “we
silos where people who worked on one aspect of used to have an organizational structure built around
the cars rarely spoke to people who worked in other parts—the body, the interior, the electrical structure,
functional areas. For example, the switch problem and unfortunately, that created a situation in which
was, in part, a result of a single engineer who rede- people were expert in this or that without recogniz-
signed a faulty part but failed to renumber it. Because ing people don’t buy this or that—they buy a car and
it was not renumbered, when the part moved down we’ve got to pull it together, and people have to talk.”
through the line through other divisions, those divi- She also noted that GM was “going to restructure
sions all thought they were working on the original operations to prioritize safety.” This was accom-
part. Then, when reports of cars stalling began roll- plished by creating a system of “czars” who have
ing in, this was treated as a customer satisfaction specific decision-making authority that cut across
problem, not a safety issue or a design flaw. Thus, functional units and who all report to a single new
the personnel monitoring customer satisfaction never Vice President of Global Safety.
talked to the personnel in design who were not even
SOURCES: R. Foroohar, “Mary Barra’s Bumpy Ride,” Time Magazine,
aware of the problem until it was too late. October 6, 2014, pp. 33–38; T. Higgens and N. Summers, “GM Recalls:
A second problem with GM’s structure was that it How General Motors Silenced a Whistle-Blower,” Bloomsberg
Businessweek, June 14, 2014, www.businessweek.com; P. Valdes-Dalpena
was not at all clear who had decision-making authority and T. Yellin, “Steps to a Recall Nightmare,” CNNMoney, May 21, 2014,
for different decisions, and people at lower levels of http://money.cnn.com.
145
146 CHAPTER 4 The Analysis and Design of Work
Introduction
In Chapter 2 we discussed the processes of strategy formulation and strategy imple-
mentation. Strategy formulation is the process by which a company decides how it will
compete in the marketplace; this is often the energizing and guiding force for everything
it does. Strategy implementation is the way the strategic plan gets carried out in activi-
ties of organizational members. We noted five important components in the strategy
implementation process, three of which are directly related to the human resource man-
agement function and one of which we will discuss in this chapter: the task or job. For
example, as we can see in the case of GM described in the opening vignette, the way
the work was structured and the confusion regarding decision-making authority created
conditions that led to a very costly recall.
Many central aspects of strategy formulation address how the work gets done, in
terms of individual job design as well as the design of organizational structures that link
individual jobs to each other and the organization as a whole. The way a firm competes
can have a profound impact on the ways jobs are designed and how they are linked via
organizational structure. In turn, the fit between the company’s structure and environ-
ment can have a major impact on the firm’s competitive success.
For example, if a company decides to compete on cost, and hence hire low-cost off-
shore labor, the jobs have to be designed so that they can be performed by minimally
skilled people who will require little training. The organization in this case needs to have
a centralized structure so that low-level workers are not forced into making too many
decisions and the workers should work independently to prevent errors from cascading
through the system. In contrast, if the organization is going to compete by differentiating
its product, and hence hiring high-wage labor, it has to design the jobs in a different way.
Throughout this chapter, we provide examples of the kinds of decisions that need
to be made with regard to how organizations should be structured and to the jobs that
exist within these organizations, so you can learn how these choices affect a number of
outcomes. This includes not just quantity and quality of production, but also outcomes
like coordination; innovation; and worker attraction, motivation, and retention. In many
cases, there are trade-offs associated with the choices, and the more you know about
these trade-offs, the better decisions you can make in terms of making your team or
organization more competitive.
Thus, it should be clear from the outset of this chapter that there is no “one best way”
to design jobs and structure organizations. The organization needs to create a fit between
its environment, competitive strategy, and philosophy on the one hand, with its jobs and
organizational design on the other. Failing to design effective organizations and jobs
has important implications for competitiveness. Many years ago, some believed that the
difference between U.S. auto producers and their foreign competitors could be traced
to American workers; however, when companies like Toyota and Honda came into the
United States and demonstrated clearly that they could run profitable car companies
with American workers, the focus shifted to processes and organization. Although many
U.S. automakers are now making a comeback, as we saw in our opening vignette, for
some companies like GM, this is still an ongoing process.1
This chapter discusses the analysis and design of work and, in doing so, lays out
some considerations that go into making informed decisions about how to create and
link jobs. The chapter is divided into three sections, the first of which deals with “big-
picture” issues related to work-flow analysis and organizational structure. The remaining
two sections deal with more specific, lower-level issues related to job analysis and job
design.
CHAPTER 4 The Analysis and Design of Work 147
The fields of job analysis and job design have extensive overlap, yet in the past they
have been treated differently.2 Job analysis has focused on analyzing existing jobs to
gather information for other human resource management practices such as selection,
training, performance appraisal, and compensation. Job design, on the other hand, has
focused on redesigning existing jobs to make them more efficient or more motivating to
jobholders. Thus job design has had a more proactive orientation toward changing the
job, whereas job analysis has had a passive, information-gathering orientation.
Work-Flow Analysis and

Organization Structure
Work-flow design is the process of analyzing the tasks necessary for the production of a LO 4-1
product or service, prior to allocating and assigning these tasks to a particular job cate- Analyze an organiza-
gory or person. Only after we thoroughly understand work-flow design can we make tion’s structure and
work-flow process,
informed decisions regarding how to initially bundle various tasks into discrete jobs that identifying the output,
can be executed by a single person. activities, and inputs
Organization structure refers to the relatively stable and formal network of vertical in the production of a
and horizontal interconnections among jobs that constitute the organization. Only after product or service.
we understand how one job relates to those above (supervisors), below (subordinates),
and at the same level in different functional areas (marketing versus production) can we
make informed decisions about how to redesign or improve jobs to benefit the entire
organization.
Finally, work-flow design and organization structure have to be understood in the
context of how an organization has decided to compete. Both work-flow design and
organization structure can be leveraged to gain competitive advantage for the firm, but
how one does this depends on the firm’s strategy and its competitive environment.
WORK-FLOW ANALYSIS
All organizations need to identify the outputs of work, to specify the quality and quantity
standards for those outputs, and to analyze the processes and inputs necessary for pro-
ducing outputs that meet the quality standards. This conception of the work-flow process
is useful because it provides a means for the manager to understand all the tasks required
to produce a number of high-quality products as well as the skills necessary to perform
those tasks. This work-flow process is depicted in Figure 4.1.
Analyzing Work Outputs

Every work unit—whether a department, team, or individual—seeks to produce some
output that others can use. An output is the product of a work unit and, within manu-
facturing realms like those discussed in our opening story, this is often an identifiable
object such as a jet engine blade, a forklift, or a football jersey. However, an output
can also be a service, such as the services provided by an airline that transports you to
some destination, a housecleaning service that maintains your house, or a babysitter who
watches over your children.
We often picture an organization only in terms of the product that it produces, and
then we focus on that product as the output. Merely identifying an output or set of out-
puts is not sufficient. Once these outputs have been identified, it is necessary to specify
standards for the quantity or quality of these outputs. In many cases, the number and
Figure 4.1
Developing a Work– Raw Inputs
Unit Activity Analysis
What materials,
data, and
information are
needed?
Equipment Activity Output
What special What tasks are What product,

equipment, required in the information, or
facilities, and production of the service is provided?
systems are output? How is the output
needed? measured?
Human Resources
What knowledge,
skills, and abilities
are needed by
those performing
the tasks?
nature of the outputs chosen create challenges for how to efficiently process the inputs
in order to generate the outputs. For example, recently McDonald’s restaurants added
many new items to its menus, including oatmeal, snack wraps, and lattes in order to
appeal to a wider array of consumers. In fact, the number of menu items at McDonald’s
swelled to 121 items in 2014, compared to just 85 in 2007. Not surprisingly this results
in slower service, and McDonald’s also recorded its worst speed-of-performance metrics
that same year. Managers often referred to the McWrap specifically as a “showstopper”
that required many of the workers to look up a series of instructions in order to execute
a single order. As one franchise owner stated, “We’ve recognized that we’ve overtaxed
our restaurants and need to take a step back on that.” Thus, this first step in deciding on
the number of products or services offered is a critical step when it comes to structuring
the work.3
Analyzing Work Processes

Once the outputs of the work unit have been identified, it is possible to examine the
work processes used to generate the output. The work processes are the activities that
members of a work unit engage in to produce a given output. Every process consists of
operating procedures that specify how things should be done at each stage of the devel-
opment of the product. These procedures include all the tasks that must be performed in
the production of the output. The tasks are usually broken down into those performed by
each person in the work unit. Of course, in many situations where the work that needs to
be done is highly complex, no single individual is likely to have all the required skills.
In these situations, the work may be assigned to a team, and team-based job design is
becoming increasingly popular in contemporary organizations. In addition to providing
a wider set of skills, team members can back each other up, share work when any mem-
ber becomes overloaded, and catch each other’s errors.
For example, in the field of medicine, team-based care is increasingly becoming the
norm. Rather than a single one-on-one doctor–patient relationship, many medical ser-
vices are delivered by a team that might include a nurse practitioner, physician’s assis-
tant, clinical pharmacist, and a variety of technicians who work alongside the primary
physician. Part of this is a result of increased workload created by the new Affordable
Care Act, as well as a reduction in the number of general practitioners minted by medi-
cal schools. As noted by Dr. Kirsten Meisinger, a supervising physician who oversees
an 11-person team, “I can’t possibly do everything that needs to be done for all of our
patients as a single human being.” The main challenge with team-based work design
is to make sure that there is effective coordination and communication between team
members to make sure patients do not fall through the cracks or miss some important
treatment due to a weak “hand-off.”4
Teams are not a panacea and for teams to be effective, it is essential that the level of
task interdependence (how much they have to cooperate) matches the level of outcome
interdependence (how much they share the reward for task accomplishment).5 That is, if
work is organized around teams, team bonuses rather than individual pay raises need to
play a major role in terms of defining rewards. Teams also have to be given the auton-
omy to make their own decisions in order to maximize the flexible use of their skill and
time and thus promote problem solving.6 In addition, some members of teams may lean
too much on the other team members and fail to develop their own skills or take respon-
sibility for their own tasks, and so even in teams it is critical to establish individual
accountability of behavior.7
There is a great deal of value in studying workflow processes and this is best illus-
trated when private equity groups come in and buy a failing company at a low price,
revamp the workflow process, and then sell the company again at a higher price.
Private equity groups employ efficiency experts who try to wring out every ounce
of waste in production operations. When efficiency experts first come into a com-
pany, they are looking for three different kinds of waste: (1) movement that creates
no value, (2) the overburdening of specific people or machines, and (3) inconsistent
production that creates excessive inventories. Typically armed with stopwatches, clip-
boards, and flowcharts, efficiency experts prowl the manufacturing floor for waste that
would not be detected by most managers. More often than not, this leads to a reduc-
tion in headcount because improved procedures dramatically streamline operations.
As Justin Hillenbrand, an executive at Monomoy Capital Partners, notes, “You could
have the best CEO in the world, but in a manufacturing company, profits are made on
the floor.”8
Organizations often work hard to minimize overstaffing via lean production tech-
niques. Lean production refers to processes developed in Japan, but then adopted world-
wide, emphasizing manufacturing goods with a minimum amount of time, materials,
money—and most important—people. Lean production tries to leverage technology,
along with small numbers of flexible, well-trained, and skilled personnel in order to
produce more custom-based products at less cost. This can be contrasted with more tra-
ditional “batch work” methods, where large groups of low-skilled employees churn out
long runs of identical mass products that are stored in inventories for later sale. In lean
production systems, there are fewer employees to begin with, and the skill levels of
those employees are so high that the

opportunity to cuts costs by laying off
employees is simply less viable.
Indeed, a paradox of the most
recent recession in 2008–2009 was
how small many of the layoffs in the
manufacturing sector of the economy
were given the huge drop in produc-
tion levels. For example, 14 months
into the recession of 2000, manufac-
turers cut 9.5% of their employees in
response to a 2% cut in production.
In contrast, 14 months into the most
recent recession, the same 9.5% of
employees were laid off in response to
a 12% cut in production. If the same
Photo by Andrew Ford/Courtesy of ConMed Corporation
ratio of job cuts to production cuts
This job may look tedious or possibly even uninteresting. Considering from the year 2000 held in the year
how to engage employees in seeing the benefits of their work outside of
2009, this would have resulted in an
the lab is an important way to motivate them through their day.
astounding layoff rate of over 50% of
manufacturing employees. Many have attributed the lower “job cut” to a “production
cut” ratio experienced in the most recent recession to the use of job redesign initiatives
that emphasize lean production over more traditional approaches.
For example, at Parker Hannifan Corporation’s plastics manufacturing plant in South
Carolina, lean production techniques have cut the number of people required to run the
plant to such a small number that permanently pulling one highly trained person off the
line saves very little money, and yet makes it impossible to sustain production at all. In
addition, the work has been restructured to create smaller production runs that result in
reduced inventories, so that when a downturn hits, it is noticed more quickly and can be
responded to more gradually. In the past, by the time a recession was detected, invento-
ries had bulged to such a level that more employees had to be laid off more quickly and
for longer time periods.9
Analyzing Work Inputs

The final stage in work-flow analysis is to identify the inputs used in the development of
the work unit’s product. As shown in Figure 4.1, these inputs can be broken down into the
raw materials, equipment, and human skills needed to perform the tasks. Raw materials
consist of the materials that will be converted into the work unit’s product.
Organizations that try to increase efficiency via lean production techniques often
try to minimize the stockpile of inputs via “just-in-time” inventory control procedures.
Indeed, in some cases, inventories are being abandoned altogether, and companies at the
edge of the lean production process do not even manufacture any products until custom-
ers actually place an order for them. For example, surgical device maker Conmed used
to forecast demand for their products one to two months ahead, and when those forecasts
turned out to be inaccurate they would either lose sales or stockpile inventories. Today,
because the length of time it takes to produce their devices has decreased from 6 weeks
to 48 hours, they do not even manufacture any products that are not already sold. The
impact of this can be seen at Conmed’s plant in Utica, New York, where a $93,000
inventory that used to take up 3,300 square feet on the factory floor has been all but
Orion and UPS: Plotting the Path to Efficiency and Savings
On average, one single UPS union workforce that deliv- consistency, is
driver can log over 200 miles ers mainly to widely scattered one of the fea-
and make over 120 stops every households. The problem with tures that make Orion different
day. When you multiply this planning the best route each from most purely mathemati-
times thousands of drivers who day, however, is that there are cal optimizing programs. The
work 5 or 6 days a week for a literally over a billion options. If program recognizes that both
year, then you begin to see how one were to leave each driver to human operators and customers
even very small improvements his or her own discretion in how place a great deal of value on
in efficiency can generate huge to plan their route, there would consistency, and thus, sacrifices
sums of money when it comes be very wide variability in their some degree of pure efficiency
to saving on gas and vehicle decisions, and the odds that any in order to create a comfortable
wear and tear. As the company one of them might come up with routine in terms of delivery times
CEO says, “In our business, the optimal path, is for all intents and routes.
small things mean a lot. If you and purposes zero.
can reengineer the process, This is where the computer DISCUSSION QUESTION
the gains will be greater than program “Orion” comes in. Orion Can you think of any other
you think.” In fact, UPS can save is a 1,000-page algorithm that industries or jobs where a pro-
$50 million a year by just reduc- tries to mathematically deter- gram like Orion might have
ing the aggregated travel dis- mine the optimal route for mak- value, and is this a product
tance for its average driver just ing those 120 stops every day or service that you believe
one mile. for UPS drivers. Working like a UPS could market to other
This is critical to UPS because GPS system on steroids, Orion companies?
it competes directly with FedEx, constantly updates a driver’s SOURCES: S. Rosenbush and L. Stevens,
but unlike FedEx, which employs schedule and automatically vec- “At UPS, the Algorithm Is the Driver,” The Wall
a private contractor model and tors the vehicle based on two Street Journal, February 16, 2015, www.wsj
.com; D. Zax, “Brown Down: UPS Drivers
delivers mainly to businesses, criteria: optimum efficiency and versus UPS Algorithms,” Fast Company,
UPS manages a high-wage consistency. This latter criterion, January 3, 2013, www.fastcompany.com.
eliminated. This allowed the company to take back lost sales from Chinese competitors
whom, despite their lower labor costs, face the costs of long lead times, inventory pile-
ups, and quality problems and transportation costs. As David Johnson, Vice President for
Global Operations at Conmed notes, “If more U.S. companies deploy these job design
methods we can compete with anybody and still provide security to our workforce.”10
However, there are also downsides to “just-in-time” inventory management practices.
Specifically, the efficiency gained from maintaining an inventory measured in days rather
than weeks creates a of lack of flexibility. An example of this can be seen in the aftermath
of the earthquake that struck northern Japan in 2011. This region of Japan was home to a
number of suppliers who had to unexpectedly halt all production overnight on March 22.
This disruption rippled through the entire global economy that relied on “just-in-time”
practices when organizations as varied as Boeing, General Motors, John Deere, Hewlett-
Packard, and Dell had to halt their own production lines after running out of inputs. As
one analyst noted, “If supply is disrupted in this situation, there’s nowhere to get inputs.”11
Equipment refers to the technology and machinery necessary to transform the
raw materials into the product. Increasingly, as we see in the “Competing through
151
Technology” box, equipment refers to software programs that try to support human
operators. Although most of the early software programs were designed to free human
operators from many mundane tasks, such as an auto-pilot function on an airplane or
computer-aided design program for an architect, increasingly new software is capable of
analysis and decision making. Thus, rather than “up-skilling” the work, many programs
“de-skill” the work, and over time, people who use it become less self-reliant. For exam-
ple, one study found that the more pilots relied on auto-pilot when actually flying, the
less able they were to react to emergencies in a training simulator. Some actually attrib-
uted the medical community’s slow reaction to the Ebola breakout to medical diagnos-
ing software that was not sensitive to detecting highly rare and complex events. As one
physician noted, “medical software is no replacement for basic history-taking, examina-
tion skills, and critical thinking.”12 Still, as our Evidence-Based HR feature shows, there
are cases in the field of medicine where electronic decision-making support can have a
strong positive impact on efficiency.
In general, the amount of money that an organization invests in equipment is calcu-
lated in terms of the amount of “capital spending per worker,” and some in the United
States are concerned that this form of investment has not kept pace with what is needed
to compete against international competition. For example, 2014 marked the fifth year
in a row that the U.S. economy showed no growth in capital spending per worker, and
EVIDENCE-BASED HR
A key element of managing workflow efficiently is relying on the latest empirical
evidence regarding best practices for certain routine tasks and then making sure every
employee engages in standardized protocols. Sometimes this means not using equip-
ment. In fact, nowhere is the push to develop standardized procedures more urgent
than in the field of medicine, where spiraling costs in the United States—that do not
seem to be related to patient outcomes—have been a major problem when it comes to
affordable care. However, getting physicians who had wide latitude on making their
own decisions to engage in standardized practices has been a challenge. Still, many
different experiments have shown that if lone physician judgments were replaced by
standard practices recommended by professional associations such as the American
Heart Association (AHA), hospitals would be much better off.
For example, cardiac telemetry is performed with equipment that lets one monitor
the heart for abnormal rhythms. At Christiana Care hospitals, administrators knew
that this equipment was being used by many physicians, even when it was not con-
sidered necessary by the AHA. In order to reduce routine use of this machine, the
electronic ordering system was redesigned so that this was not a multiple choice
answer that could simply be checked. A physician could still override the system
and “write it in,” but he or she had to take this one extra step. The results a year later
showed that use of telemetry fell by 70%, costs were reduced by over $13,000, and
there was no negative effect on patients. Nader Najafi, a professor from the Univer-
sity of California–San Francisco who led the study, noted that “it is remarkable to
achieve such a substantial reduction in the use of such a resource without significantly
increased adverse outcomes.”
SOURCE: J. Whalen, “Hospitals Cut Costs by Getting Doctors to Stick to Guidelines,” The Wall Street Journal,
September 22, 2014, www.wsj.com.
not coincidentally, this year also witnessed a severe drop in worker productivity. Even
though profits are up, U.S. employers are not investing in equipment but instead are
using their funds to pay stock dividends or support stock buyback programs. Thus, the
average age of equipment in U.S. plants is 7.4 years old—the highest figure in 20 years.13
The final input in the work-flow process is the human skills and efforts necessary to
perform the tasks. Obviously, the human skills consist of the workers available to the
company. Generally speaking, in terms of human skills, work should be delegated to
the lowest-cost employee who can do the work well, and in some cases this principle
gets violated when too much emphasis is placed on reducing headcount. For example,
between 2009 and 2011 the U.S. economy wiped out close to 1 million office and admin-
istrative support positions, and at one level, this might seem a reasonable place to cut
costs. However, does it really make financial sense to have a C-level executive booking
their own travel, typing up routine paperwork, loading toner into the copier and screen-
ing 500 e-mails a day when 400 of those are basically spam? For an executive making
$1 million a year, an $80,000 assistant only needs to increase that person’s productivity
by 8% for the company to break even.14
ORGANIZATION STRUCTURE
Whereas work-flow design provides a longitudinal overview of the dynamic relation-
ships by which inputs are converted into outputs, organization structure provides a cross-
sectional overview of the static relationships between individuals and units that create
the outputs. Organization structure is typically displayed via organizational charts that
convey both vertical reporting relationships and horizontal functional responsibilities.
Dimensions of Structure
Two of the most critical dimensions of organization structure are centralization and
departmentalization. Centralization refers to the degree to which decision-making Centralization
authority resides at the top of the organizational chart as opposed to being distributed Degree to which
decision-making
throughout lower levels (in which case authority is decentralized). Departmentalization
authority resides at the
refers to the degree to which work units are grouped based on functional similarity or top of the organiza-
similarity of work flow. tional chart.
For example, a school of business could be organized around functional similarity so
that there would be a marketing department, a finance department, and an accounting Departmentalization
department, and faculty within these specialized departments would each teach their Degree to which work
area of expertise to all kinds of students. Alternatively, one could organize the same units are grouped
school around work-flow similarity, so that there would be an undergraduate unit, a based on functional
similarity or similarity of
graduate unit, and an executive development unit. Each of these units would have its
work flow.
own marketing, finance, and accounting professors who taught only their own respective
students and not those of the other units.
Structural Configurations
Although there are an infinite number of ways to combine centralization and depart-
mentalization, two common configurations of organization structure tend to emerge in
organizations. The first type, referred to as a functional structure, is shown in Figure 4.2.
A functional structure, as the name implies, employs a functional departmentaliza-
tion scheme with relatively high levels of centralization. High levels of centralization
tend to go naturally with functional departmentalization because individual units in the
Figure 4.2
The Functional Structure
President
Vice president Vice president Vice president Vice president Vice president Vice president
marketing engineering manufacturing finance personnel legal affairs
Marketing Engineering Manufacturing Finance Personnel Legal affairs

department department department department department department
Shipping
Market Quality
Sales Records and Production
research assurance
receiving
Research Sales Records

Plant I Plant II Plant III
groups force clerk
Supervisor Supervisor Supervisor Supervisor

line 1 line 2 line 3 line 4
Assembly workers
SOURCE: Adapted from J. A. Wagner and J. R. Hollenbeck, Organizational Behavior: Securing Competitive Advantage, 3rd ed. (New York: Prentice
Hall, 1998).
structures are so specialized that members of the unit may have a weak conceptualization
of the overall organization mission. Thus, they tend to identify with their department and
cannot always be relied on to make decisions that are in the best interests of the organi-
zation as a whole. In addition, the opportunity for finger pointing and conflict between
subunits that fundamentally do not understand the work that other subunits do creates
the need for a centralized decision-making mechanism to manage potential disputes.15
For example, some believed that one of the major problems with the failed launch of
the HealthCare.gov website that was meant to support the administration of the Afford-
able Care Act was that the structure of the system that employed highly functionalized
groups for different elements of the website were not tightly linked to a centralized
authority system. In testimony before the U.S. Congress, each contractor responsible for
one part of the system pointed the finger of blame at some other contractor, and the cen-
tral administration seemed unable to convey who they thought was accountable for what.
At one point, the congressional committee became so frustrated with the lack of clarity
on who in the central administration made key decisions that they forced people at the
contracting agencies to name specifically who talked to whom on what date.16 Note how
the problems stated here are exactly the same issues that plagued General Motors in the
vignette that opened this chapter.
Structuring a Global Terrorist Organization
Although one’s stereotype of raise their own money through leaves most of
religiously based radical terrorist the sale of stolen goods, smug- the structure
groups might be that they are gling, kidnapping, extortion, and intact and opera-
loosely structured and impulsive even oil production. The local tional. However, this structure
in their actions, based upon a divisions are then further broken is very vulnerable to internal
study of documents retrieved down into functional specialties exploitation since the lack of
when U.S. forces helped allied such as “mortars,” “booby traps,” oversight makes it hard to control
forces retake Anbar Province, “gas production,” “tents,” and cheating on the tax or failing to
this is hardly the case when it “kitchens.” At the lowest level report on side operations that
comes to ISIS (i.e., the Islamic of the organization are “suicide generate revenue unknown to
State in Iraq and Syria). These bombers,” who typically are for- central authorities. Thus, as we
recovered documents detailed eign fighters with no real skills have noted, there are strengths
a very frightening but yet “very and who cannot speak Arabic. and liabilities associated with all
rational managerial approach” The subunits contribute a tax forms of structure, even those
to organization that resembles to the national treasury that is directed at creating chaos.
many modern businesses, often managed by the central authori-
referred to as an M-form. ties, and this treasury is used DISCUSSION QUESTION
Specifically, ISIS is struc- to help support strategic initia- How does the structure that is
tured as a set of geographically tives that may cross geographic employed by one’s competitor
decentralized, semi-autonomous boundaries or exploit rich local affect one’s own structure, and if
units that are responsible for opportunities that are too expen- one is trying to destroy an orga-
day-to-day operations, but who sive for any one geographic nization like ISIS, what type of
report to a small central unit unit to support. This structure structure would be best?
that is responsible for long-term is highly resistant to external SOURCES: C. Simpson, “The Banality of
strategy. The geographical sub- attacks from outside the organi- Islamic State,” Bloomsberg Businessweek,
November 20, 2014, pp. 56–61; J. Opperman,
units are for the most part self- zation, because lopping off the “How ISIS Works,” The New York Times
funding, in the sense that they small head of the organization September 16, 2014, www.nytimes.com.
Alternatively, a second common configuration is a divisional structure, three exam-

ples of which are shown in Figures 4.3, 4.4, and 4.5. Divisional structures combine a
divisional departmentalization scheme with relatively low levels of centralization. Units
in these structures act almost like separate, self-sufficient, semi-autonomous organiza-
tions. The organization shown in Figure 4.3 is divisionally organized around different
products; the organization shown in Figure 4.4 is divisionally organized around geo-
graphic regions; and the organization shown in Figure 4.5 is divisionally organized
around different clients. As you can see from the “Competing through Globalization”
box, there are certain virtues to organizing divisionally by geographic region that make
this particular form of structure a good fit for terrorist organizations.
Regardless of how subunits are formed, many organizations try to keep the size of
each subunit small enough that people within the subunit feel like they can make a differ-
ence and feel connected to others. People within very large subunits experience reduced
feelings of individual accountability and motivation, which hinders organizational per-
formance. Research suggests that these types of problems start to manifest themselves
once a group exceeds 150 people and hence many organizations try to limit subunits
155
Figure 4.3
Divisional Structure: Product Structure
President
Vice president Vice president Vice president Vice president Vice president
Vice president
consumer automotive household corporate corporate
legal affairs
electronics components furnishings administration finance
Consumer electronics Household furnishings Corporate office Corporate legal Corporate finance
division division staff division division
Automotive Automotive Automotive Automotive

marketing engineering manufacturing personnel
SOURCE: Adapted from J. A. Wagner and J. R. Hollenbeck, Organizational Behavior: Securing Competitive Advantage, 3rd ed. (New York: Prentice
Hall, 1998).
to this specific size. For example, W.L. Gore and Associates, the company that makes
Gore-Tex and other innovative materials, typically will break up a division once its size
exceeds this number, splitting it in two and opening a new physical office.17
Because of their work-flow focus, their semi-autonomous nature, and their proxim-
ity to a homogeneous consumer base, divisional structures tend to be more flexible and
innovative. They can detect and exploit opportunities in their respective consumer base
faster than the more centralized functionally structured organizations. In fact, when
highly functional structures that are really built for efficiency and cost containment try
to compete via speed and flexibility, serious problems can ensue.
This is perfectly illustrated in the “fast fashion” industry. Historically, retailers
launched new styles at the beginning of each season, and it often took a full year for
Figure 4.4
Divisional Structure: Geographic Structure
President
North America Europe Asia South America Australia
SOURCE: Adapted from J. A. Wagner and J. R. Hollenbeck, Organizational Behavior: Securing Competitive Advantage, 3rd ed.
(New York: Prentice Hall, 1998).
Figure 4.5
Divisional Structure: Client Structure
President
military consumer government corporate financial
contracts products contracts contracts services
SOURCE: Adapted from J. A. Wagner and J. R. Hollenbeck, Organizational Behavior: Securing Competitive Advantage, 3rd ed.
(New York: Prentice Hall, 1998).
a design concept to go from the drawing board to the store floor. Although last minute
changes could be made, these were typically costly and cut into margins at a rate that
offset the value of the change. However, chains such as H&M and Zara are rewriting
the rules of the fashion industry and increasingly introducing new styles every month
as part of the push for “fast fashion.”18 The only problem with this practice, however, is
that many feel that it can only be accomplished via the exploitation of workers in small,
emerging, third-world labor markets. It might not seem like such a major request to
shift an order from 20,000 blue blouses to 10,000 blue blouses and 10,000 red blouses.
However, quick shifts in operations like this, when not accompanied by changes in order
delivery dates, cause plant managers in emerging economies to pump up worker hours
and take short cuts with maintenance that create major safety issues.
These problems have surfaced most clearly in Bangladesh, a country that has been at
the forefront of the fast fashion industry after surging wages in China sent retailers look-
ing for cheaper and more accommodating manufacturers. In May 2013, 500 workers toil-
ing away at the Rana Plaza garment factory died when the five-story building housing
the operations collapsed. In all, over 1,000 garment workers in Bangladesh died between
2006 and 2013, most of whom were young women working 16-hour days for less than
$40 a month.19
In some extreme cases, small divisions may not even be supervised by a formal man-
ager, and the employees may self-manage. For example, Valve Corporation, a videogame
producer located in Bellevue, Washington, touts itself as a “boss-free” company where
decisions regarding hiring, firing, and pay are made by the employees themselves, who
are organized into teams. The teams tend to vote on most decisions, or in some cases,
due to experience or expertise, one or two people will emerge as leaders for specific
projects. Typically this type of leadership emergence occurs in a way that is supported
by the team. As one employee notes, “It absolutely is less efficient up front, but once you
have the organization behind it, the buy-in and the execution happen quickly.”20
A good example of the interplay of alternative structures can be seen in recent devel-
opments in the computer industry. Historically, the computer industry started with
large and divisionally structured companies like IBM, that over time splintered off into
increasingly smaller and functionally specialized organizations. Technology companies
focused in narrowly on hardware or software or data storage or IT consulting services,
but no one company was interested in providing all of these services. The thought was
that specialization would boost efficiency and technical innovation. Indeed, as one ana-
lyst noted, “today, a typical corporate computer system might be assembled by Accenture
PLC with data storage systems from EMC Corporation and computers from Hewlett-
Packard that use chips from Intel Corporation to run Oracle software.”
However, Oracle recently announced that they were going to reverse that trend with
their announcement to purchase Sun Microsystems Inc., making them both a software pro-
ducer and a hardware manufacturer. Oracle now plans on selling complete systems made
of chips, computers, storage devices, and software—highlighting a competitive strategy
that is based on the idea that corporate customers are tired of assembling and integrating
different technological components from multiple suppliers. In similar moves, Hewlett-
Packard announced just a few months after this that they were going to purchase Electronic
Data Systems, thus entering the data storage industry and Apple announced it was making
a move to enter the semiconductor chip business by buying chip maker P.A. Semi.
The temptation toward this type of “vertical integration” can be strong because one
of the virtues of divisional structures is that they allow one to control all aspects of an
entire business, making one’s former supplier part of the team, as opposed to an unpre-
dictable element of the business environment. Vertical integration also tends to generate
large-scale operations that would not naturally evolve organically from smaller organiza-
tions, and with size comes some degree of power. Indeed, Oracle’s CEO, Larry Ellison
directly invoked the old 1960s IBM model by stating, “we want to be T. J. Watson’s
IBM, which was the greatest company in the history of enterprise in America because
its hardware and software ran most companies.”21 Time will tell whether this strategy is
effective, or like the old IBM, whether Oracle will learn that there are real limits associ-
ated with divisional structures as well.
Divisional structures are not very efficient because of the redundancy associated
with each group carrying its own functional specialists. Also, divisional structures can
“self-cannibalize” if the gains achieved in one unit come at the expense of another unit.
For example, Kinko’s stores are structured divisionally with highly decentralized con-
trol. Each manager can set his or her own price and has autonomy to make his or her
own decisions. But the drawback to this is lack of coordination in the sense that “every
Kinko’s store considers every other Kinko’s store a competitor; they vie against each
other for work, they bid against each other competing on price.”22 These problems even-
tually led to the demise of the company when it was taken over by FedEx, restructured,
and renamed FedEx Office and Print Shops.23
Lack of coordination caused by decentralized and divisional structures can be especially
problematic with new and emerging organizations that do not have a great deal of history
or firmly established culture. Higher levels of centralization and more functional design of
work make it easier in this context to keep everyone on the same page while the business
builds experience.24 Decentralized and divisional structures can also create problems if the
stand-alone divisions start making decisions that are overly risky or out of line with the
organization’s larger goals. For example, many analysts felt that many of the problems asso-
ciated with the near bankruptcy of Citibank in 2009 were caused by excessive risk taking
in several autonomous divisions that were not being closely monitored by any centralized
authority. This was especially the case with the division that managed collateralized debt
obligations (CDOs). Many conservative banking analysts warned that CDOs and other sim-
ilar derivatives spread risk and uncertainty throughout the economy more widely and did
little to reduce risk through diversification. This belief was validated in the 2008 recession,
when the housing market crashed and thousands of people defaulted on their mortgages.25
Another example of this can be seen in the recent experiences at Procter and Gam-
ble (P&G), where each separate division was given control over its own research and
development budget. During tough economic times, each separate unit began to reduce
expenditures on R&D resulting in an effort to tighten their budgets and meet short-term
profit goals. The cumulative effect of all of these short-term independent decisions was
that as a company, P&G was under investing in R&D, and a dearth of new and inno-
vative products wound up harming long-term competitiveness. CEO Bob McDonald
stepped in and centralized the R&D function so that the majority of researchers worked
in a single unit and reported to a single authority, Jorge Mesquita. The hope was to lever-
age the research talent that was spread across the divisions and consolidate them into a
single unit focused on more radical breakthroughs rather than incremental innovations.26
Alternatively, functional structures are very efficient, with little redundancy across
units, and provide little opportunity for self-cannibalization or for rogue units running
wild. Also, although the higher level of oversight in centralized structures tends to
reduce the number of errors made by lower level workers, when errors do occur in overly
centralized systems, they tend to cascade through the system as a whole more quickly
and can, therefore, be more debilitating. Moreover, these structures tend to be inflexible
and insensitive to subtle differences across products, regions, or clients.
Functional structures are most appropriate in stable, predictable environments, where
demand for resources can be well anticipated and coordination requirements between
jobs can be refined and standardized over consistent repetitions of activity. This type of
structure also helps support organizations that compete on cost, because efficiency is
central to making this strategy work. Divisional structures are most appropriate in unsta-
ble, unpredictable environments, where it is difficult to anticipate demands for resources,
and coordination requirements between jobs are not consistent over time. This type of
structure also helps support organizations that compete on differentiation or innovation,
because flexible responsiveness is central to making this strategy work.
Of course, designing an organizational structure is not an either–or phenomenon, and
some research suggests that “middle-of-the-road” options that combine functional and divi-
sional elements are often best. For example, most organizations take a “mixed” approach
to how they structure the Human Resource function within their organization. Typically,
there is a subunit called a shared service center that is highly centralized and handles all
the major routine transactional tasks such as payroll. There is also a center of excellence
subunit that houses specialized expertise in the area of training or labor relations, which is
centralized but separate from the shared service center. Finally, there is a third decentral-
ized subunit that acts as business partner to other sub-unit leaders on talent management
or succession planning. This three-pronged structure has elements that strive to achieve
efficiency when it comes to routine tasks, specialization when it comes to complex tasks,
and flexibility when it comes to supporting each separate business unit.27
Structure and the Nature of Jobs

Finally, moving from big-picture issues to lower-level specifics, the type of organization
structure also has implications for the design of jobs. Jobs in functional structures need
to be narrow and highly specialized. Workers in these structures (even middle manag-
ers) tend to have little decision-making authority or responsibility for managing coor-
dination between themselves and others. For example, at Nucor Steel, production at its
30 minimill plants has doubled almost every two years and profit margins have pushed
beyond 10% largely because of its flat, divisional structure. At Nucor, individual plant
managers have wide autonomy in how to design work at their own mills. Nucor plants
sometimes compete against each other, but the CEO makes sure that the competition
is healthy and that best practices are distributed throughout the organization as fast as
possible, preventing any long-term sustainable advantage to any one plant. Moreover,
the profit-sharing plan that makes up the largest part of people’s pay operates at the orga-
nizational level, which also promotes collaboration among managers who want to make
sure that every plant is successful. Thus, after taking over a new mill for the first time,
one new plant manager got a call or visit from every other manager, offering advice and
assistance. As the new manager noted, “It wasn’t idle politeness. I took them up on it.
My performance impacted their paycheck.”28
Nucor employs just four levels of management and operates a headquarters of just
66 people, compared to one of its competitors, U.S. Steel, which has over 20 levels
and 1,200 people at its headquarters. This gives Nucor a long-term sustainable com-
petitive advantage, which it has held for close to 15 years. Sales at Nucor grew from
$4.5 billion in 2000 to over $13 billion in 2006. During the same period, U.S. Steel’s
volume decreased by 6%. This has translated into success for both investors (roughly
400% return on investment in the last five years) and workers, whose wages average
$100,000 a year, compared to $70,000 a year at U.S. Steel. As one industry analyst notes,
“In terms of a business model, Nucor has won this part of the world,” and much of that
victory can be explained by their superior structure and process for managing work.29
The choice of structure also has implications for people who would assume the jobs cre-
ated in functional versus divisional structures. For example, managers of divisional struc-
tures often need to be more experienced or high in cognitive ability relative to managers
of functional structures.30 The relatively smaller scope and routine nature of jobs created
in centralized and functional structures make them less sensitive to individual differences
between workers. The nature of the structure also has implications for relationships, in the
sense that in centralized and functional structures people tend to think of fairness in terms
of rules and procedures, whereas in decentralized and divisional structures, they tend to
think of fairness in terms of outcomes and how they are treated interpersonally.31
Taller structures also have implications for organizational culture in terms of ethics
and accountability. For example, in a highly public scandal, Putnam Investments was
fined $110 million for engaging in “market timing,” that is, jumping quickly in and out
of funds in order to take advantage of momentary market inefficiencies. This is consid-
ered an unethical practice within the industry because it increases fund expenses which,
in turn, harms long-term investors. Many long-term investors left the organization, some
of whom had more than $800 million being managed by Putnam.
According to Putnam insiders, the organization’s tall and narrow organizational struc-
ture created a situation in which too many people were managing other people and tell-
ing them what they had to do to get promoted. Because the only way to earn more money
at Putnam was to climb the corporate ladder, too much pressure was put on manag-
ers and employees alike to boost short-term results in order to attract the attention of
those high above. The culture was one where people tended to ask “What is the fine for
this?” instead of “What does this do to help my clients?” When new CEO Ed Haldeman
was brought in to repair the damage, one of his first steps was to remove hundreds of
salespeople, and then flatten the structure. The goal was to attract a different kind of
employee, who would be less interested in short-term gains and hierarchical promotions
handed out by others and more interested in establishing personal long-term relation-
ships with customers and more collaborative relationships with colleagues. In Halde-
man’s words, “To retain and attract the best people, it’s necessary to provide them with
autonomy and independence to make their own decisions.”32
In our next section, we cover specific approaches for analyzing and designing jobs.
Although all of these approaches are viable, each focuses on a single, isolated job. These
approaches do not necessarily consider how that single job fits into the overall work flow
or structure of the organization. Whereas the Putnam Investments example shows how a
firm moved from a functional structure to a divisional structure, Eli Lilly changed their
structure in just the opposite direction, and this reinforces our general principle that there
is no “one best way” when it comes to organizational structure. Without this big-picture
appreciation, we might redesign a job in a way that might be good for that one job but
out of line with the work flow, structure, or strategy of the organization.
For example, because patents for well-established drugs run out after a set time
period, a company like Eli Lilly can only survive by inventing new products before the
time bomb represented by their older drugs goes off. Faced with the prospect of losing
the patent on its $5 billion a year schizophrenia pill, Zyprexa, this company restructured
operations in a functional direction in order to create new products more quickly and
efficiently. For example, all persons who were responsible for converting molecules into
medicine were taken out of their home departments and placed under one roof in the new
Development Center for Excellence.
This group of intensely focused specialists, who were all working together for the
first time, came up with an innovative new method for launching and testing drugs. This
group took a formerly sequential two-stage process for determining general effectiveness
and then the optimal dosage, and converted it into a single-stage process where multiple
dose levels were tested all at once and compared to each other. This process shaved
14 months off the process of developing a new drug for diabetes, and was then general-
ized to other therapeutic causes.33
Job Analysis LO 4-2

Understand the impor-
Job analysis refers to the process of getting detailed information about jobs. It is importance of job analysis
tant for organizations to understand and match job requirements and people to achieve in strategic human
high-quality performance. This is particularly true in today’s competitive marketplace. resource management.
Job Analysis
THE IMPORTANCE OF JOB ANALYSIS The process of getting
Job analysis is the building block of everything that human resource managers do. detailed information
Almost every human resource management program requires some type of information about jobs.
that is gleaned from job analysis: selection, performance appraisal, training and devel-
opment, job evaluation, career planning, work redesign, and human resource planning.
Work Redesign. As previously discussed, job analysis and job design are interrelated.
Often a firm will seek to redesign work to make it more efficient or effective. To rede-
sign the work, detailed information about the existing job(s) must be available. In addi-
tion, redesigning a job will, in fact, be similar to analyzing a job that does not yet exist.
Human Resource Planning. In human resource planning, managers analyze an orga-
nization’s human resource needs in a dynamic environment and develop activities that
enable a firm to adapt to change. This planning process requires accurate information
about the levels of skill required in various jobs to ensure that enough individuals are
available in the organization to meet the human resource needs of the strategic plan.
Selection. Human resource selection identifies the most qualified applicants for
employment. To identify which applicants are most qualified, it is first necessary to
determine the tasks that will be performed by the individual hired and the knowledge,
skills, and abilities the individual must have to perform the job effectively. This informa-
tion is gained through job analysis.
Training. Almost every employee hired by an organization will require training. Some
training programs may be more extensive than others, but all require the trainer to have
identified the tasks performed in the job to ensure that the training will prepare individu-
als to perform their jobs effectively.
Performance Appraisal. Performance appraisal deals with getting information about
how well each employee is performing in order to reward those who are effective,
improve the performance of those who are ineffective, or provide a written justification
for why the poor performer should be disciplined. Through job analysis, the organization
can identify the behaviors and results that distinguish effective performance from inef-
fective performance.
Career Planning. Career planning entails matching an individual’s skills and aspi-
rations with opportunities that are or may become available in the organization. This
matching process requires that those in charge of career planning know the skill require-
ments of the various jobs. This allows them to guide individuals into jobs in which they
will succeed and be satisfied.
Job Evaluation. The process of job evaluation involves assessing the relative dollar
value of each job to the organization to set up internally equitable pay structures. If pay
structures are not equitable, employees will be dissatisfied and quit, or they will not see
the benefits of striving for promotions. To put dollar values on jobs, it is necessary to get
information about different jobs to determine which jobs deserve higher pay than others.
THE IMPORTANCE OF JOB ANALYSIS TO LINE MANAGERS

Job analysis is clearly important to the HR department’s various activities, but why it is
important to line managers may not be as clear. There are many reasons. First, manag-
ers must have detailed information about all the jobs in their work group to understand
the work-flow process. Second, managers need to understand the job requirements to
make intelligent hiring decisions. Very seldom do employees get hired by the human
resource department without a manager’s input. Third, a manager is responsible for
ensuring that each individual is performing satisfactorily (or better). This requires the
manager to evaluate how well each person is performing and to provide feedback to
those whose performance needs improvement. Finally, it is also the manager’s respon-
sibility to ensure that the work is being done safely, knowing where potential hazards
might manifest themselves and creating a climate where people feel free to interrupt the
production process if dangerous conditions exist.34
For example, some were shocked when Alcoa’s new CEO Paul O’Neill’s opening
remarks at his first shareholders meeting were focused on pointing out the nearest emer-
gency exits in the building. However, O’Neill’s emphasis on safety and work processes
actually wound up making him one of the best CEOs in history. After he took over at
Alcoa, O’Neill changed reporting procedures so that any time an employee got hurt, the
department head in that unit had to develop a plan detailing how work processes were
going to be changed to make sure the same accident did not happen again. Executives
who failed to embrace this new standard routine were fired. As a result of this new pol-
icy, each department head had to become intimately familiar with work processes which
ultimately led to many conversations with lower level workers who had great ideas for
not only shoring up safety, but also streamlining workflow. Eventually, even as safety
was improving, costs came down, quality went up and productivity skyrocketed.35
Of course, one problem with trying to make job analysis fulfill so many differ-
ent purposes is that the best job analysis for one objective may not be the best job
analysis for another. For example, a job description that is based on a job analysis
performed for recruitment purposes needs to be short and attract attention to appli-
cants who may not spend a great deal of time reading an advertisement. In contrast,
a job description that is based on a job analysis used as part of a performance man-
agement program needs to be detailed enough to tease out the strengths and weak-
nesses of a job incumbent who may have been observed over a full one year. Thus, a
company may actually wind up performing multiple job analyses for a single job or
derive multiple job descriptions from a single job analysis. Sodexo USA, a food and
facilities management company, does exactly this and has “dual documents” for over
900 different jobs.36
JOB ANALYSIS INFORMATION

Nature of Information
Two types of information are most useful in job analysis: job descriptions and job speci-
fications. A job description is a list of the tasks, duties, and responsibilities (TDRs) that a Job Description
job entails. TDRs are observable actions. For example, a clerical job requires the job- A list of the tasks,
holder to type. If you were to observe someone in that position for a day, you would cer- duties, and responsi-
bilities (TDRs) that a job
tainly see some typing. When a manager attempts to evaluate job performance, it is most entails.
important to have detailed information about the work performed in the job (that is, the
TDRs). This makes it possible to determine how well an individual is meeting each job
requirement. Table 4.1 shows a sample job description. On the one hand, job descriptions
need to be written broadly because overly restrictive descriptions make it easy for some-
one to claim that some important task, perhaps unforeseen, “is not my job.” On the other
hand, lack of specificity can also result in disagreement and conflict between people
Table 4.1
A Sample Job Description
Job Title: Maintenance Mechanic

General Description of Job: General maintenance and repair of all equipment used in the operations of a
particular district. Includes the servicing of company vehicles, shop equipment, and machinery used on job sites.
1. Essential Duty (40%): Maintenance of Equipment
Tasks: Keep a log of all maintenance performed on equipment. Replace parts and fluids according to
maintenance schedule. Regularly check gauges and loads for deviances that may indicate problems with
equipment. Perform nonroutine maintenance as required. May involve limited supervision and training of
operators performing maintenance.
2. Essential Duty (40%): Repair of Equipment
Tasks: Requires inspection of equipment and a recommendation that a piece be scrapped or repaired. If
equipment is to be repaired, mechanic will take whatever steps are necessary to return the piece to working
order. This may include a partial or total rebuilding of the piece using various hand tools and equipment. Will
primarily involve the overhaul and troubleshooting of diesel engines and hydraulic equipment.
3. Essential Duty (10%): Testing and Approval
Tasks: Ensure that all required maintenance and repair has been performed and that it was performed
according to manufacturer specifications. Approve or reject equipment as being ready for use on a job.
4. Essential Duty (10%): Maintain Stock
Tasks: Maintain inventory of parts needed for the maintenance and repair of equipment. Responsible for
ordering satisfactory parts and supplies at the lowest possible cost.
Nonessential Functions
Other duties as assigned.
about the essential elements of what the job entails.37 Thus, it is critical to strike an effec-
tive balance between breadth and specificity when constructing job descriptions.
Job Specification A job specification is a list of the knowledge, skills, abilities, and other characteristics
A list of the knowledge, (KSAOs) that an individual must have to perform the job. Knowledge refers to factual or
skills, abilities, and
procedural information that is necessary for successfully performing a task. A skill is an
other characteristics
(KSAOs) that an indi- individual’s level of proficiency at performing a particular task. Ability refers to a more
vidual must have to general enduring capability that an individual possesses. Finally, other characteristics
perform a job. might be personality traits such as one’s achievement motivation or persistence. Thus
KSAOs are characteristics about people that are not directly observable; they are observ-
able only when individuals are carrying out the TDRs of the job. If someone applied for
the clerical job discussed, you could not simply look at the individual to determine
whether he or she possessed typing skills. However, if you were to observe that individ-
ual typing something, you could assess the level of typing skill. When a manager is
attempting to fill a position, it is important to have accurate information about the char-
acteristics a successful jobholder must have. This requires focusing on the KSAOs of
each applicant.
Sources of Job Analysis Information

In performing the job analysis, one question that often arises is, Who should be respon-
sible for providing the job analysis information? Whatever job analysis method you
choose, the process of job analysis entails obtaining information from people familiar
with the job. We refer to these people as subject-matter experts because they possess
deep knowledge of the job.
In general, it will be useful to go to the job incumbent to get the most accurate infor-
mation about what is actually done on the job. This is especially the case when it is diffi-
cult to monitor the person who does the job. The ratings of multiple job incumbents that
are doing the same job do not always agree, however, especially if the job is complex and
does not involve standardized equipment or tight scripts for customer contact.38 Thus,
you will also want to ask others familiar with the job, such as supervisors, to look over
the information generated by the job incumbent. This serves as a check to determine
whether what is being done is congruent with what is supposed to be done in the job.
Job incumbents are also useful when one is trying to assess the informal social network
that exists within the formal organizational structure. That is, although the formal orga-
nizational structure suggests who should be talking to whom from a top-down normative
perspective, an analysis of a company’s social structure actually shows who really is
talking to whom from a bottom-up descriptive perspective. In fact, one example of the
growing field of business analytics deals with people analytic programs that show who
is talking to whom on a day-to-day basis via self-report surveys or e-mail trails or from
data derived from wearable sensors. In many cases, social networks develop due to limi-
tations in the formal structure when people realize they need to interact with some per-
son in a way that was not anticipated by a formal organizational designer. Once alerted
to this need, formal planners may wish to reconfigure the formal structure to reflect the
needs identified by the informal, emergent social structure.39
In contrast to cases where some communication link develops between people in
order to meet a legitimate need to get the job done, a close examination of the social
network in other cases uncovers individuals who overcommunicate for no good reason
related to the work, and hence wind up wasting their time and the time of others. For
example, one company that performed an analysis of its e-mail communications found
one executive who generated so many e-mails that it took the equivalent of 10 people
working full time just to read the e-mails sent by this one person. An analysis of these
e-mails suggested that few of the people who were being sent the communications
really needed e-mails from this person to do their job. An intervention directed at
“fixing” this part of the social network wound up increasing the efficiency of a large
number of people.40
One conclusion that can be drawn from this research is that incumbents may provide
the most accurate estimates of the actual time spent performing job tasks. However,
supervisors may be a more accurate source of information about the importance of job
duties. Incumbents also seem more accurate in terms of assessing safety-related risk
factors associated with various aspects of work, and in general the further one moves
up the organizational hierarchy, the less accurate the risk assessments.41 Although job
incumbents and supervisors are the most obvious and frequently used sources of job
analysis information, other sources, such as customers, can be helpful, particularly for
service jobs. Finally, when it comes to analyzing skill levels, external job analysts who
have more experience rating a wide range of jobs may be the best source.42
JOB ANALYSIS METHODS LO 4-3

Choose the right job
There are various methods for analyzing jobs and no “one best way.” In this section,
analysis technique
we discuss two methods for analyzing jobs: the position analysis questionnaire and the for a variety of human
Occupational Information Network (O*NET). Although most managers may not have resource activities.
time to use each of these techniques in the exact manner suggested, the two provide
some anchors for thinking about broad approaches, task-focused approaches, and per-
son-oriented approaches to conducting job analysis.
Position Analysis Questionnaire (PAQ)

We lead this section off with the PAQ because this is one of the broadest and most well-
researched instruments for analyzing jobs. Moreover, its emphasis on inputs, processes,
relationships, and outputs is consistent with the work-flow analysis approach that we
used in leading off this chapter (Figure 4.1).
The PAQ is a standardized job analysis questionnaire containing 194 items.43 These
items represent work behaviors, work conditions, and job characteristics that can be gen-
eralized across a wide variety of jobs. They are organized into six sections:
1. Information input—Where and how a worker gets information needed to perform
the job.
2. Mental processes—The reasoning, decision making, planning, and information
processing activities that are involved in performing the job.
3. Work output—The physical activities, tools, and devices used by the worker to per-
form the job.
4. Relationships with other persons—The relationships with other people required in
performing the job.
5. Job context—The physical and social contexts where the work is performed.
6. Other characteristics—The activities, conditions, and characteristics other than
those previously described that are relevant to the job.
The job analyst is asked to determine whether each item applies to the job being
analyzed. The analyst then rates the item on six scales: extent of use, amount of time,
importance to the job, possibility of occurrence, applicability, and special code (spe-
cial rating scales used with a particular item). These ratings are submitted to the PAQ
headquarters, where a computer program generates a report regarding the job’s scores on
the job dimensions.
Research has indicated that the PAQ measures 12 overall dimensions of jobs (listed
in Table 4.2) and that a given job’s scores on these dimensions can be very useful. The
significant database has linked scores on certain dimensions to scores on subtests of the
General Aptitude Test Battery (GATB). Thus, knowing the dimension scores provides
some guidance regarding the types of abilities that are necessary to perform the job.
Obviously, this technique provides information about the work performed in a format
that allows for comparisons across jobs, whether those jobs are similar or dissimilar.
Another advantage of the PAQ is that it covers the work context as well as inputs, out-
puts, and processes.
Knowledge of work context is important because in many cases, one can predict
absenteeism and turnover from the nature of the surroundings in which the work takes
place, and some people are more resilient than others when it comes to dealing with
adverse environments. In addition, if one knows that the job includes adverse working
conditions, providing additional levels of peer support and supervisor support might be
required to help people cope.44 In contrast, work spaces that are designed in ways that
people find pleasing can often help overcome other aspects of a job that are generally
seen as less desirable.45
The Occupational Information Network (O*NET)

The Dictionary of Occupational Titles (DOT) was born during the 1930s and served
as a vehicle for helping the new public employment system link the demand for skills
and the supply of skills in the U.S. workforce. Although this system served the country
well for more than 60 years, it became clear to officials at the U.S. Department of Labor
that jobs in the new economy were so qualitatively different from jobs in the old econ-
omy, that the DOT no longer served its purpose. Technological changes in the nature of
work, global competition, and a shift from stable, fixed manufacturing jobs to a more
flexible, dynamic, service-based economy were quickly making the system obsolete.46
For all these reasons, the Department of Labor abandoned the DOT in 1998 and
developed an entirely new system for classifying jobs referred to as the Occupational
Information Network, or O*NET. Instead of relying on fixed job titles and narrow
task descriptions, the O*NET uses a common language that generalizes across jobs to
describe the abilities, work styles, work activities, and work context required for various
Table 4.2
Overall Dimensions Decision/communication/general responsibilities
of the Position Clerical/related activities
Analysis Technical/related activities
Questionnaire Service/related activities
Regular day schedule versus other work schedules
Routine/repetitive work activities
Environmental awareness
General physical activities
Supervising/coordinating other personnel
Public/customer/related contact activities
Unpleasant/hazardous/demanding environment
Nontypical work schedules
occupations that are more broadly defined (e.g., instead of the 12,000 jobs in the DOT,
the O*NET describes only 1,000 occupations).47 Although it was developed to analyze
jobs in the U.S. economy, research suggests that the ratings tend to be transportable
across countries. That is, if one holds the job title constant (e.g., first-line supervisor,
office clerk, computer programmer), the ratings of the job tend to be the same even if the
job is located in a different country.48
The O*NET is being used by many employers and employment agencies. For exam-
ple, after closing its Seattle-based headquarters, Boeing used the O*NET system to help
find new jobs for the workers who were laid off because of the impending move.49 The
O*NET was also designed to help job seekers. For example, the O*NET seems par-
ticularly well suited to describing the literacy requirements associated with alternative
jobs. Thus, individuals who want to improve their ability to find employment can obtain
relatively accurate information about what jobs they are qualified for given their current
literacy level from the O*NET. They can also see how much their literacy skills would
have to improve if they wanted to apply for higher-level jobs characterized by higher
levels of complexity.50
DYNAMIC ELEMENTS OF JOB ANALYSIS LO 4-4

Identify the tasks per-
Although we tend to view jobs as static and stable, in fact, jobs tend to change and
formed and the skills
evolve over time. Those who occupy or manage the jobs often make minor, cumulative required in a given job.
adjustments to the job that try to match either changing conditions in the environment or
personal preferences for how to conduct the work.51 Indeed, although there are numerous
sources for error in the job analysis process,52 most inaccuracy is likely to result from job
descriptions simply being outdated. For this reason, in addition to statically defining the
job, the job analysis process must also detect changes in the nature of jobs.
For example, in today’s world of rapidly changing products and markets, some people
have begun to question whether the concept of “the job” is simply a social artifact that
has outlived its usefulness. Indeed, many researchers and practitioners are pointing to a
trend referred to as “dejobbing” in organizations. This trend consists of viewing orga-
nizations as a field of work needing to be done rather than a set of discrete jobs held
by specific individuals. For example, at Amazon.com, HR director Scott Pitasky notes,
“Here, a person might be in the same ‘job,’ but three months later be doing completely
different work.”53 This means Amazon.com puts more emphasis on broad worker speci-
fications (“entrepreneurial and customer-focused”) than on detailed job descriptions
(“C++ programming”) that may not be descriptive one year down the road.
Job Design LO 4-5

Understand the differ-
So far we have approached the issue of managing work in a passive way, focusing only ent approaches to job
on understanding what gets done, how it gets done, and the skills required to get it done. design.
Although this is necessary, it is a very static view of jobs, in that jobs must already exist
and that they are already assumed to be structured in the one best way. However, a man-
ager may often be faced with a situation in which the work unit does not yet exist, requir-
ing jobs within the work unit to be designed from scratch. Sometimes work loads within
an existing work unit are increased, or work group size is decreased while the same
work load is required. Finally, sometimes the work is not being performed in the most
efficient manner. In these cases, a manager may decide to change the way that work is
done in order for the work unit to perform more effectively and efficiently. This requires
redesigning the existing jobs.
Job Design Job design is the process of defining how work will be performed and the tasks that
The process of defin- will be required in a given job. Job redesign refers to changing the tasks or the way work
ing the way work will is performed in an existing job. To effectively design jobs, one must thoroughly under-
be performed and
the tasks that will be stand the job as it exists (through job analysis) and its place in the larger work unit’s
required in a given job. work-flow process (work-flow analysis). Having a detailed knowledge of the tasks per-
formed in the work unit and in the job, a manager then has many alternative ways to
design a job. This can be done most effectively through understanding the trade-offs
Job Redesign between certain design approaches.
The process of chang-
ing the tasks or the way Research has identified four basic approaches that have been used among the various
work is performed in an disciplines (such as psychology, management, engineering, and ergonomics) that have
existing job. dealt with job design issues.54 All jobs can be characterized in terms of how they fare
according to each approach; thus a manager needs to understand the trade-offs of empha-
sizing one approach over another. Table 4.3 displays how jobs are characterized along
each of these dimensions, and the Work Design Questionnaire (WDQ), a specific instru-
ment that reliably measures these and other job design characteristics, is available for
use by companies wishing to comprehensively assess their jobs on these dimensions.55
MECHANISTIC APPROACH
The mechanistic approach has roots in classical industrial engineering. The focus of
the mechanistic approach is identifying the simplest way to structure work that maxi-
mizes efficiency. This most often entails reducing the complexity of the work to provide
more human resource efficiency—that is, making the work so simple that anyone can be
trained quickly and easily to perform it. This approach focuses on designing jobs around
the concepts of task specialization, skill simplification, and repetition.
For example at Chili’s Restaurants, cooks used to cut up vegetables, meats, and
other ingredients as part of preparing a meal. In order to increase efficiency, however,
the organization decided to break this job into two smaller parts: one job, called “prep
cooks” who come in the morning and do all the cutting up, and the second job, “line
cooks” who take these prepared ingredients and use them to assemble the final meal.56
Table 4.3
Major Elements of The mechanistic approach
Various Approaches Specialization
to Job Design Skill variety
Work methods autonomy
The motivational approach
Decision-making autonomy
Task significance
Interdependence
The biological approach
Physical demands
Ergonomics
Work conditions
The perceptual approach
Job complexity
Information processing
Equipment use
SOURCE: From Michael A. Campion and Paul W. Thayer, “Job Design: Approaches, Outcomes, and Trade-Offs,” Orga-
nizational Dynamics, Winter 1987, Vol. 15, No. 3. Reprinted with permission from Elsevier.
Scientific management was one of the earliest and best-known statements of the
mechanistic approach.57 According to this approach, productivity could be maximized
by taking a scientific approach to the process of designing jobs. Scientific management
first sought to identify the “one best way” to perform the job. Once the best way to per-
form the work is identified, workers should be selected based on their ability to do the
job, they should be trained in the standard “one best way” to perform the job, and they
should be offered monetary incentives to motivate them to work at their highest capacity.
The scientific management approach was built upon in later years, resulting in a
mechanistic approach that calls for jobs to be designed so that they are very simple.
By designing jobs in this way, the organization reduces its need for high-ability indi-
viduals and thus becomes less dependent on individual workers. Individuals are eas-
ily replaceable—that is, a new employee can be trained to perform the job quickly and
inexpensively.
Many jobs structured this way are performed in developing countries where there is a
large supply of low-skilled labor and relatively lax legal guidelines regarding safety stan-
dards. For example, manufacturing silicon chips involves a process that exposes work-
ers to a large number of carcinogens that are less heavily regulated in Asia relative to
what one would find in the United States, and hence chip production has largely moved
overseas.58 As one might expect, this includes a host of “low-tech” manufacturing and
assembly jobs, but increasingly this also involves “digital factory jobs.” For example,
ProQuest Historical Newspaper provides a service where subscribers can access the
contents of any article ever published by one of nine major U.S. newspapers simply by
entering an author name, keyword, or image. You might wonder how all of this histori-
cal, nondigital information and text is entered into this digital database, and the answer
would be found in Madras, India. Here workers take this material and enter the headline,
author, major key words, and first paragraph of the work by hand into the database, and
then run a program to attach a visual file to the rest of the article. This menial work is
conducted by 850 workers, who comprise three 8-hour shifts that work 24 hours a day,
7 days a week.59 It would be difficult, if not impossible to find workers in the United
States willing to put up with work this boring.
In some cases, jobs designed via mechanistic practices result in work that is so simple
that a child could do it, and this is exactly what can happen in some undeveloped coun-
tries. This can lead to a backlash against companies that benefit from this unethical
practice, and increasingly, organizations are taking the lead in preventing these kinds of
practices. For example, when it learned that Uzbekistan cotton growers were using child
labor to pick their crops, Walmart used its power to force them to abandon this practice.
Working with other large U.S. retailers, Walmart took the lead to create the first system
for tracking where cotton came from and organized a boycott against Uzbekistan, which
quickly acquiesced to the corporate giant’s pressure, freeing the children to return to
school.60 At the time, almost everyone else perceived that Walmart was a corporate vil-
lain and bully, assaulting workers, the environment, and consumers. Over the course of
his tenure as the Walmart CEO, H. Lee Scott dramatically reversed this perception, and
now Walmart is routinely listed as one of the most sustainable and corporately respon-
sible organizations in the United States.61
MOTIVATIONAL APPROACH
The motivational approach to job design has roots in organizational psychology and man-
agement literature and, in many ways, emerged as a reaction to mechanistic approaches
to job design. It focuses on the job characteristics that affect psychological meaning and
motivational potential, and it views attitudinal variables (such as satisfaction) as the most
important outcomes of job design. The prescriptions of the motivational approach focus
on increasing the meaningfulness of jobs through such interventions as job enlargement,
job enrichment, and the construction of jobs around socio technical systems.62
A model of how job design affects employee reactions is the “Job Characteristics
Model.”63 According to this model, jobs can be described in terms of five characteristics.
Skill variety is the extent to which the job requires a variety of skills to carry out the
tasks. Task identity is the degree to which a job requires completing a “whole” piece of
work from beginning to end. Autonomy is the degree to which the job allows an individ-
ual to make decisions about the way the work will be carried out. Feedback is the extent
to which a person receives clear information about performance effectiveness from the
work itself. Task significance is the extent to which the job has an important impact on
the lives of other people. Although all five characteristics are important, the belief that
the task is significant because performing it well leads to outcomes one values may be the
most critical motivational aspect of work.64 This can often be enhanced by making it
clear to the worker how his or her job affects other people, whether they be customers,
co-workers or society in general.65
Job design interventions emphasizing the motivational approach tend to focus on
increasing the meaningfulness of jobs. Much of the work on job enlargement (broadening
the types of tasks performed), job enrichment (empowering workers by adding more deci-
sion-making authority to jobs), and self-managing work teams has its roots in the motiva-
tional approach to job design. Not all workers respond positively to enriched jobs like these
because it requires some degree of flexibility and responsiveness to other people, but with
the right workers, interventions such as these have been found to have dramatic effects on
employee motivation.66 Indeed, relatively elaborate theories have been developed that link
specific personality traits to specific job characteristics and thus, to some degree, creating
meaningful work requires matching the right type of person to the right type of task.67
In some cases, even work that may not be that interesting can be made significant by
clarifying the link between what workers do and the outcomes of their work, perhaps far
down the chain. For example, in medicine, a stent is an expandable wire form or perfo-
rated tube that is inserted into an artery to help promote blood flow after a heart opera-
tion. The actual work that goes into stent production is an assembly line process where
each worker does a very small and, some might argue, boring task. To help increase the
meaningfulness of this work, however, the company sponsors a party each year where
line workers get to meet people whose lives were saved by the stents that were produced
on that line. This is often a moving emotional experience for both parties and helps the
employees see the impact of their work in a context where this would not naturally hap-
pen.68 Indeed, one of the secrets behind effective transformational leaders is their ability
to help workers see the larger meaning in what they are doing on a day-to-day basis.69
BIOLOGICAL APPROACH
The biological approach to job design comes primarily from the sciences of biomechan-
ics (i.e., the study of body movements), work physiology, and occupational medicine,
Ergonomics and it is usually referred to as ergonomics. Ergonomics is concerned with examining the
The interface between interface between individuals’ physiological characteristics and the physical work envi-
individuals’ physi- ronment. The goal of this approach is to minimize physical strain on the worker by struc-
ological characteristics
and the physical work
turing the physical work environment around the way the human body works. It therefore
environment. focuses on outcomes such as physical fatigue, aches and pains, and health complaints.
Any job that creates a significant number of injuries is a target for ergonomic redesign.
The biological approach has been applied in redesigning equipment used in jobs
that are physically demanding. Such redesign is often aimed at reducing the physical
demands of certain jobs so that anyone can perform them. In addition, many biologi-
cal interventions focus on redesigning machines and technology, such as adjusting the
height of the computer keyboard to minimize occupational illnesses (like carpal tunnel
syndrome). The design of chairs and desks to fit posture requirements is very important
in many office jobs and is another example of the biological approach to job design.
Although providing comfortable, ergonomically designed chairs is certainly laudable,
recent research also suggests that getting employees out of their chairs is also critically
important when it comes to health outcomes. That is, the evidence is becoming increas-
ingly clear that merely sitting down for long periods can be damaging to employees.
From an evolutionary perspective, the human body was designed to move and long
stretches of sedentary behavior are at odds with this design. For example, people who
are above the mean in “time spent sitting” are at a 24% greater risk to develop colon
cancer, a 32% higher risk of endometrial cancer, and a 21% increased risk for lung can-
cer even when one controls for the amount of physical exercise that people get when they
are not sitting. Thus, office redesign programs that involve the introduction of treadmill
desks or stand-up desks are becoming increasingly common elements of design, and
some organizations are trying to make standing, rather than sitting, as the default posi-
tion for performing jobs.70
In addition to the direct effects of these kinds of interventions on worker well-being,
these types of programs also have a positive psychological effect on workers by empha-
sizing an organizational climate that values safety and health.71 That is, in addition to
changes in design, some organizations try to instill a safety culture by giving each and
every employee the power to report, or better yet, stop any worker who engages in unsafe
behavior. At Chevron, for example, any worker within its headquarters office in Sam
Ramon, California, can halt an activity he or she deems unsafe by taking out a small
white “stop work” card. Thus, in terms of decision-making authority, each person has
the power to identify and correct safety lapses regardless of where they reside on the for-
mal organizational chart.72 Indeed, in workplaces where safety is a major concern—such
as working on a nuclear submarine—there may be hundreds of rules that new employees
have to memorize prior to being able to start on the job.73
Often redesigning work to make it more worker-friendly also leads to increased effi-
ciencies. For example, at International Truck and Engine Corporation, one of the most
difficult aspects of truck production was pinning the axles to the truck frame. Tradi-
tionally, the frame was lowered onto the axle and a crew of six people, armed with
oversized hammers and crowbars, forced the frame onto the axle. Because the workers
could not see the bolts they had to tighten under the frame, the bolts were often not
fastened properly, and many workers injured themselves in the process. After a brain-
storming session, the workers and engineers figured that it would be better to flip the
frame upside down and attach the axles from above instead of below. The result was a
job that could be done twice as fast by half as many workers, who were much less likely
to make mistakes or get injured.74 Although in this case, designing for cost efficiency
made the work more worker-friendly, as the “Competing through Sustainability” box
shows, all too often, organizations that compete on cost and efficiency more often cre-
ate jobs that do not promote employee well-being. The Occupational Safety and Health
Organization is the primary agency for monitoring employer behavior with respect to
safety, and as you can see from the “Integrity in Action” box, this organization often
goes beyond the written law and regulations when it comes to forcing employers to
engage in ethical behavior.
Business Practices at Nail Salons May Be Cause for Concern
Although there may be noth- salons has increased five-fold of the salons,
ing more fashionable than a between 2000 and 2015, and like many of the
fresh set of perfectly manicured the oversupply of shops has put customers, are highly affluent
nails, there has been increased pressure on profits that now can and have become rich on the
scrutiny of how this service is often only be achieved by labor backs of these poorly treated
traditionally delivered. Specifi- practices that border on slavery. workers. However, progress
cally, it is questionable whether Most low-level salon workers in toward reform is often hindered
current business practices are New York City are illegal immi- by the fact that workers will
sustainable given the pres- grants lacking basic English rarely cooperate with authorities.
sure on wages and working language skills. This is a work- Many manicurists are unwilling
conditions that seem to go force that is ripe for exploitation. or unable to speak to inspectors,
along with the current business New workers often have to pay and as one DOL agent noted,
model. Certainly, when it comes up to $100 dollars just to join a “they are totally running scared
to barriers to entry, there are salon and then work for up to in this industry.”
very few industries easier to three months with no pay. After
get started into than this one. this “apprenticeship” period, the DISCUSSION QUESTION
Setting up a new salon requires workers, who are considered Why is cost containment—the
only a few thousand dollars “tip workers,” receive far less source of so many of these
for chairs, whirlpool baths, than the minimum wage. They workers’ problems—so essential
bottles of polish and wax, and also receive no health care cov- to this industry, and what other
some easily obtained (or easily erage, despite the fact that many industries are under similar pres-
ignored) licenses. Beyond this, of the chemicals they work with sures and respond the same
it is just a matter of rent and for 12 hours a day are known way? What can be done to pro-
employee wages and working carcinogens. mote ethical behavior in these
conditions. Recent crackdowns on own- kinds of industries?
Perhaps because of the ers of these salons by govern-
ease of entry, the number of ment bodies such as the New SOURCES: S. M. Nir, “Perfect Nails, Poisoned
salons that have opened up York Department of Labor (DOL) Workers,” The New York Times, May 8, 2015,
www.nytimes.com; S. M. Nir, “The Price of Nice
has skyrocketed. In New York are beginning to change this pic- Nails,” The New York Times, May 7, 2015 www.
City alone, the number of nail ture. Indeed, many of the owners nytimes.com.
PERCEPTUAL–MOTOR APPROACH
The perceptual–motor approach to job design has roots in human-factors literature.
Whereas the biological approach focuses on physical capabilities and limitations, the
perceptual–motor approach focuses on human mental capabilities and limitations. The
goal is to design jobs in a way that ensures they do not exceed people’s mental capa-
bilities and limitations. This approach generally tries to improve reliability, safety, and
user reactions by designing jobs to reduce their information-processing requirements.
In designing jobs, one looks at the least capable worker and then constructs job require-
ments that an individual of that ability level could meet. Similar to the mechanistic
approach, this approach generally decreases the job’s cognitive demands.
Recent changes in technological capacities hold the promise of helping to reduce
job demands and errors, but in some cases, these developments have actually made the
172
INTEGRITY IN ACTION
Policy Shift by OSHA May Help Pinpoint Unethical Business Activities
The difference between illegal workers from known hazards. decisions
behavior and unethical behavior This is controversial because in about where
is often a function of whether or some cases an employer may to accept employment. Note that
not there is a valid and up-to- be well within the published in this case, there was no formal
date statute, as well as the abil- standards for exposure but still finding that the employer was
ity to monitor and enforce such found guilty. For example, even engaged in any wrongful action,
statutes. The challenge that is though an inspection found that and yet, OSHA is suggesting to
often faced by OSHA in policing levels of styrene at Fiberdome the world at large that where
employers with respect to safety Inc. of Lake Mills, Wisconsin, there is smoke, there is probably
standards is that budget cuts were below the required thresh- fire. Both of these new practices
have resulted in highly dated old, the company was still fined shift the focus from purely illegal
rules and a lack of resources $50,000 when a worker experi- activities to potentially unethi-
when it comes to proving enced respiratory bronchitis due cal activities, but some question
beyond a reasonable doubt to styrene. whether these practices them-
that employers have violated Second, in January 2015, selves are ethical.
the rules. In order to overcome OSHA developed a new “name
these challenges, the agency and shame” program that DISCUSSION QUESTION
has recently developed two new requires employers to notify the Is it fair to hold employers liable
and controversial practices. agency within 24 hours every for injuries that occur despite
First, in order to overcome time an employee loses an eye, their being within the written
outdated rules, OSHA is suffers an amputation, or gets regulations and without a formal
now less focused on specific admitted to a hospital due to finding of wrongdoing?
standards for exposure to toxic an injury incurred at work. The SOURCES: “Using the Web to Police Danger-
chemicals and instead targeting name of the employer is then ous Workplaces,” Bloomberg Businessweek,
employers with the broader placed on a public list that could September 18, 2014, pp. 33–34; A. Berzon,
“OSHA Uses New Way to Enforce Out-of-Date
“general duty clause” that states be accessed by would-be job Rules,” The Wall Street Journal, November 20,
that organizations must protect applicants when they are making 2013, www.wsj.com.
problem worse. The term “absence presence” has been coined to refer to the reduced
attentive state that one might experience when simultaneously interacting with multiple
media. For example, someone might be talking on a cell phone while driving a car, or
surfing the net while attending a business meeting, or checking e-mail while preparing a
presentation. In all these cases, the new technology serves as a source of distraction from
the primary task, reducing performance and increasing the opportunities for errors.75
It is important to stress that in this case, the source of distraction is mental, not physi-
cal. Hence ergonomic interventions aimed at reducing physical barriers are likely to be
largely ineffective. For example, holding a stressful conversation while driving in heavy
traffic is dangerous regardless of whether one is using a “hands-free” device or not. It
is the mental strain, not the physical challenge, that makes this a hazardous activity.76
Research shows that on complex tasks, even very short interruptions can break one’s
train of thought and derail performance. Thus, e-mail servers that have a feature that sig-
nals the arrival of each incoming message might best be turned off if the job incumbent
cannot resist the temptation this creates to interrupt ongoing activity.77
173
In addition to external disruptions, information processing errors are also increased

in any context that requires a “handoff” of information from one person to another.
Indeed, problems with handoffs have become a major concern in the field of medi-
cine. As Mike Leonard, physician leader for patient safety at Kaiser Colorado Hospital,
notes, “In almost all serious avoidable episodes of patient harm, communication failures
play a central role.” This would include information that fails to get handed off from
nurses, doctors, and medical technicians to one another (e.g., the results of the most
recent test that was handed to the attending doctor does not get handed to the attending
nurse) or information that fails to get handed off from one work shift to another (e.g., a
patient who has already received medication from one shift gets it again from the next
shift). Problems between shifts are especially likely due to fatigue and burnout, which
may be present at the end of a shift for workers in stressful jobs.78
Increasingly, hospitals are borrowing the “SBAR” method, originally developed in
commercial and military aviation as a means to hand off an airplane moving through
different people’s airspace, to standardize communication protocols at the handoff point
in medical contexts. SBAR stands for situation, background, assessment, and recom-
mendation, which constitute the four components of every successful handoff. That is, in
a few seconds, the person handing off the patient needs to get control of the situation by
demanding the listener’s attention (situation), then relay enough information to establish
the context or the problem (background), then give an overall evaluation of the condition
(assessment), and finally make a specific suggestion about the next best course of action
(recommendation). At one hospital that introduced this procedure, the rate of adverse
events (i.e., unexpected medical problems that cause harm) was reduced by more than
half, from 90 to 40 for every 1,000 patients treated.79
As work design increasingly relies on teams to accomplish organizational objec-
tives, studying the best way to manage “hand-offs” and other aspects of interdepen-
dence between jobs becomes more critical. Just as there are standardized instruments
for assessing the nature of a job, there are also standardized frameworks for assess-
ing the nature of teams. The three most critical dimensions needed to describe teams
include (a) skill differentiation, the degree to which members have specialized knowl-
edge or functional capacities that make it more or less difficult to substitute mem-
bers, (b) authority differentiation, the degree to which decision-making responsibility is
vested in individual members, subgroups of the team, or the collective as a whole, and
(c) temporal stability, the degree to which team members are expected to work together
for a long time.80
In many cases, team-based work design is a central component in terms of strategy
and competitive advantage. In fact, even industries like apparel and clothing—where
U.S. manufacturing was written off for dead—are experiencing a renaissance due to
team-based work design. For example, Boathouse Sports, a manufacturer of jerseys,
uniforms, and jackets in Philadelphia, Pennsylvania, relies on flexible manufactur-
ing teams and finds its own unique competitive advantage in adaptively responding
to small orders, and then delivering results with the kind of speed that simply can-
not be matched by offshore producers. Even though Boathouse prices are 10–15%
higher, they can deliver on most small orders in four weeks, compared to Chinese
manufacturers who would take over eight weeks. Indeed, the high cost of shipping
expenses due to the recent spike in oil prices is even cutting into the price differential.
Thus, although some have suggested that global competition is eliminating high-wage
manufacturing jobs where workers have a strong voice in how the work gets accom-
plished, in many corners of the economy, high-priced and empowered workers are
more than earning their own way.81
TRADE-OFFS AMONG DIFFERENT APPROACHES TO JOB DESIGN LO 4-6

Comprehend the trade-
A great deal of research has aimed at understanding the trade-offs and implications of offs among the various
these different job design strategies.82 For example, although the motivational and mecha- approaches to design-
nistic approaches to job design do work against one another somewhat, at the same time ing jobs.
there is not a tight, one-on-one correspondence between the two. Thus, not all efficiency-
producing changes result in dissatisfying work, and not all changes that promote satisfac-
tion create inevitable inefficiencies. By carefully and simultaneously attending to both
efficiency and satisfaction aspects of job redesign, managers can sometimes achieve the
best of both worlds.83 For example, at the Indiana Heart Hospital in Indianapolis, much
of the work was digitized in order to create a paperless organization. There are more
than 600 computer terminals placed throughout the facility, and the doctors and staff
directly enter or access information from these terminals as needed. This has eliminated
the need for nurses’ stations, chart racks, medical records departments, file storage rooms,
and copiers and has cut down paperwork, resulting in an increase in efficiency, but also
increased job satisfaction by eliminating bureaucracy, allowing the staff more immediate
access to needed information. This has affected the bottom line by reducing the length of
time a patient stays in the hospital from an average of five days at other hospitals to three
days at Indiana Heart Hospital. This allows the hospital to process more patients per bed
relative to the competition, giving them a direct source of competitive advantage.84
A LOOK BACK
Structural Problems at General Motors
This chapter opened with a vignette that illustrated how the workflow and organi-
zational structure at General Motors contributed to a major disaster associated with
an ignition switch failure that injured or killed a large number of people. We also
showed throughout the chapter numerous methods and examples of how orga-
nizations can promote safety and still successfully compete via a more effective
design for workflows, organizational structures, and individual jobs.
QUESTIONS
1. The analysis of workflow design traditionally starts at the end of the process,
with the final product or service that is to be rendered. One then works back
to determine the best process for this, and then the appropriate inputs. If an
employer like GM wants to commit to processes that highlight the role of safety,
how could the process of workflow design play out and how might the results
be different than if the organization was committing to processes that were
aimed at reducing costs?
2. Although there are advantages and disadvantages to different structural configu-
rations, why might it be more difficult to change one’s structure in some directions
than others? Specifically, how are the HR challenges associated with moving
from centralized and functional structures to decentralized and divisional differ-
ent from the challenges of moving one’s structure in the alternative direction?
3. Throughout this chapter we have seen that many ways of reducing the cost of
getting jobs done often come at some price to workers who have to do those
jobs. What can be done to promote a more just, fair, humane, and sustainable
workforce in all corners of the world? Does the competitive nature of produc-
tion or labor markets mean that “nice guys always finish last”?
SUMMARY
The analysis and design of work is one of the most impor- work unit, and the way to gain this information is through
tant components to developing and maintaining a com- job analysis. Equipped with an understanding of the work-
petitive advantage. Strategy implementation is virtually flow process and the existing job, managers can redesign
impossible without thorough attention devoted to work-flow jobs to ensure that the work unit is able to achieve its goals
analysis, job analysis, and job design. Managers need to while individuals within the unit benefit from the various
understand the entire work-flow process in their work unit to work outcome dimensions such as motivation, satisfaction,
ensure that the process maximizes efficiency and effective- safety, health, and achievement. This is one key to competi-
ness. To understand this process, managers also must have tive advantage.
clear, detailed information about the jobs that exist in the
KEY TERMS
Centralization, 153 Job description, 163 Job redesign, 168
Departmentalization, 153 Job specification, 164 Ergonomics, 170
Job analysis, 161 Job design, 168
1. Assume you are the manager of a fast-food restaurant. increasing use of computers, (b) increasing international
What are the outputs of your work unit? What are the competition.
activities required to produce those outputs? What are 5. Why is it important for a manager to be able to conduct a
the inputs? job analysis? What are the negative outcomes that would
2. Based on Question 1, consider the cashier’s job. What result from not understanding the jobs of those reporting
are the outputs, activities, and inputs for that job? to the manager?
3. Consider the “job” of college student. Perform a job 6. What are the trade-offs between the different approaches
analysis on this job. What are the tasks required in the to job design? Which approach do you think should be
job? What are the knowledge, skills, and abilities neces- weighted most heavily when designing jobs?
sary to perform those tasks? What environmental trends 7. For the cashier job in Question 2, which approach to job
or shocks (like computers) might change the job, and design was most influential in designing that job? In the
how would that change the skill requirements? context of the total work-flow process of the restaurant,
4. Discuss how the following trends are changing the skill how would you redesign the job to more heavily empha-
requirements for managerial jobs in the United States: (a) size each of the other approaches?
The chapter described how the Department of Labor’s workforce,” visit O*NET’s website at http://online.onet-
Occupational Information Network (O*NET) can help center.org/.
employers. The system was also designed to help job Look up the listing for your current job or dream job. List
seekers. To see if you think this new system meets the the skills identified for that job. For each skill, evaluate how
goal of promoting “the effective education, training, well your own experiences and abilities enable you to match
counseling, and employment needs of the American the job requirements.
EXERCISING STRATEGY
Safety as a Competitive Strategy
Even prior to the Upper Big Branch mine explosion that leadership. In one infamous memo, the previous CEO told
killed 29 workers, Massey Energy was notorious for putting all employees in writing that “if any of you have been asked
coal miners at risk. In fact, according to a 2011 investiga- by your group presidents, your supervisors, your engineers,
tive report into the disaster, no United States coal company or anyone else to do anything other than run coal, you need
had a worse fatality record than Massey Energy, with over to ignore them and run coal. This memo is necessary only
50 deaths in the five years that led up to the fatal events at because we seem not to understand that coal pays the bills.”
Upper Big Branch. Memos like this were one reason that despite residing in
Many industry insiders attributed this record to an “orga- a region marked by chronically high unemployment, and
nizational culture in which wrongdoing became acceptable, where workers with nothing but a high school diploma could
and where deviation was the norm.” Under the leadership earn $70,000 a year, the turnover rate among coal miners at
of CEO Donald Blankenship, Massey’s competitive strat- Massey was over 20% compared to their competitors who all
egy was to push relentlessly for higher production and lower had rates in the single digits. Crutchfield has vowed to get
costs, and the organization largely turned a blind eye to the turnover rate down to 5% in an effort to cut training costs
worker safety. For example, government inspectors repeat- and improve productivity. In the process he stresses, “I can
edly shut down large stretches of the mine, but as one worker assure you, I will not be sending any memos like that.”
noted, “management never fully addressed the issues, they
QUESTIONS
would fix it just good enough to fool the inspectors and get
1. In what ways, other than higher than average turnover,
back to loading coal—that was just the Massey way.”
does having an unsavory ethical reputation harm an orga-
Later in 2011, when Massey was acquired by Alpha Nat-
nization’s competitive advantage?
ural Resources, the new CEO, Kevin Crutchfield, vowed to
2. What role does the company’s CEO play in establish-
change that culture, stating, “We’re going to run this right
ing the competitive strategy and how does this “trickle
and lead by example.” One of Crutchfield’s first moves
down,” when it comes to the organization’s structure and
was to initiate and promote the new “Running Right Pro-
culture?
gram.” The key component of this program was “observa-
3. What are some of the major difficulties associated with
tion cards” that workers were encouraged to anonymously
trying to change an unethical culture, and is it realistic
submit to higher-level managers that identified unsafe prac-
for a new CEO to think he or she can change the cul-
tices or conditions anywhere in or around the mines. The
ture without terminating a large number of upper-level
“Running Right Program” is run by 18 staffers in central
managers?
headquarters who process over 15,000 cards a month, and
review these along with employee involvement groups that SOURCES: P. M. Barrett, “Cleaning America’s Dirtiest Coal Company,”
work at the sites. Businessweek, August 29, 2011; J. Raby, “Ex-CEO Implicated in Massey
Coal Mine Disaster,” USA Today, February 28, 2013, www.usatoday.com;
The message sent by this program is quite a bit differ- H. Berkes, “Former Massey CEO Accused of Conspiracy in Court Hearing,”
ent from what the workers were used to under Blankenship’s NPR, February 28, 2013, www.npr.org.
MANAGING PEOPLE
Robots Attack Okun’s Law
Okun’s Law, named after economist Arthur Okun, states have expected to see an unemployment rate of around 1%
that there is a robust and steady relationship between pro- in the U.S. economy—not nearly the 9% that was actually
ductivity on the one hand, and unemployment rates on the in place.
other hand. In general, the formula expressed in this law Some have suggested that the fundamental relationship
suggests that every 3% gain in output should reduce the between growth and unemployment has changed due to the
unemployment rate by 1%. Although the data fit this pattern increased use of robots in the workplace. In fact, the U.S.
extremely well in the time period between 1947 and 2005, produces 25% more goods and services in 2012 than it did in
more recently, this “law” does not even meet the criteria 1999, but does so with almost the same number of workers.
for a “rule of thumb.” For example, if one applied this law The difference can be traced to the substitution of technol-
to the five-year span from 2008 to 2012, then one would ogy for human labor, especially in the form of increasingly
sophisticated robots. Although the traditional idea was that times. For example, who would have thought that develop-
robots could do only simple jobs, and thus free humans up to ing apps for smartphones would be a viable professional job
do other work, this is less and less true. a mere decade ago? Clearly, the productivity gains attrib-
For example, in the wake of the BP oil spill disaster utable to technological advancements need to be channeled
where 11 workers died, a company called Robotic Drill- back into education and training programs that make human
ing Systems designed a series of robots that did the work workers and sophisticated robots valuable partners rather
that was formerly done by deckhands and pipe handlers. than direct competitors.
The 10-foot-tall robot deckhand has a jointed arm that can
extend 10 feet and has roughly a dozen interchangeable, QUESTIONS
three-fingered hands that allow it to pick up anything from 1. Can you think of some common jobs that exist today
a one-ton drill bit to an egg. Robots can now drive cars, fly that would have been inconceivable to your parents or
airplanes, translate documents and speech from one lan- grandparents when they were your age?
guage to another, search for legal precedents, and even write 2. Do these new lines of work require more or less of
sports stories based solely on box scores. Labor economist human beings when it comes to problem solving and
David Autor has noted, “The era we’re in is one in which the critical thinking?
scope of tasks that can be automated is increasing rapidly 3. Are these new lines of work going to be relatively high-
and in the areas where we used to think those were our best paying jobs or low-paying jobs, and what may deter-
skills—things that require thinking.” mine one of these outcomes versus the other?
Still, others insist that rather than being job destroyers,
SOURCES: D. Lynch, “Did That Robot Take My Job?” Businessweek,
robots will eventually become job creators in the sense that January 9, 2012, pp. 15–16; D. Wethe, “Transformers on the Oil Patch,”
almost all new technologies spawn new jobs and business Businessweek, September 3, 2012, pp. 48–50; S. Grobart, “What Machines
opportunities that could never have been imagined in prior Can’t Do,” Businessweek, December 17, 2012, pp. 4–5.
Inclusivity Defines BraunAbility’s Products and Its Jobs
Ralph Braun built his company out of his creativity in accessibility problems creatively, so that person is likely to
meeting his own personal needs. Growing up in rural have become a great innovator. Wherever possible, work
Indiana, Braun had difficulty climbing stairs, and doctors schedules are tailored to employees’ needs. Many employees
diagnosed him with spinal muscular atrophy. At age 14, have flexible schedules, working their choice of eight hours
Braun needed a wheelchair to get around. He was disap- between 7:00 A.M. and 6:00 P.M. Some employees telecom-
pointed but developed his mechanical aptitude, honed by mute full-time or part-time. Even production workers, who
years of helping his uncles fix motorcycles and race cars, must coordinate their tasks as vans move from one work sta-
and used it to build himself a battery-powered scooter. With tion to the next, have flexibility to negotiate arrangements
the scooter, Braun was able to navigate his way around a job that work for them as a group. They told the company that
at an automotive supply factory, where co-workers would they wanted just a couple of short breaks during the day
ask him to build something similar for their family mem- instead of a long lunch break, so they could leave earlier.
bers and acquaintances. Later, for better transportation to BraunAbility went along with the idea.
and from the job, Braun figured out how to convert a Dodge As you might expect from a company founded by a cre-
van with a lift so he could enter the van on his scooter and ative man, innovation is valued over hierarchy at BraunAbil-
drive it from there. Again, people saw the van and asked ity. Garnett says, “If anyone has an idea, that person is
for something similar. Eventually, Braun took all his earn- listened to.” For example, an employee suggested that, rather
ings from scooters and van conversions and started Save-A- than going through the process of safely disposing of left-
Step Manufacturing, later named BraunAbility, which has over paint, workers use it to paint the vehicle floors under
become the world’s largest maker of wheelchair-accessible the carpet, for a little additional protection of the vehicle.
vans and wheelchair lifts. The company readily adopted the suggestion.
The passion and purposefulness of the company’s Along with feeling respected, workers at Braun Abil-
founder are reflected in the structure of BraunAbility’s jobs ity feel their work matters to society. In Garnett’s words,
and work. Recruiting is inclusive, with an especially great because the company’s vans make it possible to travel inde-
appreciation for the potential of disabled workers. Cyndi pendently, employees “know that they’re changing the lives
Garnett, the company’s director of human resources, notes of people with disabilities with every product that goes out
that a person with a disability has to go through life solving the door.”
QUESTIONS reinforce employees’ sense that their jobs have an impor-

1. In what ways is work at BraunAbility motivating? What tant positive impact on others. What would you suggest?
other features of motivating work might BraunAbility be SOURCES: Company website, www.braunability.com, accessed May 14,
able to offer its employees? 2014; “Collaboration, Inclusion Help Create That Small-Town’ Feeling,”
2. What place would efficient job design have in a company white paper, HR.BLR.com, January 18, 2010, http://hr.blr.com; “How
like BraunAbility? How could BraunAbil-ity improve I Did It: Ralph Braun of BraunAbility,” Inc., December 1, 2009, www.
inc.com; and “BraunAbility Launches EntervanXT to Accommodate
job efficiency in a way that is consistent with the com-
Needs of Taller Wheelchair and Scooter Users,” Marketing Weekly News,
pany’s emphasis on inclusiveness and flexibility? October 10, 2009, Business & Company Resource Center, http://galenet.
3. Imagine that you work with the HR director at BraunAbil- galegroup.com.
ity, and she has asked you to suggest some ways to
NOTES
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Human Resource Planning
and Recruitment
PART TWO
5
C H A P T E R
Acquisition and Preparation of Human Resources
LEARNING OBJECTIVES
LO 5-1 Discuss how to align a company’s strategic direction

with its human resource planning. page 185
LO 5-2 Determine the labor demand for workers in various job categories. page 186
LO 5-3 Discuss the advantages and disadvantages of various ways of

eliminating a labor surplus and avoiding a labor shortage. page 188
LO 5-4 Describe the various recruitment policies that organizations

adopt to make job vacancies more attractive. page 204
LO 5-5 List the various sources from which job applicants can
be drawn, their relative advantages and disadvantages,
and the methods for evaluating them. page 206
LO 5-6 Explain the recruiter’s role in the recruitment process, the limits
the recruiter faces, and the opportunities available. page 212
182
>>>
Is the Demand for On-Demand Labor about to Shift?
When they discuss their business model,
representatives for Uber always focus on the
software application that links would-be riders with
would-be drivers, and hence, quickly and seamlessly
connects a specific demand for labor with a specific
supply of labor. The success of this business model
is undeniable in the sense that even though it has
only been existence for five years, the company has
expanded to more than 300 cities and is now valued
at over $50 billion. The number of people who drive
for Uber all over the world is very difficult to estimate,
but the company states that they have 26,000 driv-
ers in New York City, 15,000 in London, 10,000 in
Paris, and 20,000 in Chengdu, China alone.
Beyond the software application, though, a big
© McGraw-Hill Education/Mark Dierker, photographer
part of Uber’s success can also be attributed to the
fact that all of the labor employed is low paid, has of the future. As one labor economist noted, “The
no job security, and is provided no benefits. In the $40-an-hour-manufacturing job is not going to come
United States, for example, many Uber drivers enjoy back, but the $25 local services job represents a
the flexibility that this work provides but the fact is viable alternative.”
that they are paid far less than the minimum wage, Few of these jobs actually wind up paying at this
especially when one figures in expenses and vehicle rate, however, and the generally high level of worker
depreciation. The company can get away with this discontent has made some of these companies
because the drivers are classified as “independent reconsider their business model. For example, Insta-
contractors” rather than “traditional employees.” cart announced, ironically enough the week after the
This classification has been challenged in several California ruling, that it was reclassifying its workers
instances, however, and in June 2015, the California as employees. Instacart ran a trial experiment with
Labor Commissioner’s Office ruled that Uber drivers this reclassification in Boston the year before and
should be classified as traditional employees. came to the conclusion that “this change improved
This finding has huge implications because Uber the quality and efficiency of order picking and made
is just one of many “on-demand” companies that rely for a better customer experience.” Apparently, the
on this ever-increasing business model for manag- customer services advantages of a more traditional
ing workers. This is the same model that is employed supply of labor outweighed the cost savings associ-
by Uber’s #1 rival, Lyft, as well as companies such ated with the on-demand labor supply.
as Instacart that delivers groceries, Handybook that
SOURCES: S. A. O’Brien, “The Uber Effect: Instacart Shifts Away from
provides cleaning services, TaskRabbit that does Contract Workers,” CNN Money, June 22, 2015, http://money.cnn.com;
odd jobs, and Mechanical Turk that provides a broad M. Isaac and N. Singer, “California Says Uber Driver Is Employee, Not a
Contractor,” The New York Times, June 17, 2015, www.nytimes.com; L.
range of services. Some have even suggested that
Weber and R.E. Silverman, “On-demand Workers: We Are Not Robots,”
this freelance model of employment is the next wave The Wall Street Journal, January 27, 2015, www.wsj.com.
183
184 CHAPTER 5 Human Resource Planning and Recruitment
Introduction
Human resource managers are at the forefront of the worldwide war for competitive
advantage. Organizations need to find the best set of workers for meeting their strate-
gic objectives, attract those workers to their companies, and then get them to stay long
enough to obtain some return on their investment. As our opening vignette shows, Uber
was able to go from being worth zero to being worth $50 billion in just five years because
of its unique business model that relies on an independent contracting model attached
to a unique software application that matches the demand for a ride with the supply of a
ride. Although some see this as the “wave of the future,” other, more-established compa-
nies have used this same model as a source of competitive advantage. For example, Fed-
eral Express truck drivers also work as independent contractors, and this arrangement
saves the company 30% of payroll costs, including the payroll tax, unemployment insur-
ance, workers compensation, and state taxes versus a competitor such as UPS that treats
workers as traditional employees. Both FedEx and UPS are committed to their business
strategies, but they compete in different ways. UPS delivers mainly to far-flung indi-
vidual residences and needs an experienced and committed workforce, whereas FedEx
delivers mainly to businesses in urban environments and needs an efficient, but not nec-
essarily engaged set of drivers.1 Thus, there are advantages and disadvantages associated
with different workforces, and organizations that survive and thrive find the best match
between the workers they need and the strategy they employ to compete in the market.
The purpose of this chapter is to examine factors that influence the supply and
demand for labor, and, in particular, focus on what human resources managers can do in
terms of planning and executing human resource policies that give their firms competi-
tive advantage in a dynamic environment. Although our focus in at the firm level, it is
worth noting that nations also compete in labor markets, and when a country begins to
see most of its human talent emigrate, this type of “brain drain” can have a devastating
impact on national competitiveness. For example, in Iran, 40% of the top graduates in
undergraduate science and technology programs leave the country to attend graduate
school in Europe and the United States, and then, upon matriculation, 90% never return
to Iran.2 Two of the major ways that societal trends and events affect employers are
through (1) consumer markets, which affect the demand for goods and services, and
(2) labor markets, which affect the supply of people to produce goods and services. In
some cases, the market might be characterized by a labor shortage. In other cases, the
market may be characterized by a surplus of labor. Reconciling the difference between
the supply and demand for labor presents a challenge for organizations, and how they
address this will affect their overall competitiveness.
There are three keys to effectively utilizing labor markets to one’s competitive advan-
tage. First, companies must have a clear idea of their current configuration of human
resources. In particular, they need to know the strengths and weaknesses of their present
stock of employees. Second, organizations must know where they are going in the future
and be aware of how their present configuration of human resources relates to the con-
figuration that will be needed. Third, where there are discrepancies between the present
configuration and the configuration required for the future, organizations need programs
that will address these discrepancies.
This chapter looks at tools and technologies that can help an organization develop
and implement effective strategies for leveraging labor market “threats” into opportuni-
ties to gain competitive advantage. In the first half of the chapter, we lay out the actual
steps that go into developing and implementing a human resource plan. Through each
section, we focus especially on recent trends and practices (like downsizing, employing
CHAPTER 5 Human Resource Planning and Recruitment 185
temporary workers, and outsourcing) that can have a major impact on the firm’s bottom
line and overall reputation. In the second half of the chapter, we familiarize you with the
process by which individuals find and choose jobs and the role of personnel recruitment
in reaching these individuals and shaping their choices.
The Human Resource Planning Process LO 5-1

Discuss how to align
An overview of human resource planning is depicted in Figure 5.1. The process con- a company’s strategic
sists of forecasting, goal setting and strategic planning, and program implementation and direction with its human
resource planning.
evaluation. We discuss each of these stages in the next sections of this chapter.
FORECASTING
The first step in the planning process is forecasting, as shown in the top portion of Forecasting
Figure 5.1. In personnel forecasting, the HR manager attempts to ascertain the supply of The attempts to
and demand for various types of human resources. The primary goal is to predict areas determine the supply
of and demand for
within the organization where there will be future labor shortages or surpluses. various types of human
Forecasting, on both the supply and demand sides, can use either statistical methods resources to predict
or judgmental methods. Statistical methods are excellent for capturing historic trends areas within the organi-
in a company’s demand for labor, and under the right conditions they give predictions zation where there will
that are much more precise than those that could be achieved through subjective judg- be future labor short-
ages or surpluses.
ments of a human forecaster. On the other hand, many important events that occur in
the labor market have no historical precedent; hence, statistical methods that work from
historical trends are of little use in such cases. With no historical precedent, one must
rely on the pooled subjective judgments of experts, and their “best guesses” might be the
only source from which to make inferences about the future. Typically, because of the
complementary strengths and weaknesses of the two methods, companies that engage in
human resource planning use a balanced approach.
Figure 5.1
Forecasts of Forecasts of Overview of the
labor demand labor supply Human Resource
Planning Process
Forecasts of labor
surplus or shortage
Goal setting and

strategic planning
Program implementation
and evaluation
LO 5-2 Determining Labor Demand

Determine the labor Typically, demand forecasts are developed around specific job categories or skill areas
demand for workers in
relevant to the organization’s current and future state. Once the job categories or skills
various job categories.
are identified, the planner needs to seek information that will help predict whether the
need for people with those skills or in that job category will increase or decrease in the
future. For example, due to the aging population in the United States, elder care is one
of the fast-growing industries, and thus, there is likely to be a high demand for workers
with skills that suit this work. In contrast, the advent of e-mail, the Internet, and text
messaging means that the demand for postal carriers is headed in the opposite direction.3
Organizations differ in the sophistication with which such forecasts are derived.
At the most sophisticated level, an organization might have statistical models that
predict labor demand for the next year given relatively objective statistics on leading
Leading Indicator indicators from the previous year. A leading indicator is an objective measure that accu-
An objective measure rately predicts future labor demand. For example, in the cattle industry, the price of corn
that accurately predicts is closely related to the cost of beef. Hence, sharp increases in corn prices at Time 1
future labor demand.
affect the price, and therefore the demand for cattle at Time 2. In turn, the demand for
cattle affects the number of workers needed to staff slaughterhouses. Thus, when drought
conditions in 2012 caused a spike in corn prices, this predictably meant that Cargill, a
large beef processor, would need fewer workers in 2013. Thus, Cargill shut down a large
plant in Plainview, Texas, well before the effects of the drought were even seen at the
plant. Had the company not anticipated this drop in demand, as many as 2,000 workers
would have had to be paid even though they had nothing to do.4 In contrast, although the
relationship between oil prices and demand for rig workers is well known, the drop in oil
prices in 2015 attributed to the rapid growth of the fracking industry came as a surprise
to many, and hence over 100,000 workers in this industry had to be laid off when con-
fronted with an unanticipated change in demand.5
Similarly, the demand for welders can be predicted by the growth in the manufac-
turing sector of the economy. Thus, when the U.S. manufacturing sector grew for four
straight years between 2010 and 2014, the demand for skilled welders increased. How-
ever, decades of slow manufacturing growth meant that many people left this field and
few new people entered the field. Hence, the American Welding Society has estimated
that by 2020 there will be a demand for close to 300,000 more welders relative to the
number working today.6
Statistical planning models are useful when there is a long, stable history that can
be used to reliably detect relationships among variables. However, these models almost
always have to be complemented by subjective judgments of people who have expertise
in the area. There are simply too many “once-in-a-lifetime” changes that have to be con-
sidered and that cannot be accurately captured in statistical models. For example, only a
decade ago, one would have never even heard the job title “cloud computing engineer,”
and yet, this is projected to be one of the fast-growing areas when it comes to the demand
for labor in the future. Thus, for a job like this, there is no historical data to fall back on.
Still, experts in the area rely on subjective judgments, and hence, Robert Patrick, vice
president for marketing at Hewlett-Packard, confidently predicts that “the clouds skill
gap is the single biggest barrier to the future adoption of cloud infrastructures.”7
Determining Labor Supply

Once a company has projected labor demand, it needs to get an indicator of the firm’s
labor supply. Determining the internal labor supply calls for a detailed analysis of how
many people are currently in various job categories (or who have specific skills) within
the company. This analysis is then modified to reflect changes in the near future caused
by retirements, promotions, transfers, voluntary turnover, and terminations.
As in the case of labor demand, projections for labor supply can be derived either from
historical statistical models or through judgmental techniques. One type of statistical pro-
cedure that can be employed for this purpose involves transitional matrices. Transitional Transitional Matrix
matrices show the proportion (or number) of employees in different job categories at dif- Matrix showing the
ferent times. Typically these matrices show how people move in one year from one state proportion (or number)
of employees in
(outside the organization) or job category to another state or job category. different job categories
Table 5.1 shows a hypothetical transitional matrix for a hypothetical manufacturer, at different times.
focusing on seven job categories. Although these matrices look imposing at first, you
will see that they are easy to read and use in determining the internal labor supply. A
matrix like the one in this table can be read in two ways. First, we can read the rows to
answer the question “Where did people in this job category in 2013 go by 2016?” For
example, 70% of those in the clerical job category (row 7) in 2013 were still in this job
category in 2016, and the remaining 30% had left the organization. For the production
assembler job category (row 6), 80% of those in this position in 2013 were still there in
2016. Of the remaining 20%, half (10%) were promoted to the production manager job
category, and the other half (10%) left the organization. Finally, 75% of those in the pro-
duction manager job category in 2013 were still there in 2016, while 10% were promoted
to assistant plant manager and 15% left the organization.
Reading these kinds of matrices across rows makes it clear that there is a career pro-
gression within this firm from production assembler to production manager to assistant
plant manager. Although we have not discussed rows 1 through 3, it might also be noted
that there is a similar career progression from sales apprentice to sales representative
to sales manager. In this organization, the clerical category is not part of any career
progression. That is, this job category does not feed any other job categories listed in
Table 5.1.
A transitional matrix can also be read from top to bottom (in the columns) to answer
the question “Where did the people in this job category in 2016 come from (Where
were they in 2013)?” Again, starting with the clerical job (column 7), 70% of the
2016 clerical positions were filled by people who were also in this position in 2013,
and the remaining 30% were external hires (they were not part of the organization in
2013). In the production assembler job category (column 6), 80% of those occupying
this job in 2016 occupied the same job in 2013, and the other 20% were external hires.
The most diversely staffed job category seems to be that of production manager
Table 5.1
2016 A Hypothetical
Transitional Matrix
2013 (1) (2) (3) (4) (5) (6) (7) (8)
for an Auto Parts
Manufacturer
(1) Sales manager .95 .05
(2) Sales representative .05 .60 .35
(3) Sales apprentice .20 .50 .30
(4) Assistant plant manager .90 .05 .05
(5) Production manager .10 .75 .15
(6) Production assembler .10 .80 .10
(7) Clerical .70 .30
(8) Not in organization .00 .20 .50 .00 .10 .20 .30
(column 5): 75% of those in this position in 2016 held the same position in 2013; how-
ever, 10% were former production assemblers who were promoted, 5% were former
assistant plant managers who were demoted, and 10% were external hires who were
not with the company in 2013.
Matrices such as these are extremely useful for charting historical trends in the
company’s supply of labor. More important, if conditions remain somewhat constant,
they can also be used to plan for the future. For example, if we believe that we are
going to have a surplus of labor in the production assembler job category in the next
three years, we note that by simply initiating a freeze on external hires, the ranks of
this position will be depleted by 20% on their own. Similarly, if we believe that we will
have a labor shortage in the area of sales representatives, the matrix informs us that we
may want to (1) decrease the amount of voluntary turnover in this position, since 35%
of those in this category leave every three years, (2) speed the training of those in the
sales apprentice job category so that they can be promoted more quickly than in the
past, and/or (3) expand external recruitment of individuals for this job category, since
the usual 20% of job incumbents drawn from this source may not be sufficient to meet
future needs.
As with labor demand, historical precedents for labor supply may not always be
reliable indicators of future trends. For example, it is typically the case that when
unemployment is high, applications for any open positions increase dramatically com-
pared to what might be experienced when the unemployment rate is low. However, in
2010, many employers who were posting open positions found that there were very
few people actually applying for jobs. This was attributed to the fact that unemploy-
ment benefits had been extended to unprecedented lengths (99 weeks) and because
the collapse of the housing market made it impossible for people to sell their homes,
leaving them locked into their current location.8 Similarly, in the nuclear energy field,
the near meltdown of three nuclear power plants in Fukushima, Japan, following the
earthquake and tsunami that rocked that region in 2011 had an immediate effect on
students enrolling in nuclear engineering programs across the world. Many students
stopped enrolling in those programs or switched to other fields of study, suggesting
that in the future, the supply of young people with this set of skills is likely to be much
lower than it is today.9
Determining Labor Surplus or Shortage

LO 5-3 Once forecasts for labor demand and supply are known, the planner can compare the fig-
Discuss the advantages ures to ascertain whether there will be a labor shortage or labor surplus for the respective
and disadvantages of job categories. When this is determined, the organization can determine what it is going
various ways of elimi-
nating a labor surplus
to do about these potential problems. For example, in the construction industry in 2015,
and avoiding a labor a shortage of skilled laborers meant that many real estate developers had to cut back on
shortage. building plans or had these plans delayed an inordinate amount of time because of the
inability to find workers with specific skills. In Denver, Shea Homes had plans and fund-
ing to build 325 homes but could not execute these plans because the company could
not find workers to fit and install cabinets, as well as heating, ventilation, and air condi-
tioning installers.10 In contrast, the Bureau of Labor Statistics estimates that during the
decade ending in 2020, the U.S. economy will create roughly 70,000 lawyer positions,
while U.S. law schools are matriculating over 25,000 graduates a year. This translates
into a labor surplus of 175, 000 lawyers with little of nothing to do.11 Clearly, the longer
one has to adjust to these kinds of surpluses and shortages, the easier the adjustment, and
thus forecasting is a critical strategic human resource activity.
GOAL SETTING AND STRATEGIC PLANNING

The second step in human resource planning is goal setting and strategic planning, as
shown in the middle of Figure 5.1. The purpose of setting specific quantitative goals is
to focus attention on the problem and provide a benchmark for determining the relative
success of any programs aimed at redressing a pending labor shortage or surplus. The
goals should come directly from the analysis of labor supply and demand and should
include a specific figure for what should happen with the job category or skill area and a
specific timetable for when results should be achieved.
The hypothetical manufacturer described in Table 5.1, for instance, might set a goal
to reduce the number of individuals in the production assembler job category by 50%
over the next three years. Similarly, the firm might set a goal to increase the number of
individuals in the sales representative job category by 25% over the next three years.
Once these goals are established, the firm needs to choose from the many different
strategies available for redressing labor shortages and surpluses. Table 5.2 shows some
of the options for a human resource planner seeking to reduce a labor surplus. Table 5.3
shows some options available to the same planner intent on avoiding a labor shortage.
This stage is critical because the many options available to the planner differ widely in
their expense, speed, effectiveness, amount of human suffering, and revocability (how eas-
ily the change can be undone). For example, if the organization can anticipate a labor sur-
plus far enough in advance, it may be able to freeze hiring and then just let natural attrition
adjust the size of the labor force. If successful, an organization may be able to avoid layoffs
altogether, so that no one has to lose a job. Similarly, with enough advance warning, if an
organization can anticipate a labor shortage for some job category like “welder,” it might
be able to work with a local community college to provide scholarships to students who are
willing to learn those skills in return for committing to work for that employer in the future.
OPTION SPEED HUMAN SUFFERING Table 5.2

Options for Reducing
1. Downsizing Fast High an Expected Labor
Surplus
2. Pay reductions Fast High
3. Demotions Fast High
4. Transfers Fast Moderate
5. Work sharing Fast Moderate
6. Hiring freeze Slow Low
7. Natural attrition Slow Low
8. Early retirement Slow Low
9. Retraining Slow Low
Table 5.3
OPTION SPEED REVOCABILITY
Options for Avoiding
an Expected Labor
1. Overtime Fast High Shortage
2. Temporary employees Fast High
3. Outsourcing Fast High
4. Retrained transfers Slow High
5. Turnover reductions Slow Moderate
6. New external hires Slow Low
7. Technological innovation Slow Low
Unfortunately for many workers, in the past decade the typical organizational response
to a surplus of labor has been downsizing, which is fast but high in human suffering. The
human suffering caused by downsizing has both an immediate and a long-term element.
In the short term, the lack of pay, benefits, and meaningful work has negative implica-
tions for financial, physical, and psychological aspects of individuals, causing bankrupt-
cies, illnesses, and depression. Then, even if one can survive these immediate problems,
in the long term, an extended bout of unemployment (e.g., lasting over six months) can
stigmatize the individual, thus reducing future opportunities. In particular, in job catego-
ries where skills are perishable and need to be constantly updated, many laid-off workers
will take any work within their area—even unpaid volunteer work—in order to prevent
a gap in their employment history.12 However, after very long periods of unemployment,
people may give up looking for work altogether. This can often create a confusing mes-
sage as in 2014 when the unemployment rate improved, not because more people were
finding work (and hence boosting the numerator of that index), but because instead,
people stopped looking for work (and hence reduced the denominator of that index).13
As our “Evidence-Based HR” feature shows, people often give up looking for work soon
after their unemployment benefits run out. The typical organizational response to a labor
shortage has been either hiring temporary employees or outsourcing, responses that are
fast and high in revocability. Given the pervasiveness of these choices, we will devote
special subsections of this chapter to each of these options.
Downsizing
Downsizing We define downsizing as the planned elimination of large numbers of personnel designed
The planned elimination to enhance organizational effectiveness. Although one tends to think of downsizing as
of large numbers of
something that a company turns to in times of recession or when facing bouts of poor
personnel designed to
enhance organizational performance, in fact, many companies that are doing quite well still downsize their
effectiveness. workforce regularly for strategic reasons. For example, although Microsoft was doing
fine in 2014, it still laid off 18,000 workers in the phone and tablet divisions after the
purchase of Nokia left the company with a surplus of workers in those areas.14 Similarly,
Hewlett-Packard cut 16,000 jobs that same year and used the roughly $1 billion in sav-
ings to invest more heavily in cloud computing services.15
Surveys indicate three major reasons that organizations engage in downsizing. First,
many organizations are looking to reduce costs, and because labor costs represent a big
part of a company’s total costs, this is an attractive place to start. For example, in 2012,
Yahoo cut 2,000 jobs, which amounted to 15% of their workforce. The company expects
to see an annual savings of $375 million, although this is partially offset by an estimated
$145 million onetime cost associated with paying employees severance pay.16
Second, in some organizations, the introduction of new technologies or robots reduces
the need for a large number of employees. For example, at General Electric’s new bat-
tery manufacturing plant in Schenectady, New York, the entire 200,000-square-foot
facility requires only 370 workers, only 200 of which are actually on the shop floor. The
plant manager runs the entire operation, including lights, heat, inventory, purchasing and
maintenance from an iPad that is linked to wireless sensors embedded in the batteries
themselves. As Prescott Logan, the general manager of the plant, states, “It is not about
low cost labor but high technology. We are listening directly to what our batteries are
telling us and then thinking about ways to monetize that.”17 In general, new technologies
often displace workers, and in today’s modern manufacturing plants, a small number of
highly skilled workers can run a plant that in previous generations required hundreds of
low-skilled laborers whose jobs will never come back.18
EVIDENCE-BASED HR
One constant question when it comes to public policy is whether unemployment ben-
efits actually result in higher levels of unemployment because they reduce the level of
motivation for people to go back to work. That is, even though that in order to obtain
benefits, beneficiaries must be able to prove they are looking for work, many do not
accept offers while they are still enjoying benefits. Thus, based upon this logic, some
have argued that the duration of benefits should be reduced. This is exactly the oppo-
site of recent policy, however, where the length of such benefits has been frequently
extended.
A recent experiment in North Carolina provides some interesting new insights to
this debate. In 2014, the Tarheel State cut back the duration of benefits for residents
from 26 weeks, the standard in most states, to 12 weeks. Two facts quickly became
clear after this move. First, the unemployment rate dropped from 8.8% to 7.4%, which
at first glance sounds like good news. However, the second fact was that all of this
was attributable to the fact that people stopped looking for work (and hence were
dropped from the denominator of that ratio), not that people were obtaining work (the
numerator of that ratio). In terms of motivation, unemployment benefits seem to keep
people engaged in job search because they have to show they are searching in order
to continue to receive benefits. When their unemployment benefits run out, however,
they simply stop looking for work because benefits are no longer contingent upon
searching; they just stop receiving benefits either way.
SOURCES: V. McGrane, “The Downside of Lower Unemployment,” The Wall Street Journal, February 2, 2014,
www.wsj.com; J. Green, “Unemployment Rate, Down, Unemployed People, Up,” Bloomberg Businessweek,
January 12, 2014.
A third reason for downsizing was that, for economic reasons, many firms changed
the location of where they did business. Some of this shift was from one region of the
United States to another—in particular, many organizations moved from the Northeast,
the Midwest, and California to the South and the mountain regions of the West. In some
cases, technology is employed to move work that one might think was not that mobile.
For example, the McDonald’s restaurant chain experimented with drive-up windows in
Michigan that were staffed with lower-wage workers located in Fargo, North Dakota.
What looked like a standard drive-up squawk box was actually a long-distance connec-
tion, where Michigan orders were taken down by a worker in North Dakota who then
relayed the order information back to the Michigan staff.19
Although downsizing has an immediate effect on costs, much of the evidence sug-
gests that it has negative effects on long-term organizational effectiveness, especially for
some types of firms. Also, the negative effects of downsizing seem to be exacerbated
in service industries characterized by high levels of customer contact. For example, in
the five-year period between 2009 and 2013, Walmart added over 450 new stores to its
portfolio, but at the same time, reduced headcount by over 20,000 people. The average
number of employees per store dropped from 343 to 301 and this resulted in a workforce
that was spread too thinly across the large stores. This in turn resulted in longer check-
out lines, less support to customers who needed help, and difficulty keeping the shelves
stocked. One former Walmart customer, Tim White, noted, “You wait 20, 25 minutes
for someone to help you, and then, the person who comes was not trained in that area.
And, even though the long checkout lines were irritating, the No. 1 reason I gave up on
Walmart was its prolonged, horrible, maddening inability to keep items in stock.”20 In
addition, when downsizing efforts are not complemented by changes in the nature of
work roles, then performance also tends to suffer.21
Still, many employers engage in this tactic and hence it is important to understand
what goes into an effective versus ineffective downsizing campaign. There seem to be a
number of reasons for the failure of most downsizing efforts to live up to expectations
in terms of enhancing firm performance. First, although the initial cost savings are a
short-term plus, the long-term effects of an improperly managed downsizing effort can
be negative. Downsizing not only leads to a loss of talent, but in many cases it disrupts
the social networks needed to promote creativity and flexibility.22 For example, many
have attributed the slow public health response to the Ebola outbreak in 2014 to cuts
made at local agencies. City, county, and state health departments cut 60,000 jobs in
the six-year period from 2008 to 2014, and thus, education programs—that might have
prevented health care workers like those in Dallas from catching the disease from their
own patients—were eliminated. Reversing this process in an area that relies on skilled
employees is difficult. As one industry expert noted, “You may be able to buy equipment
quickly but you can’t buy trained personnel quickly.”23
Second, many downsizing campaigns let go of people who turn out to be irre-
placeable assets. In fact, one survey indicated that in 80% of the cases, firms wind
up replacing some of the very people who were let go. In other cases, firms bring
back the specific people who were let go, often at a higher salary. In fact, the term
“boomerang employee” has been coined to refer to this increasingly used source of
recruits. Several companies such as Procter and Gamble, J.C. Penney, Nike, Pep-
siCo, and Toys “R” Us have tapped former executives to lead their management team.
These individuals come in knowing the company well, but they also bring a new
perspective achieved by having success at some other venture. More than a traditional
outsider, boomerang executives have a sense of what changes will and will not take
hold at their old company.24
A third reason downsizing efforts often fail is that employees who survive the purges
often become narrow-minded, self-absorbed, and risk-averse. Motivation levels drop
off because any hope of future promotions—or even a future—with the company dies
out. Many employees also start looking for alternative employment opportunities.25 The
negative publicity associated with a downsizing campaign can also hurt the company’s
image in the labor market, making it more difficult to recruit employees later. Especially
in an age of blogs and text messaging, the once-private practice of laying off employees
is becoming increasingly transparent, and any organizational mistake that gets made in
the process is likely to become highly public.26 The key to avoiding this kind of reputa-
tion damage is to ensure that the need for the layoff is well explained and that procedures
for implementing the layoff are fair. Although this may seem like common sense, many
employers execute layoffs in ways that make matters worse. For example, as we show in
the “Competing through Technology” box, when business needs conflict with the per-
sonal needs of employees, heavy-handed practices involving layoffs can create a number
of problems.
The key to a successful downsizing effort is to avoid indiscriminant across-the-board
reductions, and instead perform surgical strategic cuts that not only reduce costs, but
also improve the firm’s competitive position. For example, at the State University of
New York, $50 million was saved across the system via a series of cuts that consolidated
many senior administrative positions. The same practice cut $70 million at the Univer-
sity of California at Berkeley, and $5 million at the University of Kansas. These cuts
were specifically targeted at “administrative bloat” revealed by research that showed that
the number of employees hired by colleges to administer people and programs rose 50%
faster than the number of professors in the last 12 years. The size of the instructional and
research staff was left as is, and the evidence suggests that student outcomes were not
affected at all by such cuts.27
Early Retirement Programs and Buyouts

Another popular means of reducing a labor surplus is to offer an early retirement pro-
gram. As shown in Figure 5.2, the average age of the U.S. workforce is increasing. But
although many baby boomers are approaching traditional retirement age, early indica-
tions are that this group has no intention of retiring any time soon.28 Several forces fuel
the drawing out of older workers’ careers. First, the improved health of older people in
general, in combination with the decreased physical labor in many jobs, has made work-
ing longer a viable option. Second, this option is attractive for many workers because
they fear Social Security will be cut, and many have skimpy employer-sponsored pen-
sions that may not be able to cover their expenses. Third, age discrimination legislation
and the outlawing of mandatory retirement ages have created constraints on organiza-
tions’ ability to unilaterally deal with an aging workforce. Finally, many employers are
increasingly concerned about losing the wealth of experience that older workers bring to
their companies.
Although an older workforce has some clear advantages for employers in terms of
experience and stability, it also poses problems. First, older workers are sometimes more
costly than younger workers because of their higher seniority, higher medical costs, and
higher pension contributions. For example, at Toyota’s plant in Georgetown, Kentucky,
veteran workers earn $26 an hour compared to $16 an hour for new hires. In an effort to
shift the workforce from high-paid to low-paid workers, Toyota offered retirement incen-
tives to 2,000 workers at the plant. Each worker could get a lump sum payment equal
to two weeks of pay for every year of service, up to a maximum of 25 years, plus eight
weeks additional pay. In return for taking the buyout, workers would agree to retire on
a fixed schedule that prevents all the workers from retiring at once.29 When the value of
40 Figure 5.2
Percentage of Americans aged 55 or older
Aging of the
U.S. Population,
2000–2020
30
20
0
2000 2010 2020
You and Your Smartphone Are Both Fired!
Imagine you are at a restaurant the fact that every employee is business informa-
enjoying dinner, and then all likely to differ in their techno- tion from one of
of a sudden, without warning, logical device needs, employ- your devices to another. Thus,
your smartphone powers off. ers have migrated to a system you need to be surgical in terms
Then, when you power it back whereby employees provide of what files that you back up at
up, you realize that everything their own devices for work. This work and what files you do not
you had on the device—your creates a situation where propri- copy. In contrast, your employer
pictures, contacts, music, games, etary business information and is probably going to be less than
and e-mail were all erased. This personal information reside side- surgical when it comes to wiping
is exactly what happened to by-side, and when it becomes out your device, in the sense that
one employee at AlphaCore necessary for the company to employers just sweep the whole
the night that both he and his erase one, it typically erases the device clean, including both
device were terminated in a other as well. business and personal data.
process called “remote wip- Most employees sign off on
ing.” The worker was part of the practice when they accept DISCUSSION QUESTIONS
a work arrangement referred an employment offer, but usu- 1. Is it fair for employers to make
to as BYOD—“Bring Your Own ally this is done as one of a employees provide their
Device”—and this is an ever- number of “dialogue boxes” that own technology in order to
increasing policy and practice at employees check “yes” to but conduct business?
many employers. never really read. So when they 2. Can you think of other non-
As the line between work and are remotely wiped, it comes technological examples of
nonwork has blurred over the as a complete surprise. If you how employees may have to
years, more and more workers are aware that you are part of a pay their own way as part of
are using their personal devices BYOD system, you might want an employment relationship?
for work. At one time, employers to make sure you back up your SOURCES: C. Green, “Six Tips for Building
used to provide such devices to personal information to some a 2015-Proof BYOD Policy,” Information Age,
employees themselves, but in other private device, but most April 28, 2015, www.information-age.com;
L. Weber, “BYOD: Leaving a Job Can Mean
order to reduce costs and avoid companies also have rules Losing Pictures of Grandma,” The Wall Street
the complexities associated with that prevent you from copying Journal, January 21, 2014, www.wsj.com.
the experience offsets these costs, then employers are fine; but if it does not, it becomes
difficult to pass these costs to consumers.
Second, because older workers typically occupy the best-paid jobs, they sometimes
prevent the hiring or block the advancement of younger workers. This is frustrating for
the younger workers and leaves the organization in a perilous position whenever the
older workers decide to retire. Indeed, although a weak economy hurts the prospects of
all workers, the impact is especially hard on young people who have limited work expe-
rience and skills. In many cases, the first place companies pull back when hiring is with
entry-level jobs critical to young employees who are trying to start their careers. For
example, the number of recruiters that require two or more years’ experience for first-
line management positions rose by 30% over the last five years. In addition, the demand
for bottom-rung professional positions such as loan officer, insurance underwriter, and
credit analyst has dropped substantially over the same time period.30 As the “Competing
through Sustainability” box shows, all these developments raise questions about how to
best educate young people when it comes to securing employment.
194
Underemployment: Is the Need for a Four-Year Degree Sustainable?
Although making the transi- to students majoring in communi- degrees and
tion from college to the world cations, liberal arts, and the social apprenticeship pro-
of work has never been easy, sciences. Also, although the grams such as those popular in
recent studies suggest that this picture for students with these Germany. This would create a
challenge is more difficult than majors is somewhat grim when better, long-term sustainable fit
it has ever been for recent U.S. it comes to underemployment, between the supply and demand
college graduates. A staggering the picture looks a little better for labor when it comes to high-
56% of 22-year-old college grad- when it comes to unemploy- and middle-level skills.
uates currently work in jobs that ment. Indeed, in December 2014,
do not require a college degree, among those who were older DISCUSSION QUESTIONS
and in many cases, these jobs than 25, 7.7% of those without 1. What are some of the reasons
fail to provide enough income a college diploma were unem- why it might be more difficult
to support loans that might have ployed compared to just 3.3% of for college graduates to enter
been incurred in order to obtain those with a college degree. the workforce today versus
such a degree. It appears that the demand 20 years ago?
Although this may make one for jobs that require “middle- 2. In what ways are the limits
question the wisdom of obtain- level skills” accounts for a great associated with not attending
ing a college degree, especially deal of the underemployment college greater today than
if one has to go into debt to rate for college graduates and they were 20 years ago?
accomplish this, in fact, a lot the unemployment rate for SOURCES: C. Gummer, “German-Style Train-
depends upon the major one those who never went to col- ing for American Factory Workers,” The Wall
chooses in college. Students lege. Many labor economists Street Journal, September 9, 2014, www.wsj.
com; D. Wessel, “For Recent Grads, Good Jobs
majoring in engineering, math, have argued the U.S. system Are Hard to Find,” The Wall Street Journal,
computers, health care, business, of education would fare much January 15, 2014, www.wsj.com; C. Porter, “Mil-
or education see a much higher better when it comes to employ- lennials Face Uphill Climb,” The Wall Street
Journal, September 30, 2013, www.wsj.com.
return on their investment relative ment by emphasizing two-year
In fact, simply graduating into a bad economy can have lasting negative effects on
workers. For example, one study found that for each percentage point rise in the unem-
ployment rate, those who graduated during a recession earn 7% less in their first year on
the job, and 3% less even 15 years later, relative to peers who just happened to graduate
in better economic times.31
In the face of such demographic pressures, many employers try to induce volun-
tary attrition among their older workers through early retirement incentive programs.
Although some research suggests that these programs do induce attrition among lower-
performing older workers, to a large extent, such programs’ success is contingent upon
accurate forecasting. For example, in Japan, many workers continue to work well beyond
the country’s official retirement age of 60. Fortunately, Japan’s private employers can
force employees to retire at 60 if they wish, and workers often accept lower wages in
order to stay on. Thus, Komatsu, the world’s second largest construction equipment
manufacturer, rehires 90% of its retirees at 40% of their past pay. In the United States, on
the other hand, people cannot be forced into retirement and have to be coaxed out of the
job with an incentive package.32
195
For example, the Washington Post offered workers roughly a year and a half in sal-
ary, and this offer seemed in line with what it generally takes to get people to leave
voluntarily. Interestingly, while the Post was cutting the number of employees, the New
York Times decided to reduce pay levels by roughly 3% and not lay off or buy out any
employees. Rather than seeing size as a liability, Executive Editor Bill Keller saw it as a
source of unique competitive advantage for the Times (in fact, the largest newsroom in
the country), describing his current stock of employees as “the engine of our long term
success.”33
Pension plans often become extremely burdensome for companies, and hence, some
large employers have recently tried to back away from their obligations. For example, in
2012, General Motors and Ford attempted to buy out the pensions of 140,000 salaried
workers. Both companies were flush with cash after having recorded profit of $9 billion
and $20 billion respectively in 2011, and saw this as a one-time opportunity to slash their
pension liabilities with a mass buyout. Because pension funds are invested in securities,
their values rise and fall unexpectedly, and hence removing these from the balance sheet
is often a very desirable goal.34
Employing Temporary Workers

Whereas downsizing has been a popular method for reducing a labor surplus, hiring
temporary workers and outsourcing has been the most widespread means of eliminating
a labor shortage. The number of temporary employees in the United States swelled from
4.5 million in 1997 to 28 million in 2014.35 Many expect this number to grow even larger
with the passage of the Affordable Care Act because employers can avoid the mandate
to provide health care to anyone who works less than 30 hours a week.36 Temporary
employment afforded firms the flexibility needed to operate efficiently in the face of
swings in the demand for goods and services. In fact, a surge in temporary employment
often preceded a jump in permanent hiring, and was often a leading indicator that the
economy was expanding. However, that no longer seems to be the case. Employers today
seem to appreciate the flexibility that comes with hiring temporary employees and like
being able to match quick changes in consumer demands for products and services with
quick changes in the supply of labor. As one CEO notes, “You need the flexibility in
your manpower costs since sales can fluctuate more.”37
In addition to flexibility, hiring temporary workers offers several other advantages:
∙ The use of temporary workers frees the firm from many administrative tasks and
financial burdens associated with being the “employer of record.”
∙ Small companies that cannot afford their own testing programs often get employees
who have been tested by a temporary agency.
∙ Many temporary agencies train employees before sending them to employers, which
reduces training costs and eases the transition for both the temporary worker and the
company.
∙ Because the temporary worker has little experience in the host firm, the person
brings an objective perspective to the organization’s problems and procedures that is
sometimes valuable.
Finally, although it may seem ironic, many employers wind up trying to hire excellent
temporary workers for full-time jobs after some period of time. Note, however, that there
is usually a fee that has to be paid for permanently “stealing” a temporary employee from
a temp agency. Still, some temp agencies actually have “Temp-to-Full-Time programs”
that actually try to promote this goal for some workers who want to be full-time employ-
ees. The client in this case is encouraged to make a job offer to the employee within a
predetermined time period, should the match seem like a good one. According to the
American Staffing Association, 74% of temporary workers actually decide to become
temporary employees because it’s a way to get a full-time job.38
Certain disadvantages to employing temporary workers need to be overcome to
effectively use this source of labor. For example, in the service sector of the economy,
low levels of commitment to the organization and its customers on the part of tempo-
rary employees often spills over and reduces the level of customer loyalty.39 Instead
of replacing long-term employees with temporary employees, many organizations try
to buffer their “core employees” from wild swings in demand by supplementing their
core staff with a small set of temporary workers. For example, in 2009, Boeing cut
1,500 temporary workers from one of its divisions, but retained all of its permanent
workers. HR executive Jim Proulx noted that, “The first imperative was to reduce
all of the contract and contingent labor that we possibly could to shield our regular
employees.”40
In addition, there is often tension between a firm’s temporary employees and its full-
time employees. If the organization is concerned about the reactions of full-time workers
to the temporaries, it may want to go out of its way to hire “nonthreatening” temporaries.
For example, although most temporary workers want their temporary assignments to
turn into full-time work (75% of those surveyed expressed this hope), not all do. Some
prefer the freedom of temporary arrangements. These workers are the ideal temporaries
for a firm with fearful full-time workers.41
Outsourcing, Offshoring, and Immigration

Whereas a temporary employee can be brought in to manage a single job, in other cases
a firm may be interested in getting a much broader set of services performed by an out-
side organization; this is called outsourcing. Outsourcing is a logical choice when a firm Outsourcing
simply does not have certain expertise and is not willing to invest time and effort into An organization’s use
developing it. For example, rather than hire an MBA full time, some companies may of an outside organiza-
tion for a broad set of
decide just to “rent one” for a short, specific project. In fact, a group of Harvard MBAs services.
started a new firm called “HourlyNerd” to meet just this growing need. Businesses pay
$75 to $100 an hour for specific one-time tasks like pricing a new product or valuating a
business that requires a short dose of expertise.42 Similarly, in the area of research and
development, generic labs have sprung up that allow companies to perform experiments
and product testing that may require expensive equipment that is better to rent than own.
For example, Emerald Therapeutics provides these kinds of services for small pharma-
ceutical companies that may have big ideas but limited infrastructure to test such ideas.
Emerald rents out both its expensive machinery and talented technicians, thus essentially
creating a virtual research and development division for a small company that could
never develop this capacity internally.43
Ironically, companies increasingly outsource many of their human resource man-
agement tasks to outside vendors who specialize in efficiently performing many of
the more routine administrative tasks associated with this function. Figure 5.3 shows
a forecast for growth rates in the human resource outsourcing (HRO) industry. Cost
savings in this area are easily obtained because rather than purchase and maintain their
own specialized hardware and software, as well as specialized staff to support such
systems, companies can time-share the facilities and expertise of a firm that focuses
Figure 5.3 (21%)

U.S. Multiprocess 1.475
HR Outsourcing $1,500 billion
Forecast (21%)
1.21
(21%) billion
$1,200
1
Market size in millions billion
(18%)
$900
825
(16%)
700
600
$600
$300
$0
2005 2006 2007 2008 2009 2010
Note: Percentage 5 compound annual growth rate.
SOURCE: NelsonHall, “Multiple HR Outsourcing in the U.S.: Market Assessment,” June 2006.
on this technology. The hope is also that this frees up HR managers to focus on more
strategic issues. As Samuel Borgese, VP of HR for Catalina Restaurant Group, notes,
“This allows us to keep strategic tasks in-house with tactical support from the out-
sourcing vendor. It’s very difficult for a VP of HR to be a strategic player if he or she
is managing the HR infrastructure.”44
In other cases, outsourcing is aimed at simply reducing costs by hiring less expensive
labor to do the work, and, more often than not, this means moving the work outside the
Offshoring country. Offshoring is a special case of outsourcing where the jobs that move actually
A special case of out- leave one country and go to another. This kind of job migration has always taken place;
sourcing where the however, rapid technological changes have made the current trends in this area histori-
jobs that move actually
leave one country and
cally unprecedented. Offshoring is controversial because close to 800,000 white-collar
go to another. jobs have moved from the United States to India, eastern Europe, Southeast Asia, and
China in the last 10 years.
Although initially many jobs that were outsourced were low scope and simple jobs,
increasingly, higher skilled work is being done overseas. Indeed, the stereotype that
“call center” staffing is the only type of work being offshored is increasingly invalid,
as countries like China, India, and those in eastern Europe try to climb the skill lad-
der of available work. The growth in India is now in higher-paying contracts dealing
with business process improvement, processing mortgages, handling insurance claims,
overseeing payrolls, and reading X-rays and other medical tests.45 Many of the simple
call center jobs that moved to India are simply moving deeper into the rural Indian
villages.46 As the “Competing through Globalization” box highlights, there may be
a new and close source for outsourcing high-skilled labor coming on line soon in the
form of Cuba.
Although this may seem problematic for U.S. employers, in fact, if effectively managed,
firms that offshore certain aspects of work gain an undeniable competitive advantage over
A Revolutionary Supply of High-Skilled Labor
In December 2014, President 80% of college-age Cubans about a future
Obama announced plans to re- are enrolled in postsecondary scenario of mak-
establish diplomatic ties between education. The emphasis of ing baseballs in
the United States and Cuba. most of this education is on the sweatshops. They have people
Soon after this, the U.S. Cham- hard sciences, engineering, and who will be adept at pharma-
ber of Commerce, working on medicine, and the skilled nature ceuticals, computer engineer-
the behalf of employers, began of this labor force was critical to ing and advanced mechanical
lobbying Congress to formally making the island nation sustain- machinery.”
lift the trade embargo on Cuba. able after the Soviet Union with-
The end goal of this effort was to drew its support in the 1990s. DISCUSSION QUESTIONS
help U.S. companies tap into the This history makes the current 1. How would lifting the trade
huge supply of high-skilled labor state of the labor pool in Cuba embargo on Cuba impact
that has been locked away in much more highly skilled relative the regional economies of
that country for decades. to any other nation in the Carib- the Southeast portion of the
Although long characterized bean region. United States?
as a villain in the Unites States, Given the gap between the 2. How would lifting the trade
one undeniable positive legacy high skills needed to support the embargo on Cuba impact
of the Fidel Castro’s regime was U.S. economy and the skill base other countries in the Carib-
its emphasis on education. In the within the country, the oppor- bean region?
immediate wake of the revolu- tunity to tap into a pool of high- 3. Who would be the economic
tion, Castro sent hundreds of skilled labor just a few hundred winners and losers after such
teachers and college students to miles offshore is an opportunity an event?
the Cuban countryside to eradi- that many find irresistible. This SOURCES: K. Vick, “Cuba on the Cusp,”
cate illiteracy, which at the time will not be a country where the Time Magazine, March 26, 2015, http://time.
was close to 50% of the popu- economy is based simply on com; A. S. Gomez and P. W. Hare, “How Educa-
tion Shaped Communist Cuba,” The Atlantic
lation. The government also tourism or low-cost manufactur- Online, February 26, 2015; A. Kurmanaev, E.
sponsored over 100,000 Cuban ing. As Phillip Brenner, a profes- Martin, and S. Valle, “Cuba’s Highly Trained
students to attend Russian and sor of international relations Workforce Beckons Foreign Investors,” Bloom-
berg Businessweek, January 12, 2015, www.
Ukrainian universities, and today, notes, “No one in Cuba is talking bloomberg.com.
their rivals. Ignoring this source of advantage is self-defeating, and akin to putting one’s
head in the sand. For example, Levi-Strauss tried for years to compete against other low-
cost jeans manufacturers who offshored their labor. However, after years of one plant
shutdown after another, the firm finally gave up and closed down all of its U.S. manufac-
turing plants. The move, which many saw as inevitable, was long overdue and had it been
made earlier, the company might have been able to avoid losing over $20 million.
When making the decision to offshore some product or service, organizations should
consider several critical factors. Many who failed to look before they leaped onto the
offshoring bandwagon have been disappointed by their results. Quality control prob-
lems, security violations, and poor customer service experiences have in many cases
wiped out all the cost savings attributed to lower wages and more. For example, in 2014,
meat supplier OSI Group Inc., a main supplier of beef and chicken to restaurants such
as McDonald’s, Yum Brands, and Burger King, was fined when inspectors discovered
that meat processed in Shanghai, China, was repackaged and sold long after the legally
199
mandated sell-by dates. Sheldon Lavin, the CEO of the company, had to go public after
this incident and stated, “I will not try to defend or explain it. It was terribly wrong, and
I am appalled that it ever happened in a company that I own.” This incident threatened
the long-term relationship between OSI and the many restaurants that it supplied, and in
some cases, those relationships came to an end.47
As another example, problems with the development of Boeing’s 787 Dreamliner, a
project that is three years overdue and billions of dollars over budget, have been attrib-
uted to both the amount and type of work that was offshored. With respect to the amount
of outsourced work, the 787 had more foreign content (30%) than any plane Boeing ever
built (where the average is 5%), and many of the component parts manufactured by far-
flung suppliers did not fit together very well. In terms of the nature of the work, Boeing
took on final assembly of the plane, but this is the activity that provided the least amount
of value added.48 Jim Albaugh, the company’s chief of aviation, admitted that “We gave
too much work to people that had never really done this before, and then we didn’t pro-
vide the oversight that was necessary. In hindsight, we spent a lot more money than we
ever would have spent if we tried to keep many of the key technologies closer to Boeing.
The pendulum swung too far.”49
These kinds of problems have led to a resurgence of outsourcing activity that keeps
the work within the boundaries of the United States. For example, many rural areas of the
United States that have been victims of lost manufacturing jobs have retooled themselves
in an effort to attract work that is currently being shipped overseas. The value proposi-
tion offered by these firms is that “We cost less than cities on the East or West Coast, and
we’re easier to deal with than India.”50 Ironically, some of the growth in rural outsourc-
ing has come from firms in India opening up U.S. facilities. For example, several of the
large Indian outsourcing firms such as Tata, Wipro, and Infosys have opened up shop in
rural Ohio using American workers. Privacy laws prevent certain data from being shipped
overseas and hence being local allows these firms to do work with the U.S. government
and health care providers that they could not do otherwise. Moreover, local workers have
a more nuanced understanding of the language and culture that supports working on more
complicated on-site business problems versus simply writing batch code.51
If one cannot take the work overseas, but still wishes to tap into less-expensive global
talent to fill a labor shortage, then one might simply bring foreign workers into the coun-
try. Immigration has always been a vital part of the American economy, and many for-
eign workers are happy to leave their home and pursue their own American dream.52
However, entrance of foreign workers into the United States to fill jobs is federally regu-
lated, so there are limits to what can be accomplished here. Employers wishing to hire
foreign workers need to help them secure work visas and show that there are no qualified
Americans who could do the same work.53
The barriers that the U.S. government has put in place to limit visas—with the current
ceiling of 85,000 a year—are designed to protect American jobs, but many believe this has
actually had the opposite effect on the economy. Research suggests that every immigrant
that is hired by a tech company actually winds up creating an additional five jobs.54 Recog-
nizing this fact, Canada has loosened its visa requirements and reached out to U.S. employ-
ers to move their operations north of the border. Many tech companies, including Microsoft,
Amazon, Facebook, and Salesforce.com, have taken the Canadians up on this offer and
are building spacious new facilities in Vancouver. As a representative for Microsoft stated,
“The U.S. laws clearly did not meet our needs, and thus we have to look to other places.”55
The limits on bringing foreign labor into the United States are particularly problem-
atic for high-tech companies. The growth of these firms has not been matched by a
growing number of students with the advanced skills in mathematics and the sciences
that these firms need. Thus, employers like Mircrosoft and Oracle have aggressively
lobbied the government to ease these restrictions.56 These efforts paid off in 2013 when
a new immigration bill was approved by the Senate Judiciary Committee. This new law
provided access to a green card to any foreign worker with a job in the U.S. and an
advanced degree in math, science, engineering or technology.57 A green card allows
a non-U.S. citizen to live and work in the U.S. on a permanent basis. Although many
employers saw this as a step in the right direction, as we noted earlier, this did not stop
companies from expanding their presence in Canada in 2014.
Altering Pay and Hours

Companies facing a shortage of labor may be reluctant to hire new full-time or part-time
employees. Under some conditions, these firms may have the option of trying to garner
more hours out of the existing labor force. Despite having to pay workers time-and-a-
half for overtime production, employers see this as preferable to hiring and training new
employees—especially if they are afraid that current demand for products or services
may not extend to the future. Also, for a short time at least, many workers enjoy the
added compensation. However, over extended periods, employees experience stress and
frustration from being overworked in this manner.
In the face of a labor surplus, organizations can sometimes avoid layoffs if they can
get their employees to take pay cuts. In general, wages tend to be “sticky” in the sense
that employers are very reluctant to cut someone’s pay, and the data suggests that this
even holds true during economic recession and depressions.58 Still, some employers have
gone this route recently. For example, Hewlett-Packard cut salaries between 3% and 20%
and reduced their contributions to 401(k) plans in the face of the last recession, and many
other firms engaged in the same sort of practices.59 Alternatively, one can avoid layoffs and
hold the pay rate constant but reduce the number of hours of all the workers. For example,
when business at the Bristol, Rhode Island, plastics manufacturer Saint Gobain slowed in
2102, none of the workers were laid off, but many had their hours cut by 40%. This would
have resulted in a major cut in pay for the workers, except for a state government program
that helped Saint Gobain pay 70% of the lost wages in return for the company keeping the
workers on the payroll. The state would have wound up paying a similar amount in unem-
ployment compensation, but this program allowed the company to hold on to experienced
employees for when the economy turns around. These kinds of “work share” programs
have always been popular in Europe but are now starting to be seen in the U.S.60
When a cut in hours is targeted at salaried workers rather than hourly workers, this is
called a furlough. For example, at Arizona State University and the University of Mary-
land, professional workers were furloughed for between 9 to 15 days, saving the institu-
tions roughly $25 million.61 Furloughs are perceived as a good strategy to employ when
the employer has an immediate need to conserve money and protect cash flow, but also
believes that need will be short term and the employees involved have skills that make
them hard to replace in the long term.62
Furloughs are controversial because, unlike most hourly workers who go home after
the assembly line stops running, the work of most white-collar professionals simply piles
up when they leave the office for extended periods of time. Indeed, at Arizona State and
Maryland, most of the professional workers came to work anyway, meaning that the fur-
loughs were actually pay cuts, not reductions in hours. Also furloughs are controversial
because they hit higher-paid employees harder than lower-paid employees, and if these
pay differences were a result of some type of pay-for-performance system, this means
that the best employees take the biggest hit.
PROGRAM IMPLEMENTATION AND EVALUATION

The programs developed in the strategic-choice stage of the process are put into practice
in the program-implementation stage, shown at the bottom of Figure 5.1. A critical aspect
of program implementation is to make sure that some individual is held accountable for
achieving the stated goals and has the necessary authority and resources to accomplish
this goal. It is also important to have regular progress reports on the implementation to
be sure that all programs are in place by specified times and that the early returns from
these programs are in line with projections. The final step in the planning process is to
evaluate the results.
THE SPECIAL CASE OF AFFIRMATIVE ACTION PLANNING

Human resource planning is an important function that should be applied to an organiza-
tion’s entire labor force. It is also important to plan for various subgroups within the
labor force. For example, affirmative action plans forecast and monitor the proportion of
various protected group members, such as women and minorities, that are in various job
categories and career tracks. The proportion of workers in these subgroups can then be
compared with the proportion that each subgroup represents in the relevant labor market.
Workforce This type of comparison is called a workforce utilization review. This process can be used
Utilization Review to determine whether there is any subgroup whose proportion in the relevant labor mar-
A comparison of the
ket is substantially different from the proportion in the job category.
proportion of workers
in protected subgroups If such an analysis indicates that some group—for example, African Americans—
with the proportion that makes up 35% of the relevant labor market for a job category but that this same group
each subgroup repre- constitutes only 5% of the actual incumbents in that job category in that organization,
sents in the relevant then this is evidence of underutilization. Underutilization could come about because of
labor market.
problems in selection or from problems in internal movement, and this could be seen via
the transitional matrices discussed earlier in this chapter. Interestingly, recent workforce
utilization reviews with respect to women show that this subpopulation of the workforce
has been faring well when it comes to employment. A record 67.5 million women were
working in 2013 and whereas women regained all the jobs they lost in the last recession,
the same was not true of men, whose labor force participation rates are at an all-time low.
Much of this can be attributed to the fact that women work in industries with strong job
growth and low wages, such as health care, education, hospitality and retail, whereas
men tend to work in construction and manufacturing—industries that were struggling
until very recently.63
These kinds of affirmative programs are often controversial because they are seen
as unfair by many nonminorities.64 Even some minorities feel that these kinds of
programs unfairly stigmatize the most highly qualified minority applicants because
of perceptions that their hiring was based on something other than their skills and
abilities.65 However, when the evidence provided from a workforce utilization review
makes it clear that a specific minority group has been historically underrepresented
because of past discrimination, and that increasing the level of representation will
benefit workforce diversity and competitiveness, then these kinds of programs are
easier to justify to all involved.66 Organizations need to realize, however, that affirma-
tive action plans need to be complemented with communication programs that clearly
spell out the needs and benefits that these programs bring to the organization and the
larger society.67 For example, as the “Integrity in Action” box illustrates, creating an
equal employment opportunity for members of all races is not just an ethical issue but
also a matter of business necessity in work contexts that demand critical thinking and
diverse opinions.
INTEGRITY IN ACTION
Beyond the Ethics of Representation:
The Business Case for Diversity at the CIA
One could definitely argue that not allowed us to optimize the In order to address this issue,
there are ethical issues asso- capabilities we have and allows the CIA set a goal to make sure
ciated with any government us to fall prey to groupthink.” that minorities would make up
agency where the representa- When a recent 2015 workforce 30% of leadership positions at
tion of minorities is far below utilization review charged the the agency within three years.
the proportion of those groups agency with failure to recruit, Although the agency has made
in the general set of citizens hire, and promote African and broken this promise before,
served by the agency. However, American employees, Brennan Brennan stated, “We’re not kid-
when it comes to the Central had to get out front of the agency ding, this is real this time,” and
Intelligence Agency (CIA), the and “make the business case he backed up this statement
role of diversity is mission criti- for diversity.” According to the with a formal plan that made
cal. Some outside critics blamed utilization report, although non- it clear that the performance
the agency’s lack of prepared- whites make up 30% of the U.S. evaluations of senior manag-
ness for the 9/11 disaster on population, 90% of the agency’s ers were going to be based on
a lack of creative and “out-of- senior leadership positions are how well they meet the diversity
the-box” thinking on the part held by whites. Brennan, who is goals he set.
of staff at the agency that was white, stressed that this problem
mainly made up of older white goes well beyond the politics of SOURCES: D. Paletta, “CIA Launches New
Americans whose main experi- this issue and has a direct impact Effort to Diversify Workforce,” The Wall Street
Journal, June 30, 2015, www.wsj.com;
ence dealt with fighting the on accomplishing the mission, J. Donovan, “CIA Failing to Recruit and Pro-
Soviet Union. Even the agency’s emphasizing, “Individuals who mote Minorities, Study Finds,” The New York
current director, John Brennan, look like me, they’re not going to Times, June 30, 2015, www.nytimes.com; E.
Perez, “CIA Lagging in Recruiting, Promoting
notes that when it comes to a be able to operate clandestinely Minorities, Study Finds,” CNN, June 30, 2015,
lack of diversity, “I think it has in many parts of the world.” www.cnn.com.
The Human Resource Recruitment Process

As the first half of this chapter shows, it is difficult to always anticipate exactly how
many (if any) new employees will have to be hired in a given year in a given job cate-
gory. The role of human resource recruitment is to build a supply of potential new hires
that the organization can draw on if the need arises. Thus, human resource recruitment is Human Resource
defined as any practice or activity carried on by the organization with the primary pur- Recruitment
pose of identifying and attracting potential employees. It thus creates a buffer between The practice or activity
carried on by the
planning and actual selection of new employees, which is the topic of our next chapter. organization with
The goal of the recruiting is not simply to generate large numbers of applicants. If the primary purpose
the process generates a sea of unqualified applicants, the organization will incur great of identifying and
expense in personnel selection, but few vacancies will actually be filled. This problem of attracting potential
generating too many applicants is often promulgated by the use of wide-reaching tech- employees.
nologies like the Internet to reach people. For example, when Trend Micro was trying
to fill a management position, it posted an advertisement on several online job boards,
which resulted in a flood of nearly 1,000 resumes.68
203
The goal of personnel recruitment is not to finely discriminate among reasonably

qualified applicants either. Recruiting new personnel and selecting new personnel are
both complex processes. Organizations explicitly trying to do both at the same time
will probably not do either well. For example, research suggests that recruiters provide
less information about the company when conducting dual-purpose interviews (inter-
views focused on both recruiting and selecting applicants).69 Also, applicants appar-
ently remember less information about the recruiting organization after dual-purpose
interviews.70
In general as shown in Figure 5.4, all companies have to make decisions in three areas
of recruiting: (1) personnel policies, which affect the kinds of jobs the company has to
offer; (2) recruitment sources used to solicit applicants, which affect the kinds of people
who apply; and (3) the characteristics and behaviors of the recruiter. These, in turn,
influence both the nature of the vacancies and the nature of the people applying for jobs
in a way that shapes job choice decisions.
LO 5-4 PERSONNEL POLICIES

Describe the various Personnel policies is a generic term we use to refer to organizational decisions that affect
recruitment policies that
the nature of the vacancies for which people are recruited. If the research on recruitment
organizations adopt
to make job vacancies makes one thing clear, it is that characteristics of the vacancy are more important than
more attractive. recruiters or recruiting sources when it comes to predicting job choice.
Internal versus External Recruiting: Job Security

One desirable feature of a vacancy is that it provides ample opportunity for advancement
and promotion. One organizational policy that affects this is the degree to which the
company “promotes from within”—that is, recruits for upper-level vacancies internally
rather than externally. Indeed, a survey of MBA students found that this was their top
consideration when evaluating a company.71 Promote-from-within policies make it clear
to applicants that there are opportunities for advancement within the company. These
opportunities spring not just from the first vacancy but from the vacancy created when a
person in the company fills that vacancy.
For example, Cisco Systems uses a program called “Talent Connection” to help
identify internal candidates for jobs within the organization that have traditionally been
staffed by outsiders. About half of Cisco’s 65,000 employees have created profiles that
Figure 5.4 Job Choice

Overview of
the Individual Vacancy Applicant
Job Choice— characteristics Job characteristics
Organizational choice
Recruitment Process
Personnel Recruiter Recruitment

policies traits and sources
behaviors
Recruitment Influences
are stored in the program and these can be easily searched for matches when a new open-
ing becomes available. Mark Hamberlin, Vice President for Global Staffing at Cisco,
notes that the program has “saved the company millions of dollars in search firm fees
and other recruiting costs while at the same time, employee satisfaction with career
development has risen by 20%.”A similar program called “Inside First,” developed at
Booz Allen Hamilton, helped increase internal staffing from 10% in 2008 to 30% in
2012. While these programs are very popular with employees because they increase
job security and promotion opportunities, the only downside to this type of program is
pushback from current managers of employees who are recruited away. Many of these
employees are top performers in the current units and some managers bristle at the loss
of these individuals.72
In addition to employing promote from within and internal recruiting sources,
perceptions of job security and long-term commitment to the organization are also pro-
moted by “due process policies.” Employment-at-will policies state that either party in the Employment-at-Will
employment relationship can terminate that relationship at any time, regardless of cause. Policies
Policies which state that
Companies that do not have employment-at-will provisions typically have extensive due
either an employer or
process policies. Due process policies formally lay out the steps an employee can take to an employee can termi-
appeal a termination decision. Organizational recruiting materials that emphasize due nate the employment
process, rights of appeal, and grievance mechanisms send a message that job security is relationship at any time,
high; employment-at-will policies suggest the opposite. Research indicates that job regardless of cause.
applicants find companies with due process policies more attractive than companies
with employment-at-will policies.73 Due Process
Policies
Policies by which a
company formally
Extrinsic and Intrinsic Rewards lays out the steps an
Because pay is an important job characteristic for almost all applicants, companies that employee can take to
take a “lead-the-market” approach to pay—that is, a policy of paying higher-than-cur- appeal a termination
decision.
rent-market wages—have a distinct advantage in recruiting. For example, Matt Noon,
owner of Noon Turf Care, a fast growing start-up with 50 employees and $4 million in
revenue, struggled to find any experienced telemarketing employees when he was paying
$25,000 per year for the position. When he changed that figure to $45,000 per year, he
was able to hire four highly qualified individuals who more than made up for the pay dif-
ference when it came to generating additional revenue.74 Pay can also make up for a job’s
less desirable features—for example, paying higher wages to employees who have to
work midnight shifts. These kinds of specific shift differentials and other forms of more
generic compensating differentials will be discussed in more detail in later chapters that
focus on compensation strategies. We merely note here that “lead” policies make any
given vacancy more attractive to applicants. For example, because the perception is that
Walmart may not be the nation’s best employer to work for, the company raised wages
24% for workers across the board in 2015 in order to help recruit new workers.75
There are limits to what can be done in terms of using pay to attract people to cer-
tain jobs, however. For example, the U.S. Army, because of the recent wars in Iraq and
Afghanistan, struggled and failed to meet its recruiting goals for new soldiers, despite
offering a $20,000 signing bonus and a $400 a month raise in base pay for infantry
positions. As General Michael Rochelle, head of Army recruiting, notes, “We can’t get
started down a slippery slope where we are depending on money to lure people in. The
reality is that while we have to remain at least competitive, we’re never going to be able
to pay as much as the private sector.” To offset this disadvantage in extrinsic finan-
cial rewards, the Army has to rely on more intrinsic rewards related to patriotism and
personal growth opportunities that people associate with military service. For example,
Rochelle suggests that “the idea that being a soldier strengthens you for today and for
tomorrow, for whatever you go on to do in life, that clearly resonates with them,” and
thus this serves as an alternative means of appealing to recruits.76 The Army’s Part-
nership for Youth Success Program uses this idea to match recruits with private-sector
employers who are interested in hiring former soldiers who have received the skills and
experiences that the Army provides.
Image Advertising
Organizations often advertise specific vacancies (discussed next in the section “Recruit-
ment Sources”). Sometimes, however, organizations advertise just to promote them-
selves as a good place to work in general. Image advertising is particularly important
for companies in highly competitive labor markets that perceive themselves as having
a bad image. Indeed, research evidence suggests that the impact of company image on
applicant reactions ranks second only to the nature of the work itself.77
For example, in a different context, in the wake of the Jerry Sandusky sex scandal at
Pennsylvania State University, the school found it increasingly difficult to recruit out-of-
state students. As one accepted student from Chicago noted, “The reputation of Penn State
has taken a hit lately.” Recruiting out-of-state students is critical to Penn State because it
receives just 6% of its revenues from the state and nonresidents pay up to $12,000 more
per year relative to Pennsylvanians. Thus, when out-of-state students’ enrollments fell
from 36% to 24% this was a major hit to revenue. In order to make up for this reputational
damage, Penn State wound up lowering acceptance standards and sent out more than
4,000 acceptances for nonresidents relative to the years prior to the scandal.78
Even though it does not provide any information about any specific job, image adver-
tising is often effective because job applicants develop ideas about the general reputation
of the firm (i.e., its brand image) and then this spills over to influence their expectations
about the nature of specific jobs or careers at the organization.79 Research suggests that
the language associated with the organization’s brand image is often similar to person-
ality trait descriptions that one might more commonly use to describe another person
(such as innovative or competent or sincere).80 These perceptions then influence the
degree to which the person feels attracted to the organization, especially if there appears
to be a good fit between the traits of the applicant and the traits that describe the orga-
nization.81 Applicants seem particularly sensitive to issues of diversity and inclusion in
these types of advertisements, and hence organizations that advertise their image need
to go out of their way to ensure that the actors in their advertisements reflect the broad
nature of the labor market constituencies that they are trying to appeal to in terms of
race, gender, and culture.82
LO 5-5 RECRUITMENT SOURCES

List the various sources The sources from which a company recruits potential employees are a critical aspect of its
from which job appli-
overall recruitment strategy. The type of person who is likely to respond to a job adver-
cants can be drawn,
their relative advan- tised on the Internet may be different from the type of person who responds to an ad in the
tages and disadvan- classified section of a local newspaper. In this section we examine the different sources
tages, and the methods from which recruits can be drawn, highlighting the advantages and disadvantages of each.
for evaluating them.
Internal versus External Sources

We discussed internal versus external sources of recruits earlier in this chapter and
focused on the positive effects that internal recruiting can have on recruits’ perceptions
of job security. We will now discuss this issue again, but with a focus on how using inter-
nal sources affects the kinds of people who are recruited.
In general, relying on internal sources offers a company several advantages. First, it
generates a sample of applicants who are well known to the firm. Second, these appli-
cants are relatively knowledgeable about the company’s vacancies, which minimizes the
possibility of inflated expectations about the job. Third, it is generally cheaper and faster
to fill vacancies internally. Finally, inside hires often outperform outsiders, especially
when it comes to filling jobs at the top end of the hierarchy. When one examines what
happens at the top of the organization, the evidence is quite clear that outsiders often
struggle to adapt to their new role. For example, when it comes to tenure, CEOs hired
from outside the company average four years prior to departing compared to five years
for insiders. In addition, when it comes to being forced out, 35% of outsider CEOs get
ousted after less than three years compared to 19% for insiders. Finally, when it comes
to return on investment, companies with an internally hired CEO outperformed those
headed by an outsider by 4.4%.83
With all these advantages, you might ask why any organization would ever employ
external recruiting methods. There are several good reasons why organizations might
decide to recruit externally. First, for entry-level positions and perhaps even for some
specialized upper-level positions, there may not be any internal recruits from which to
draw. Second, bringing in outsiders may expose the organization to new ideas or new
ways of doing business. Using only internal recruitment can result in a workforce whose
members all think alike and who therefore may be poorly suited to innovation.
Finally, recruiting from outside sources is a good way to strengthen one’s own com-
pany and weaken one’s competitors at the same time. This strategy seems to be par-
ticularly effective during bad economic times, where “counter cyclical hiring” policies
create once-in-a-lifetime opportunities for acquiring talent.84 For example, during the
most recent recession, many firms that were top performers—and hence able to weather
the storm better than their lower-performing competitors—viewed this as an excellent
opportunity to poach the highest-performing individuals within struggling companies.85
Thus, for many organizations, times of crisis and turbulence are actually the best time for
them to shine by leveraging their current talent and success to bring in more talent and
achieve even greater success over the long term.86
In fact, having one’s employees “poached” by another company can be so devastating
that companies go to great lengths, perhaps even illegal or unethical lengths, to prevent
this from happening. For example, in the constant war for talent in Silicon Valley, poach-
ing the best programmers away from one’s competition is a common strategy, and “cold
calling” is the central tactic employed to execute that strategy. “Cold calling” refers to
the practice where recruiters from one company call an employee of some other com-
pany who has the skills they need and try to get that person to switch sides. Thus, rather
than search for new employees among those that do not have jobs and are looking for
work, cold callers search the pool of people who have jobs and are not looking for work.
Obviously, to move a person who is basically happy and not looking for work costs
money, and this can lead to bidding wars that drive up salaries and employers’ costs.
One tempting way for organizations to avoid this outcome is to come to agreements
where they all refrain from trying to hire employees away from each other. For example,
when an employee at Adobe (whose CEO at the time was Bruce Chizen) received a cold
call from a recruiter at Apple, an Adobe HR executive sent an e-mail to the cold caller
stating that “Bruce and Steve Jobs have an agreement that we are not to solicit ANY
Apple employees and vice versa.” In another e-mail, after receiving a telephone call from
Jobs regarding a cold call to Apple originating at Google, CEO Eric Schmidt fired off an
e-mail to his HR staff that stated “I believe we have a policy of no recruiting from Apple.”
Schmidt told his HR unit to “get this stopped and let me know why it is happening.” 87
As tempting as this kind of agreement might be, however, this way of “competing”
is actually considered “anticompetitive,” and the e-mails described above were at the
center of an antitrust lawsuit filed against Apple, Google, Adobe, and Intel. The lawsuit
charged these firms with colluding to restrict the free movement of labor and fix wages.
These companies eventually agreed to an out-of-court settlement of $20 million to work-
ers who were affected by this policy.88
Direct Applicants and Referrals

Direct Applicants Direct applicants are people who apply for a vacancy without prompting from the orga-
People who apply for nization. Referrals are people who are prompted to apply by someone within the organi-
a job vacancy without zation. These two sources of recruits share some characteristics that make them excellent
prompting from the
organization.
sources from which to draw.
First, many direct applicants are to some extent already “sold” on the organization.
Most of them have done some homework and concluded that there is enough fit between
Referrals
People who are themselves and the vacancy to warrant their submitting an application. This process is
prompted to apply for a called self-selection. A form of aided self-selection occurs with referrals. Many job seekers
job by someone within look to friends, relatives, and acquaintances to help find employment, and evoking these
the organization. social networks can greatly aid the job search process for both the job seeker and the orga-
nization. Current employees (who are knowledgeable of both the vacancy and the person
they are referring) do their homework and conclude that there is a fit between the person
and the vacancy; they then sell the person on the job. These kinds of “word-of-mouth”
endorsements from credible sources seem to have a particularly strong effect early in the
recruitment process when people are still unfocused in their search process.89
In the war for talent, some employers who try to entice one new employee from a
competitor will often try to leverage that one person to try to entice even more people
away. The term “liftout” has been coined for this practice of trying to recruit a whole
team of people. For example, when Mike Mertz was recruited as the new chief executive
at Optimus, a computer servicing outfit, within hours of leaving his former employer,
he in turn recruited seven other former colleagues to join Optimus. Liftouts are seen as
valuable because in recruiting a whole intact group, as Mertz notes, “You get the dynam-
ics of a functioning team without having to create that yourself.”90 The team chemistry
and coordination that often takes years to build is already in place after a liftout, and this
kind of speed provides competitive advantage. Of course, having a whole team lifted
out of your organization is devastating, because customers are frequently next to leave,
following the talent rather than standing pat, and hence firms have to work hard to make
sure that they can retain their critical teams.
Advertisements in Newspapers and Periodicals

Advertisements to recruit personnel are ubiquitous, even though they typically generate
less desirable recruits than direct applications or referrals—and do so at greater expense.
However, because few employers can fill all their vacancies with direct applications and
referrals, some form of advertising is usually needed. Moreover, an employer can take
many steps to increase the effectiveness of this recruitment method.
The two most important questions to ask in designing a job advertisement are, What do
we need to say? and To whom do we need to say it? With respect to the first question, many
organizations fail to adequately communicate the specifics of the vacancy. Ideally, persons
reading an ad should get enough information to evaluate the job and its requirements, allow-
ing them to make a well-informed judgment regarding their qualifications. This could mean
running long advertisements, which costs more. However, these additional costs should be
evaluated against the costs of processing a huge number of applicants who are not reason-
ably qualified or who would not find the job acceptable once they learn more about it.
In terms of whom to reach with this message, the organization placing the advertise-
ment has to decide which medium it will use. The classified section of local newspapers
is the most common medium. It is a relatively inexpensive means of reaching many
people within a specified geographic area who are currently looking for work (or at least
interested enough to be reading the classifieds). On the downside, this medium does not
allow an organization to target skill levels very well. Typically, classified ads are read by
many people who are either over- or underqualified for the position. Moreover, people
who are not looking for work rarely read the classifieds, and thus this is not the right
medium for luring people away from their current employers. Specially targeted jour-
nals and periodicals may be better than general newspapers at reaching a specific part
of the overall labor market. In addition, employers are increasingly using television—
particularly cable television—as a reasonably priced way of reaching people.
Electronic Recruiting
The growth of the information superhighway has opened up new vistas for organizations
trying to recruit talent. There are many ways to employ the Internet, and increasingly
organizations are refining their use of this medium. Obviously, one of the easiest ways to
get into “e-cruiting” is to simply use the organization’s own web page to solicit applica-
tions. By using their own web page, organizations can highly tune their recruitment mes-
sage and focus in on specific people. For example, the interactive nature of this medium
allows individuals to fill out surveys that describe what they are looking for and what
they have to offer the organizations. These surveys can be “graded” immediately and
recruits can be given direct feedback about how well they are matched for the organiza-
tion. Indeed, customizing e-recruiting sites to maximize their targeted potential for help-
ing people effectively match their own values with the organization’s values, and their
skills with the demands of the job is probably their best feature.91 The value of steering
recruits to company websites is so high that many employers will pay to have their sites
rise to the top of the list in certain search engines when certain terms are entered.
For example, PricewaterhouseCoopers (PwC) struck a deal with the career network-
ing site LinkedIn so that if any student from one of the 60 schools it recruits does a
search of accounting-related jobs, PwC pops up first and is listed as “the featured job.”
PwC also gets space on the page to promote the organization that includes videos of
current employees extolling the virtues of working at that company.92 Other companies
pay LinkedIn roughly $8,000 a year for the opportunity to search among its 187 million
profiles, and some, such as Adobe, fill roughly half of their jobs via LinkedIn alone.93
Of course, smaller and less well-known organizations may not attract any attention
to their own websites, and thus for them this is not a good option. A second way for
organizations to use the web is to interact with the large, well-known job sites such as
Monster.com, HotJobs.com, or CareerBuilder.com. These sites attract a vast array of
applicants, who submit standardized résumés that can be electronically searched using
key terms. Applicants can also search for companies in a similar fashion. The biggest
downside to these large sites, however, is their sheer size and lack of differentiation.
The growing use of iPods and iPads has also opened up a new and rich avenue to get
information from employer to applicant via podcasts. A podcast is an audio or audio/
visual program that can be placed on the web by an employer and then downloaded for
subsequent viewing. Podcasts are like e-mails in the sense that they can be used to reach
out to a large number of people; however, the rich nature of the media—which employs
color, sound, and video—is much more powerful than a simple text-only e-mail. “Pod-
casts really make the job description comes alive,” notes Dan Finnigan, a general man-
ager at HotJobs.com, and the ability to describe the organization’s culture is so much
more emotionally charged with this media relative to mere words on a page.94
Social networking sites such as Facebook and MySpace.com are yet another avenue
for employers to reach out to younger workers in their own environments. Neither Face-
book nor MySpace allow employers to create pages as members, but it does allow them
to purchase pages in order to create what is called a “sponsored group.” Ernst & Young’s
sponsored group page has been joined by more than 5,000 Facebook users, who can
access information about Ernst & Young and chat with recruiters from the company in
a blog-like manner.95 Unlike more formal media, the conversations held here are very
informal and serve as an easy first step for potential recruits to take in their relationship
with the company. New entrants to this market like the site BranchOut take this infor-
mal format even further, and allow its members to rate other workers in a “Hot or Not”
format. That is, users are shown the pictures of two of their Facebook friends and then
asked to choose which one they would rather work with. Scores accumulate over time
and founder Rick Marini suggests that “it provides a realistic, crowd sourced assessment
of a candidate that recruiters might find hard to come by on their own.”96
As with any new and developing technology, all of these approaches present some
unique challenges. From an employer’s perspective, the interactive, dynamic, and unpre-
dictable nature of blogs and social networking sites means that sometimes people who
have negative things to say about the organization join in on the conversations, and this
can be difficult to control. The biggest liability from the applicant’s perspective is the
need to protect his or her identity, because this medium has also been a haven for identity
thieves, who post false openings in the hope of getting some applicant to provide per-
sonal information.97
Public and Private Employment Agencies

The Social Security Act of 1935 requires that everyone receiving unemployment com-
pensation be registered with a local state employment office. These state employment
offices work with the U.S. Employment Service (USES) to try to ensure that unemployed
individuals eventually get off state aid and back on employer payrolls. To accomplish this,
agencies collect information from the unemployed about their skills and experiences.
Employers can register their job vacancies with their local state employment office,
and the agency will attempt to find someone suitable using its computerized inventory
of local unemployed individuals. The agency makes referrals to the organization at no
charge, and these individuals can be interviewed or tested by the employer for potential
vacancies. Because of certain legislative mandates, state unemployment offices often
have specialized “desks” for minorities, handicapped individuals, and Vietnam-era vet-
erans. Thus, this is an excellent source for employers who feel they are currently under-
utilizing any of these subgroups.
Public employment agencies serve primarily the blue-collar labor market; private
employment agencies perform much the same service for the white-collar labor market.
Unlike public agencies, however, private employment agencies charge the organization
for the referrals. Another difference between private and public employment agencies is
that one doesn’t have to be unemployed to use a private employment agency. One special
type of private employment agency is the so-called executive search firm (ESF). These
agencies are often referred to as headhunters because, unlike the other sources we have
examined, they operate almost exclusively with people who are currently employed.
Dealing with executive search firms is sometimes a sensitive process because executives
may not want to advertise their availability for fear of their current employer’s reaction.
Many organizations have shifted away from private employment agencies in the last
few years and focused more on using their own internal recruiters to staff openings. For
example, Time Warner filled thousands of senior positions during the last seven years,
but used an outside agency only once. Instead, like roughly 25% of the Fortune 500 com-
panies, Times Warner has created a head of executive recruitment to do the work for-
merly done by private agencies. At Time Warner, this person oversees a 30-person team
where each person handles 10–15 placements at a time. This unit saved Time Warner
over $100 million in search firm fees and filled each job in roughly 100 days, compared
to 170 days associated with a private agency.98 Similarly, GE built an internal recruiting
staff of around 500 people, and in 2012, helped by LinkedIn and other social networking
sites, filled most of GE’s 25,000 openings.99 There is a general belief within these and
other companies that internal recruiters have a better feel for the organization’s culture
and thus, in addition to filling positions faster and cheaper, those recruited are also a bet-
ter fit for the company. Many have questioned whether the ESFs have a viable business
model, given the recent changes in the economy and in technology.100
Colleges and Universities

Most colleges and universities have placement services that seek to help their gradu-
ates obtain employment. Indeed, on-campus interviewing is the most important source
of recruits for entry-level professional and managerial vacancies. Organizations tend to
focus especially on colleges that have strong reputations in areas for which they have
critical needs (chemical engineering, public accounting, or the like).
Many employers have found that to effectively compete for the best students, they
need to do more than just sign prospective graduates up for interview slots. One of the
best ways to establish a stronger presence on a campus is with a college internship pro-
gram. These kinds of programs allow an organization to get early access to potential
applicants and to assess their capacities directly. These programs also allow applicants to
gain firsthand experience with the employer, so that both parties can make well-informed
choices about fit with relatively low costs and commitment.101
Another way of increasing one’s presence on campus is to participate in university
job fairs. In general, a job fair is a place where many employers gather for a short time to
meet large numbers of potential job applicants. Although job fairs can be held anywhere
(such as at a hotel or convention center), campuses are ideal locations because of the
many well-educated, yet unemployed, individuals who live there. Job fairs are a rather
inexpensive means of generating an on-campus presence and can even provide one-on-
one dialogue with potential recruits—dialogue that could not be achieved through less
interactive media like newspaper ads.
In some of the toughest labor markets, employers have bypassed colleges and gone
straight to high schools. Online coding tutorials and collaborative web communities have
made it possible for many high school students to develop their own applications well
before they reach the age to go to college. If these apps become successful, then the coder
who created them immediately draws attention from recruiters. For example, Facebook
recruited Michael Saymen when he was just 16 years old after they learned that the game
he built using Facebook’s development tools had attracted more than 500,000 players.102
Evaluating the Quality of a Source

Because there are few rules about the quality of a given source for a given vacancy, it
is generally a good idea for employers to monitor the quality of all their recruitment
sources. One means of accomplishing this is to develop and compare yield ratios for
each source. Yield ratios express the percentage of applicants who successfully move
from one stage of the recruitment and selection process to the next. Comparing yield
ratios for different sources helps determine which is best or most efficient for the type of
vacancy being investigated.
Table 5.4 shows hypothetical yield ratios and cost-per-hire data for five recruit-
ment sources. For the job vacancies generated by this company, the best two sources of
recruits are local universities and employee referral programs. Newspaper ads generate
the largest number of recruits, but relatively few of these are qualified for the position.
Recruiting at nationally renowned universities generates highly qualified applicants, but
relatively few of them ultimately accept positions. Finally, executive search firms gener-
ate a small list of highly qualified, interested applicants, but this is an expensive source
compared with other alternatives.
LO 5-6 RECRUITERS
Explain the recruiter’s The last part of the model presented in Figure 5.4 that we will discuss is the recruiter.
role in the recruitment
Moreover, many applicants approach the recruiter with some degree of skepticism.
process, the limits the
recruiter faces, and the Knowing that it is the recruiter’s job to sell them on a vacancy, some applicants may
opportunities available. discount what the recruiter says relative to what they have heard from other sources
(like friends, magazine articles, and professors). For these and other reasons, recruiters’
characteristics and behaviors seem to have less impact on applicants’ job choices than
we might expect.
Table 5.4
Hypothetical Yield Ratios for Five Recruitment Sources
RECRUITING SOURCE
LOCAL RENOWNED EMPLOYEE NEWSPAPER EXECUTIVE

UNIVERSITY UNIVERSITY REFERRALS AD SEARCH FIRMS
Résumés generated 200 400 50 500 20

Interview offers accepted 175 100 45 400 20
Yield ratio 87% 25% 90% 80% 100%
Applicants judged acceptable 100 95 40 50 19
Yield ratio 57% 95% 89% 12% 95%
Accept employment offers 90 10 35 25 15
Yield ratio 90% 11% 88% 50% 79%
Cumulative yield ratio 90/200 10/400 35/50 25/500 15/20
45% 3% 70% 5% 75%
Cost $30,000 $50,000 $15,000 $20,000 $90,000
Cost per hire $333 $5,000 $428 $800 $6,000
Recruiter’s Functional Area. Most organizations must choose whether their recruit-
ers are specialists in human resources or experts at particular jobs (supervisors or job
incumbents). Some studies indicate that applicants find a job less attractive and the
recruiter less credible when he is a personnel specialist.103 This does not completely
discount personnel specialists’ role in recruiting, but it does indicate that such special-
ists need to take extra steps to ensure that applicants perceive them as knowledgeable
and credible.
Recruiter’s Traits. Two traits stand out when applicants’ reactions to recruiters are
examined. The first, which could be called “warmth,” reflects the degree to which the
recruiter seems to care about the applicant and is enthusiastic about her potential to con-
tribute to the company. The second characteristic could be called “informativeness.” In
general, applicants respond more positively to recruiters who are perceived as warm and
informative. These characteristics seem more important than such demographic charac-
teristics as age, sex, or race, which have complex and inconsistent effects on applicant
responses.104 In addition, timing seems to play a role as well, in the sense that recruiters
have a bigger impact early in the job search process, but then give way to job and organi-
zational characteristics when it comes down to the applicant’s final decision.105
Recruiter’s Realism. Perhaps the most well-researched aspect of recruiting deals with
the level of realism that the recruiter incorporates into his message. Because the recruit-
er’s job is to attract candidates, there is some pressure to exaggerate the positive features
of the vacancy while downplaying the negative features. Applicants are highly sensitive
to negative information. On the other hand, if the recruiter goes too far in a positive
direction, the candidate can be misled and lured into taking the job under false pretenses.
This can lead to a serious case of unmet expectations and a high turnover rate. In fact,
unrealistic descriptions of a job may even lead new job incumbents to believe that the
employer is deceitful.106
Many studies have looked at the capacity of “realistic job previews” to circumvent
this problem and help minimize early job turnover. On the whole, the research indicates
that realistic job previews do lower expectations and can help reduce future turnover in
the workforce.107 Certainly, the idea that one can go overboard in selling a vacancy to
a recruit has merit. However, the belief that informing people about the negative char-
acteristics of the job will totally “inoculate” them to such characteristics seems unwar-
ranted, based on the research conducted to date.108 Thus we return to the conclusion
that an organization’s decisions about personnel policies that directly affect the job’s
attributes (pay, security, advancement opportunities, and so on) will probably be more
important than recruiter traits and behaviors in affecting job choice.
Enhancing Recruiter Impact. Although research suggests that recruiters do not have
much influence on job choice, this does not mean recruiters cannot have an impact.
Organizations can take steps to increase the impact that recruiters have on those they
recruit. First, recruiters can provide timely feedback. Applicants react very negatively
to delays in feedback, often making unwarranted attributions for the delays (such as,
the organization is uninterested in my application).109 Second, recruiting can be done in
teams rather than by individuals. As we have seen, applicants tend to view line personnel
(job incumbents and supervisors) as more credible than personnel specialists, so these
kinds of recruiters should be part of any team. On the other hand, personnel specialists
have knowledge that is not shared by line personnel (who may perceive recruiting as a
small part of their “real” jobs), so they should be included as well.
A LOOK BACK
Uber and the Traditional Employment Model
We opened this chapter with a story of how more and more jobholders are working
as part of a local “independent contractor” model rather than a traditional employ-
ment model. We saw how this can create value for both employers and workers in
some cases but also result in disgruntled workers who earn less than the minimum
wage. We also saw how companies are shifting away from outsourcing and off-
shoring, and instead relying more on local talent to compete in today’s fast-moving
economy. Still there are advantages and disadvantages to recruiting workers from
different sources, and we highlighted the strengths and weaknesses of alternative
methods for addressing a labor shortage or a labor surplus.
QUESTIONS
1. Discuss the advantages and disadvantages of hiring local workers versus
offshoring versus bringing in immigrant labor. How does the nature of the
product market affect what you might do in the labor market?
2. Assume you are a well-established company facing a labor surplus in some
job category. Why might it be in your best interest to use some method other
than layoffs to reduce this surplus, and in what sense are your options here a
function of how well you did in terms of forecasting labor demand and supply?
3. Discuss the advantages and disadvantages of promoting workers from within
your own firm versus going outside the firm to bring in external hires. How does
the nature of the business situation affect this decision?
SUMMARY
Human resource planning uses labor supply and demand Organizational recruitment programs affect applications
forecasts to anticipate labor shortages and surpluses. It also through personnel policies (such as promote-from-within
entails programs that can be utilized to reduce a labor sur- policies or due process provisions) that affect the attributes
plus (such as downsizing and early retirement programs) of the vacancies themselves. They can also impact the
and eliminate a labor shortage (like bringing in temporary nature of people who apply for positions by using differ-
workers or expanding overtime). When done well, human ent recruitment sources (like recruiting from universities
resource planning can enhance the success of the organiza- versus advertising in newspapers). Finally, organizations
tion while minimizing the human suffering resulting from can use recruiters to influence individuals’ perceptions of
poorly anticipated labor surpluses or shortages. Human jobs (eliminating misconceptions, clarifying uncertainties)
resource recruiting is a buffer activity that creates an or perceptions of themselves (changing their valences for
applicant pool that the organization can draw from in the various work outcomes).
event of a labor shortage that is to be filled with new hires.
KEY TERMS
Forecasting, 185 Outsourcing, 197 Employment-at-will policies, 205
Leading indicator, 186 Offshoring, 198 Due process policies, 205
Transitional matrix, 187 Workforce utilization review, 202 Direct applicants, 208
Downsizing, 190 Human resource recruitment, 203 Referrals, 208
1. Discuss the effects that an impending labor shortage case? If you were a human resource specialist interview-
might have on the following three subfunctions of human ing with this company for an open position, what would
resource management: selection and placement, training this practice imply for the role of the human resource
and career development, and compensation and benefits. manager in that company?
Which subfunction might be most heavily impacted? In 4. Recruiting people for jobs that entail international assign-
what ways might these groups develop joint cooperative ments is increasingly important for many companies.
programs to avert a labor shortage? Where might one go to look for individuals interested in
2. Discuss the costs and benefits associated with statistical these types of assignments? How might recruiting prac-
versus judgmental forecasts for labor demand and labor tices aimed at these people differ from those one might
supply. Under what conditions might either of these tech- apply to the “average” recruit?
niques be infeasible? Under what conditions might both 5. Discuss the relative merits of internal versus external
be feasible, but one more desirable than the other? recruitment. What types of business strategies might best
3. Some companies have detailed affirmative action plans, be supported by recruiting externally, and what types
complete with goals and timetables, for women and might call for internal recruitment? What factors might
minorities, and yet have no formal human resource plan lead a firm to decide to switch from internal to external
for the organization as a whole. Why might this be the recruitment or vice versa?
Most employers have to evaluate hundreds of résumés each 6. Does it have correct contact information?
week. If you want your résumé to have a good chance of 7. Does it have an employment objective that is specific and
being read by prospective employers, you must invest time focuses on the employer’s needs as well as your own?
and energy not only in its content, but also in its appearance. 8. Does it have at least one-inch margins?
Review your résumé and answer yes or no to each of the fol- 9. Does it use a maximum of two typefaces or fonts?
lowing questions. 10. Does it use bullet points to emphasize your skills and
accomplishments?
1. Does it avoid typos and grammatical errors? 11. Does it avoid use of underlining?
2. Does it avoid using personal pronouns (such as I and me)? 12. Is the presentation consistent? (Example: If you use all
3. Does it clearly identify what you have done and caps for the name of your most recent workplace, do
accomplished? you do that for previous workplaces as well?)
4. Does it highlight your accomplishments rather than The more “yes” answers you gave, the more likely your
your duties? résumé will attract an employer’s attention and get you a job
5. Does it exceed two pages in length? interview!
EXERCISING STRATEGY
Made in America: A Source of Competitive Advantage?
In the three-year period between 2010 and 2012, the United plans to shift $50 billion to American suppliers in 2013. At
States created over a half million new jobs in the manufac- the same time, Apple, which has traditionally relied heavily
turing sector, outpacing all other advanced countries. For on production in China, announced that it would build one
example, Walmart, a pioneer in outsourcing, announced of its new Mac computer lines in the United States. Airbus
also announced that it would manufacture a new fleet of In addition, unsafe and unethical practices in some
planes for JetBlue in Alabama, and Ashley Furniture tar- underdeveloped countries make some employers afraid of
geted North Carolina as the site for a new $80 million plant. the reputational damage caused by relying on third-world
As Paul Ashworth, chief economist for research firm Capital suppliers or worried about the theft of intellectual property.
Economics noted, “The offshoring boom has seemed to run The stability and tight regulation of U.S. suppliers removes
its course.” these concerns, and after years of sitting on the sidelines,
Clearly, having once been written off for dead, U.S. many American workers have come back to manufacturing
manufacturing is staging a much-needed comeback. with a new set of skills and willingness to be flexible that
Although for most people, any kind of job creation is good cannot be matched by European competitors. This was one
job creation, there are special virtues to the creation of of the major reasons why German-based Volkswagen and
manufacturing jobs. For one, manufacturing represents French-based Michelin decided to open new facilities in
30% of the country’s productivity growth and every $1.00 the southern states rather than in their own countries. For
of manufacturing activity adds $1.48 to the economy as these and a host of other reasons, as noted by Jeff Immelt,
a whole. In addition, 67% of private-sector spending for the CEO of General Electric, “We are probably the most
research and development takes place in manufactur- competitive, on a global basis, than we’ve been in the past
ing companies. As Dow Chemical CEO Andrew Liveris 30 years.”
states, “Innovation doesn’t just happen in laboratories by
QUESTIONS
researchers. It happens on the factory floor. The process of
1. Competitive advantage is never a “once-and-for
making stuff helps you experiment and produce new prod-
all” achievement, but instead, either countries cycle
ucts. If everything is made in China, people there will gain
through leadership exchanging the lead or a one-time
the skills knowledge and experience to innovate. And we
competitive nation just falls off the map forever. What
will be left behind.”
might be the distinguishing factors between countries
There are several forces that have combined to rekindle
that merely cycle out of leadership for a time versus
interest in the United States for organizations that used to
those that shine brightly for a moment and then fade
send manufacturing jobs overseas. Part of this is attrib-
out forever?
utable to low energy costs that resulted from the oil and
2. Do you think China is going to fade out forever as a com-
gas shale boon; however, the role of human capital in this
petitive force or just cycle back to the top after a short
reversal is also critical. U.S. workers are still highly paid
period?
relative to workers in other countries; however, in many
cases, this gap is closing. Wage rates for Chinese workers SOURCES: R. Foroohar and B. Shaparito, “Made in the U.S.A.,” Time
have gone up 13% a year as that country has expanded, and Magazine, April 22, 2013, http://business.time.com; J. Bussey, “U.S.
Manufacturing: Denying Naysayers,” The Wall Street Journal, April
the gap that still remains is often closed by the higher pro- 19, 2012, www.wsj.com; F. Zakaria, “The Case for Making It in the
ductivity rates of American workers who rely more heavily USA,” Time Magazine, February 6, 2012, p. 19; A. Ohnsman, “Surprise!
on technological advances that reduce the need for a vast Carmakers Are a Recovery Bright Spot,” Businessweek, November 7, 2011,
army of workers. pp. 19–20.
MANAGING PEOPLE
Few Line Up for Jobs Abandoned by Immigrants
Randy Rhodes, the company president of Harvest Select, a Alabama, chickens were going unprocessed, tomatoes were
food processing plant in Uniontown, Alabama, thought he going unpicked, hotel beds were going unmade, and dishes
was just having a nightmare. He simply could not believe it were going unwashed as thousands of workers vanished,
when he showed up at his plant one day only to find that all almost overnight.
of his 160 workers were missing. He had 850,000 pounds of The cause of this mass worker exodus was the pas-
catfish that had to be skinned, gutted, and trimmed for sale, sage of Alabama House Bill 56, which required police
and it would not be a pretty sight (or smell) if he were unable to question people they suspect might be in the country
to get that work done. Unfortunately this was not just a bad illegally and punish any business that hires them. The
dream and this experience was not limited to his company. goal of this legislation was to free up jobs that Governor
In plants, fields, hotels, and restaurants across the state of Robert Bentley said illegal immigrants “had stolen from
recession-battered Americans,” and it was true that the workers or whether it’s another industry that used illegal
unemployment rate in Perry County where Harvest Select immigrants, they had a business model and that business
was located was just under 20%. Unfortunately, none of model is going to have to change.”
these unemployed native Alabamians had any interest in Rhodes and other local employers claim they are stuck
any of these jobs, and thus whereas the new law failed to with the business model that they have now due to foreign
put even a tiny dent in the unemployment rate, it totally competition that pays their workers even lower wages.
devastated employers in the region. Indeed, the results Rhodes counters, “I’m sorry, but I can’t pay those kids
in Alabama pretty much reflected what has been found $13.00 per hour and then sell my product at a competitive
in large-scale research studies from other regions of the price—it is just not realistic.” Although it is difficult to pre-
country, where the presence of immigrant labor has had dict how this conflict will all play out in the future, it is
almost no effect on employment levels and wages. For the interesting to note that one of the major adaptations that
most part, few Americans compete for the jobs that are employers made in the short term was to bring in refugee
taken by immigrant workers due to the undesirable nature labor from war-torn countries of Africa and weather-dev-
of those jobs. astated Haiti. Ironically, people admitted to the country as
It is easy to see why most people would be uninter- refugees are legally allowed to work the day they arrive,
ested in the jobs at Harvest Select. People working at the and hence, are not affected by House Bill 56. Republican
plant perform manually difficult work slicing up smelly State Senator Scott Beason, who sponsored the law, is very
fish for ten hours a day in a cold, wet room for $7.25 unhappy with this most recent development, but his hands
an hour with virtually no benefits. Of course, the come- are tied. He states, “We would prefer that the companies
back to this argument is why anyone would think they hire native Alabamians,” but it is unclear that this is ever
should be able to get away with creating such terribly dis- going to happen.
satisfying jobs in the first place, and then expect to be
entitled to an endless supply of cheap labor. For example, QUESTIONS
Alabama’s director of industrial relations, Tom Surtees, 1. Is the inability to find traditional workers willing to
struck back at some of the local employers countering perform the types of jobs described here a sign that
with “Don’t tell me an Alabamian can’t work out in the the business model in some of these industries has to
field picking produce because it’s hot. Go into a steel change?
mill. Go into a foundry. Go into numerous other occu- 2. Why do the laws of supply and demand not seem to hold
pations and tell them Alabamians won’t do work where within these industries when it comes to labor markets?
it’s hot or requires manual labor. The difference being,
jobs in Alabama’s foundries and steel mills pay better and SOURCES: N. Shah, “Do Illegal Immigrants Depress Wages, Job
offer better benefits.” The stakes of this battle are high in Opportunities?” The Wall Street Journal, April 12, 2013, http://blogs.wsj.
com; M. Newkirk and G. Doubon, “Legal Immigrants Wanted for Dirty
the sense that this is a fight over the basic business model Jobs,” Bloomberg Businessweek, October 8, 2012, pp. 34–35; E. Dwoskin,
that has been in these industries for decades. As Surtees “Do You Want This Job?” Bloomberg Businessweek, November 14, 2011,
notes, “Whether an employer in agriculture used migrant pp. 70–78.
For Personal Financial Advisors, a Small Staffing Plan with a Big Impact
Robert J. Reed has been a financial planner since 1978 annual revenues to become a million-dollar firm by 2012.
and received his Certified Financial Planner designation That was a realistic goal, but not one he could achieve with
in 1981. In 1999, he hired Lucy Banquer, a former legal only the support of Banquer. Although Banquer does an
secretary, to work as his assistant and the only employee at excellent job of fielding client phone calls and answering
his firm, Personal Financial Advisors LLC in Covington, questions, Reed needed to bring in more financial expertise
Louisiana. At that point, human resource planning wasn’t to serve more clients.
on Reed’s radar at all. Typically, a financial-planning firm like Reed’s
But around 2005, Reed began to act on a desire to have expands by hiring an entry-level advisor to handle routine
a more complete plan for his firm’s growth. He determined tasks while learning on the job until he or she can take
that he wanted the business to grow from about $400,000 in on clients independently. But Reed didn’t simply take the
usual path; he considered what role he wanted for him- Reed’s decision to focus on investment management
self in his firm as it grew. Reed realized that the part he has paid off for Personal Financial Advisors, giving the
excelled at and loved most was managing the investments, firm better-than-average performance on its investments
not the presentations to clients, and that he wanted the even as revenues have climbed. And with Lindsay on board
firm to grow in a way that would free more time for him to handle client contact, Reed became able to follow the
to spend with his family, not expand his hours to super- more traditional path to further growth by hiring an associ-
vise others. As Reed defined the scope of his own desired ate financial planner, David Hutchinson, in 2008. In con-
job, he clarified what he wanted from his next employee: trast to Lindsay, Hutchinson is still preparing to become
a Certified Financial Planner who had experience plus a Certified Financial Planner, but he has an educational
an interest in all the planning and advising tasks except background in financial planning and experience as an
investment management. investment broker.
With that strategy in mind, Reed began the search for
another planner to work with him. After about eight months QUESTIONS
of recruiting, Reed met Lauren Gadkowski, who was run- 1. Is a company ever too small to need to engage in human
ning her own advisory firm in Boston but preparing to resource planning? Why or why not? Discuss whether
relocate to Baton Rouge to be with her future husband, Lee you think Robert Reed planned his hiring strategy at an
Lindsay. Reed wanted his new financial planner to operate appropriate time in the firm’s growth.
independently, so he agreed to the idea of her office being 2. Using Table 5.3, review the options for avoiding a labor
in Baton Rouge, about a 45-minute drive from his, and he shortage, and discuss how well the options besides new
let her determine how often she would need to visit the hires could have worked as ways for Reed to reach his
Covington office. goals for growth. As you do so, consider qualities of
Reed stuck to his plan: Lauren Lindsay quickly began a financial-planning business that might be relevant
working with Reed’s larger clients and introduced her- (for example, direct client contact and the need for
self as their main contact with the firm. After sitting in confidentiality).
on a few meetings to satisfy himself that he had made a 3. Suppose that when Reed was seeking to hire a certified
good hiring decision, Reed shifted his efforts to manag- financial planner, he asked you for advice on where to
ing the investments. About 10% of the clients indicated recruit this person. Which sources would you suggest,
they would prefer to maintain their working relationship and why?
with Reed. Lindsay took over the remaining 90% as well SOURCES: Angie Herbers, “Letting Go,” Investment Advisor, June 2009,
as the new clients she has brought into the firm since pp. 96–97; and Personal Financial Advisors, “Why Choose Us?” corporate
joining it. website, http://www.mypfa.com, accessed June 26, 2015.
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and D. A. Jones, “Applicant Attraction to Organizations and Job 99. C. Hymowitz and J. Green, “These Days, Anybody Can Head-
Choice: A Meta-analytic Review of the Correlates of Recruit- hunt,” Businessweek, January 21, 2013, pp. 19–20.
ing Outcomes,” Journal of Applied Psychology 90 (2005), pp. 100. A. McConnon, “A Headhunter Searches for a Second Life,”
928–44. BusinessWeek, January 26, 2009, pp. 80–81.
78. A. Athavaley, R. Bachman, K. Maher, and J. W. Miller, “Selling 101. H. Zhao and R. C. Liden, “Internship: A Recruitment and Selection
Students on Penn State,” The Wall Street Journal Online, Janu- Perspective,” Journal of Applied Psychology 96 (2011), pp. 221–229.
ary 31, 2012. 102. “OMG, Best Summer Ever,” Bloomberg Businessweek, July 20,
79. C. Collins and C. K. Stevens, “The Relationship between Early 2014, pp. 31–32.
Recruitment-Related Activities and the Application Decisions 103. M. S. Taylor and T. J. Bergman, “Organizational Recruitment Activ-
of New Labor Market Entrants: A Brand Equity Approach ities and Applicants’ Reactions at Different Stages of the Recruit-
to Recruitment,” Journal of Applied Psychology 87 (2002), ment Process,” Personnel Psychology 40 (1984), pp. 261–85.
pp. 1121–33. 104. L. M. Graves and G. N. Powell, “The Effect of Sex Similarity on
80. F. Lievens and S. Highhouse, “The Relation of Instrumental Recruiters’ Evaluations of Actual Applicants: A Test of the Sim-
and Symbolic Attributes to a Company’s Attractiveness as an ilarity–Attraction Paradigm,” Personnel Psychology 48 (1995),
Employer,” Personnel Psychology 56 (2003), pp. 75–102. pp. 85–98.
81. J. E. Slaughter, M. J. Zickar, S. Highhouse, and D. C. Mohr, 105. K. L. Uggerslev, N. E. Fassina, and D. Kraichy, “Recruiting
“Personality Trait Inferences about Organizations: Development Through the Stages: A Meta-Analytic Test of Predictors of
Applicant Attraction at Different Stages of the Recruiting 108. P. G. Irving and J. P. Meyer, “Reexamination of the Met-
Process,” Personnel Psychology, 65 (2012), pp. 597–660. Expectations Hypothesis: A Longitudinal Analysis,” Journal of
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atory Investigation into Theoretical Mechanisms Underlying Real- 109. W. J. Becker, T. Connolly, and J. E. Slaughter, “The Effect of
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tiple Organizational Outcomes: A Meta-analysis,” Academy of
Management Journal 41 (1998), pp. 673–90.
Selection and Placement
6
C H A P T E R
LEARNING OBJECTIVES
LO 6-1 Establish the basic scientific properties of personnel selection methods,

including reliability, validity, and generalizability. page 224
LO 6-2 Discuss how the particular characteristics of a job, organization,

or applicant affect the utility of any test. page 233
LO 6-3 Describe the government’s role in personnel selection decisions,

particularly in the areas of constitutional law, federal laws,
executive orders, and judicial precedent. page 235
LO 6-4 List the common methods used in selecting human resources. page 239
LO 6-5 Describe the degree to which each of the common methods used
in selecting human resources meets the demands of reliability,
validity, generalizability, utility, and legality. page 239
222
>>>
U.S. Supreme Court Makes a Fashion Statement
Samantha Elauf was a mere 17 years old when she In general, there are three categories of religious
began a journey that would take her all the way to discrimination in the workplace, and two of them are
the U.S. Supreme Court. Like many 17-year-olds, central parts of this case. First, it is illegal to make
Samantha liked to spend her time hanging out at employment decisions based upon someone’s faith
the local mall. She loved to shop, watch movies, and or lack of faith. Second, it is illegal to harass some-
above all eat at her favorite sushi restaurant. Thus, one at work because of their religion. Third, it is
when she needed money and decided to apply illegal to fail to make reasonable accommodations
for a part-time job, she sought out employment to meet an employee’s religious beliefs, unless such
within the mall at the local Abercrombie & Fitch accommodations create some undue hardship for
clothing store. Everything seemed to go well in her the employer. Clearly in this case, both the first and
interview, but in the end, Samantha was denied third categories come into play; however, lawyers for
employment because of what she was wearing—a Abercrombie & Fitch argued that Samantha never
simple black head scarf. Samantha was a Muslim explicitly stated in the interview that she wore the
American and wearing such a scarf was required by hijab for religious reasons, and hence, “they had no
her religious beliefs. idea that she was Muslim.”
In terms of competitive advantage, Abercrombie & In the end, the Supreme Court sided with Saman-
Fitch has tried to carve out a unique retail niche by tha in an 8-1 ruling, and Judge Antonin Scalia, noted
promoting what it calls is a “classic East Coast col- explicitly that, “This is really easy.” Allowing Muslim
legiate style.” Promoting this image is paramount to employees to wear the hijab was considered a
the company from top to bottom, and this includes very reasonable accommodation, and not a factor
young people who work on the sales floor. This is that could be used to deny someone employment.
not a unique characteristic of Abercrombie & Fitch, Although this may have been an easy call in Saman-
and virtually all modern retailers maintain what is tha’s favor in the United States, it should be noted
called a “looks policy” that is used to reinforce their that in other countries, this would have been an easy
brand image. The problem with some of these poli- call for Abercrombie & Fitch. For example, in France,
cies, however, is that the “looks” being reinforced the laws actually prohibit people from wearing overt
are not nearly as diverse as the nation as a whole. signs of religion, including the hijab, and hence
Thus, in this case, a hijab, which is apparently not Samantha would not have fared so well had the trial
part of the “looks policy” at Abercrombie & Fitch, been held in France.
became a major if unstated issue, because avoiding SOURCES: C. A. Liptak, “Muslim Denied Job over Head Scarf Wins in
an employee wearing a hijab put its brand image Supreme Court,” The Wall Street Journal, June 1, 2015, www.wsj.com;
“A Muslim Woman Beats Abercrombie and Fitch,” The Washington Post,
strategy in conflict with laws that prevent religious June 1, 2015, www.washingtonpost.com; J. Smith; “European Court
discrimination in hiring. Upholds French Full Veil Ban, BBC News, July 1, 2014, www.bbc.com.
223
224 CHAPTER 6 Selection and Placement
Introduction
Any organization that intends to compete through people must take the utmost care
with how it chooses organizational members. These decisions have a critical impact
on the organization’s ability to compete, as well as each and every job applicant’s life.
Organizations have to strive to make sure that the decisions they make with respect to
who gets accepted or rejected for jobs promote the best interests of the company and are
fair to all parties involved. Inaccurate and biased stereotypes like those alluded to in our
opening vignette threaten the viability of organizations, especially in an increasingly
diverse world.
This is as true at the level of individual firms, as it is with respect to competition
between nations. The United States has always been a magnet for talent from other
nations, and this country grew economically powerful through the contributions of many
different people who emigrated here from other countries. Some have suggested the
United States is losing its edge in this regard, however, and that “this is America’s most
serious long-term threat.”1 That is, social and economic inequality, racial and ethnic
bias, growing political intolerance, and a failing educational system are contributing to a
state of reverse migration, where highly trained professionals who came to this country
are now leaving the United States in larger percentages than those coming in. Innovation
and economic growth are fueled by people, and the firms or countries that bring in the
best people will be the ones that compete most successfully.
The purpose of this chapter is to familiarize you with ways to minimize errors in
employee selection and placement and, in doing so, improve your company’s competi-
tive position. The chapter first focuses on five standards that should be met by any selec-
tion method. The chapter then evaluates several common selection methods according
to those standards.
LO 6-1 Selection Method Standards

Establish the basic
scientific properties of
Personnel selection is the process by which companies decide who will or will not be
personnel selection allowed into organizations. Several generic standards should be met in any selection
methods, including process. We focus on five: (1) reliability, (2) validity, (3) generalizability, (4) utility, and
reliability, validity, and (5) legality. The first four build off each other in the sense that the preceding standard
generalizability. is often necessary but not sufficient for the one that follows. This is less the case with
legal standards. However, a thorough understanding of the first four standards helps us
understand the rationale underlying many legal standards.
RELIABILITY
Much of the work in personnel selection involves measuring characteristics of people to
determine who will be accepted for job openings. For example, we might be interested
in applicants’ physical characteristics (like strength or endurance), their cognitive abili-
ties (such as spatial memory or verbal reasoning), or aspects of their personality (like
their decisiveness or integrity). Many people have inaccurate stereotypes about how
these kinds of characteristics may be related to factors such as race, sex, age, or ethnic
background, and therefore, we need to get past these stereotypes and measure the actual
attributes directly. So for example, in the vignette that opened this chapter, one could
see that Abercrombie & Fitch may have had stereotypes about Muslim workers that did
not really apply to Samantha Elauf, who was a very traditional American teenager with
CHAPTER 6 Selection and Placement 225
perhaps one exception—the hijab. At the other end of the age spectrum, many people
have stereotypes about older workers that no longer hold up to any type of scrutiny.2
One key standard for any measuring device is its reliability. We define reliability as the Reliability
degree to which a measure is free from random error. If a measure of some supposedly The consistency of a
stable characteristic such as intelligence is reliable, then the score a person receives performance measure;
the degree to which a
based on that measure will be consistent over time and in different contexts. performance measure
is free from random
error.
Estimating the Reliability of Measurement
Most measurement in personnel selection deals with complex characteristics like intelli-
gence, integrity, and leadership ability. However, to appreciate some of the complexities
in measuring people, we will consider something concrete in discussing these concepts:
the measurement of height. For example, if we were measuring an applicant’s height, we
might start by using a 12-inch ruler. Let’s say the first person we measure turns out to
be 6 feet 1 and 4/16 inches tall. It would not be surprising to find out that someone else
measuring the same person a second time, perhaps an hour later, found this applicant’s
height to be 6 feet and 12/16 inches. The same applicant, measured a third time, maybe the
next day, might be measured at 6 feet 1 and 8/16 inches tall.
As this example makes clear, even though the person’s height is a stable characteris-
tic, we get slightly different results each time he is assessed. This means that each time
the person is assessed, we must be making slight errors. If we used a measure of height
that was not as reliable as a ruler—for example, guessing someone’s height after see-
ing her walk across the room—we might see an even greater amount of unreliability in
the measure. Thus reliability refers to the measuring instrument (a ruler versus a visual
guess) rather than to the characteristic itself.
We can estimate reliability in several different ways, however; and because most
of these rely on computing a correlation coefficient, we will briefly describe and
illustrate this statistic. The correlation coefficient is a measure of the degree to which
two sets of numbers are related. The correlation coefficient expresses the strength
of the relationship in numerical form. A perfect positive relationship (as one set of
numbers goes up, so does the other) equals +1.0; a perfect negative relationship (as
one goes up, the other goes down) equals –1.0. When there is no relationship between
the sets of numbers, the correlation equals .00. Although the actual calculation of this
statistic goes beyond the scope of this book, it will be useful for us to conceptually
examine the nature of the correlation coefficient and what this means in personnel
selection contexts.
When assessing the reliability of a measure, for example, we might be interested in
knowing how scores on the measure at one time relate to scores on the same measure
at another time. Obviously, if the characteristic we are measuring is supposedly stable
(like intelligence or integrity) and the time lapse is short, this relationship should be
strong. If it were weak, then the measure would be inconsistent—hence unreliable. This
is called assessing test–retest reliability. Note that the time period between measure-
ments is important when it comes to interpreting test–retest reliability. The assumption
is that the characteristic being measured is not changing, and hence any change from
Time 1 to Time 2 is treated as an error. When the time period becomes too long, this
increases the opportunity that the characteristic is actually changing. For example, if one
is measuring personality traits, the evidence suggests that people become more consci-
entious, more introverted, and more emotionally stable as they get older. These are not
age stereotypes, but rather scientifically documented facts about the instability of certain
personality traits over extended periods of time.3
Plotting the two sets of numbers on a two-dimensional graph often helps us to

appreciate the meaning of various levels of the correlation coefficient. Figure 6.1, for
example, examines the relationship between student scholastic aptitude in one’s junior
and senior years in high school, where aptitude for college is measured in three ways:
(1) via the scores on the Scholastic Aptitude Test (SAT), (2) via ratings from a high
school counselor on a 1-to-100 scale, and (3) via tossing dice. In this plot, each number
on the graphs represents a person whose scholastic aptitude is assessed twice (in the
junior and senior years), so in Figure 6.1a, 11 represents a person who scored 1580 on the
SAT in the junior year and 1500 in the senior year; 2020 represents a person who scored
480 in the junior year and 620 in the senior year.
Figure 6.1a shows a very strong relationship between SAT scores across the two
years. This relationship is not perfect in that the scores changed slightly from one year
to the next, but not a great deal. Turning to Figure 6.1b, we see that the relationship
between the high school counselors’ ratings across the two years, while still positive, is
not as strong. That is, the counselors’ ratings of individual students’ aptitudes for college
are less consistent over the two years than their test scores. This might be attributable to
the fact the counselor’s rating during the junior year was based on a smaller number of
observations relative to the ratings made during senior year. Finally, Figure 6.1c shows a
worst-case scenario, where the students’ aptitudes are assessed by tossing two six-sided
dice. As you would expect, the random nature of the dice means that there is virtually
no relationship between scores taken in one year and scores taken the next. Although no
one would seriously consider tossing dice to be a measure of aptitude, it is worth noting
that research shows that the correlation of overall ratings of job applicants’ suitability for
jobs based on unstructured interviews is very close to .00. Thus, one cannot assume a
measure is reliable without actually checking this directly. Novices in measurement are
often surprised at exactly how unreliable many human judgments turn out to be. Thus,
Figure 6.1a
Measurements of a
Student’s Aptitude
1600 2
Senior-Year SAT Score
10 5
1300 3
8
15 11 6
4
16 13
1000 7
14 9
17
19
700 12
20
18
400
400 700 1000 1300 1600

Junior-Year SAT Score
Figure 6.1b
100
Senior-Year Counselor’s Rating
80 1
13 4
8 2
17
6
60 14 3
11
16
7 5
9
20
40 12
18
15 10
19
20
20 40 60 80 100
Junior-Year Counselor’s Rating
much of the science that deals with selection tries to go beyond subjective human judg-
ments. So for example, if one wants to really know how extraverted someone is, a socio-
metric badge that records the number, length, and nature of this person’s communication
patterns across time is likely to provide more reliable test–retest data relative to the sub-
jective perceptions of a former supervisor or interviewer who met the person just once.4
Figure 6.1c
12
11 8
10 14 3
Senior-Year Toss of Dice
9 19 9 1
8 15 10 5
7 18 4
6 16 11 6
5 20 12 2
4 17 7
3 13
2 3 4 5 6 7 8 9 10 11 12
Junior-Year Toss of Dice
Standards for Reliability

Regardless of what characteristic we are measuring, we want highly reliable measures.
Thus, in the previous example, when it comes to measuring students’ aptitudes for
college, the SAT is more reliable than counselor ratings, which in turn are more reliable
than tossing dice. But in an absolute sense, how high is high enough—.50, .70, .90? This
is a difficult question to answer specifically because the required reliability depends in
part on the nature of the decision being made about the people being measured.
For example, let’s assume some college admissions officer was considering several
students depicted in Figures 6.1a and 6.1b. Turning first to Figure 6.1b, assume the
admissions officer was deciding between Student 1 (11) and Student 20 (2020). For this
decision, the .50 reliability of the ratings is high enough because the difference between
the two students is so large that one would make the same decision for admission regard-
less of the year in which the rating was taken. That is, Student 1 (with scores of 100 and
80 in the junior and senior year, respectively) is always admitted and Student 20 (with
scores of 12 and 42 for junior and senior years, respectively) is always rejected. Thus,
although the ratings in this case are not all that reliable in an absolute sense, their reli-
ability is high enough for this decision.
On the other hand, let’s assume the same college admissions officer was deciding between
Student 1 (11) and Student 2 (22). Looking at Figure 6.1a, it is clear that even with the highly
reliable SAT scores, the difference between these students is so small that one would make a
different admission decision depending on what year one obtained the score. Student 1 would
be selected over Student 2 if the junior-year score was used, but Student 2 would be chosen
over Student 1 if the senior-year score was used. Thus, even though the reliability of the SAT
exam is high in an absolute sense, it is not high enough for this decision. Under these condi-
tions, the admissions officer needs to find some other basis for making the decision regarding
these two students (like high school GPA or rank in graduating class).
Although these two scenarios clearly show that no specific value of reliability is
always acceptable, they also demonstrate why, all else being equal, the more reliable
a measure is, the better. For example, turning again to Figures 6.1a and 6.1b, consider
Student 9 (99) and Student 14 (1414). One would not be able to make a decision between
these two students based on scholastic aptitude scores if assessed via counselor ratings,
because the unreliability in the ratings is so large that scores across the two years con-
flict. On the other hand, one would be able to base the decision on scholastic aptitude
scores if assessed via the SAT, because the reliability of the SAT scores is so high that
scores across the two years point to the same conclusion.
Validity
The extent to which a
performance measure
assesses all the
VALIDITY
relevant—and only the We define validity as the extent to which performance on the measure is related to per-
relevant—aspects of job formance on the job. A measure must be reliable if it is to have any validity. On the other
performance. hand, we can reliably measure many characteristics (like height) that may have no rela-
tionship to whether someone can perform a job. For this reason, reliability is a necessary
Criterion-Related
Validity
but insufficient condition for validity.
A method of establish-
ing the validity of a
personnel selection Criterion-Related Validation
method by showing a One way of establishing the validity of a selection method is to show that there is an
substantial correlation
between test scores
empirical association between scores on the selection measure and scores for job perfor-
and job-performance mance. If there is a substantial correlation between test scores and job-performance
scores. scores, criterion-related validity has been established.5 For example, Figure 6.2 shows the
relationship between 2014 scores on the Scholastic Aptitude Test (SAT) and 2015 fresh-
man grade point average (GPA). In this example, there is roughly a .50 correlation between
the SAT and GPA. This .50 is referred to as a validity coefficient. Note that we have used
the correlation coefficient to assess both reliability and validity, which may seem some-
what confusing. The key distinction is that the correlation reflects a reliability estimate
when we are attempting to assess the same characteristic twice (such as SAT scores in the
junior and senior years), but the correlation coefficient reflects a validity coefficient when
we are attempting to relate one characteristic (SAT) to performance on some task (GPA).
Criterion-related validity studies come in two varieties. Predictive validation seeks to Predictive Validation
establish an empirical relationship between test scores taken prior to being hired and A criterion-related
validity study that
eventual performance on the job. Because of the time and effort required to conduct a
seeks to establish an
predictive validation study, many employers are tempted to use a different design. Con- empirical relationship
current validation assesses the validity of a test by administering it to people already on between applicants’
the job and then correlating test scores with existing measures of each person’s perfor- test scores and their
mance. For example, the testing company Infor measures 39 behavioral, cognitive, and eventual performance
on the job.
cultural traits among job applicants and then compares their scores on those dimensions
with the top performers in the company. The assumption is that if high performers in the
company score high on any trait, then the company should use scores on this trait to Concurrent
Validation
screen new hires.6 Figure 6.3 compares the two types of validation study. A criterion-related
Despite the extra effort and time needed for predictive validation, it is superior to validity study in which
concurrent validation for a number of reasons. First, job applicants (because they are a test is administered
seeking work) are typically more motivated to perform well on the tests than are cur- to all the people cur-
rent employees (who already have jobs). Thus, job applicants are more tempted to fake rently in a job and then
incumbents’ scores are
responses in order to look good relative to current job holders. Second, current employ- correlated with existing
ees have learned many things on the job that job applicants have not yet learned. There- measures of their per-
fore, the correlation between test scores and job performance for current employees formance on the job.
may not be the same as the correlation between test scores and job performance for less
Figure 6.2
Relationship
between 2014 SAT
Scores and 2015
Freshman GPA
Freshman GPA (2015)
4.0 1
13 4
8 2
17
6
3.0 14 3
11
16
7 5
9
20
2.0 12
18
15 10
19
1.0
0.0
400 500 600 700 800
SAT Scores (2014)
knowledgeable job applicants. Third, current employees tend to be homogeneous—that

is, similar to each other on many characteristics. Thus, on many of the characteristics
needed for success on the job, most current employees will show restriction in range.
This restricted range makes it hard to detect a relationship between test scores and job-
performance scores because few of the current employees will be very low on the char-
acteristic you are trying to validate. For example, if emotional stability is required for
a nursing career, it is quite likely that most nurses who have amassed five or six years’
experience will score high on this characteristic. Yet to validate a test, you need both
high test scorers (who should subsequently perform well on the job) and low test scorers
(who should perform poorly on the job). Thus, although concurrent studies can some-
times help one anticipate the results of predictive studies, they do not serve as substitutes.
Obviously, we would like our measures to be high in validity; but as with the reli-
ability standard, we must also ask, how high is high enough? When trying to determine
how much validity is enough, one typically has to turn to tests of statistical significance.
A test of statistical significance answers the question, “Assuming that there is no true
Figure 6.3 Concurrent Validation

Graphic Depiction
of Concurrent and Measure all current
Predictive Validation job incumbents on
Designs attribute
Obtain correlation
between these two
sets of numbers
Measure all current
job incumbents’
performance
Predictive Validation
Measure all job

applicants on
attribute
Hire some applicants

and reject others
Obtain correlation
between these two
sets of numbers
Wait for some time
period
Measure all newly

hired job incumbents’
performance
relationship between the predictor and the criterion, what are the odds of seeing a rela-
tionship this strong by chance alone?” If these odds are very low, then one might infer
that the results from the test were in fact predicting future job performance.
Table 6.1 shows how big a correlation between a selection measure and a measure
of job performance needs to be to achieve statistical significance at a level of .05 (that
is, there is only a 5 out of 100 chance that one could get a correlation this big by chance
alone). Although it is generally true that bigger correlations are better, the size of the
sample on which the correlation is based plays a large role as well. Because many of the
selection methods we examine in the second half of this chapter generate correlations in
the .20s and .30s, we often need samples of 80 to 90 people. A validation study with a
small sample (such as 20 people) is almost doomed to failure from the start. Fortunately,
advances in the ability to process “big data” via cloud-based analytics is greatly expand-
ing the ability to find valid predictors of future job performance. For example, in the old
days, when it came to staffing its call centers, Xerox Corporation always looked for appli-
cants who had done the job before. This seemed like a reasonable approach to take until
one day, when they actually assessed the empirical relationship between experience, on
the one hand, and performance and turnover on the other hand, they learned that experi-
ence did not matter at all. Instead, what really separated winners and losers in this occupa-
tion was their personality. People who were creative tended to perform well and stay on
the job for a long time, whereas those who were inquisitive tended to struggle with the job
and leave well before the company ever recouped its $5,000 investment in training.
Xerox now leaves all hiring for its nearly 500,000 call center jobs to a computer soft-
ware algorithm that tirelessly looks for links between responses to personality items
and a highly specific set of job outcomes. The program was developed by Evolv Incor-
porated, and rather than relying on interviewer judgments that might be subject to per-
sonal biases, the Evolv program puts applicants through a battery of tests and personality
items, then tracks their outcomes at the company over time. The algorithm is constantly
adjusting itself with the accumulation of ever more data, all in an effort to develop a
statistical model that describes the ideal call center employee.7
Evolv is just one player in an expanding industry that seeks to use big data to help
companies find and retain the best employees. Globally, spending on this sort of talent
management software rose 15% in just one year to an estimated value of $3.8 billion and Content Validation
A test-validation
the competition for this business is intense. For example, in 2011 alone, IBM purchased strategy performed
Kenexa Corporation for $1.3 billion, Oracle acquired Taleo for $1.9 billion, and SAP by demonstrating that
bought SuccessFactors for $3.4 billion.8 the items, questions,
or problems posed by
a test are a represen-
tative sample of the
Content Validation kinds of situations or
When sample sizes are small, an alternative test validation strategy, content validation, problems that occur on
can be used. Content validation is performed by demonstrating that the questions or the job.
Table 6.1
SAMPLE SIZE REQUIRED CORRELATION
Required Level
of Correlation to
5 .75 Reach Statistical
10 .58 Significance as a
20 .42 Function of Sample
40 .30 Size
80 .21
100 .19
problems posed by the test are a representative sample of the kinds of situations or prob-
lems that occur on the job. A test that is content valid exposes the job applicant to situa-
tions that are likely to occur on the job, and then tests whether the applicant currently has
sufficient knowledge, skill, or ability to handle such situations.
Many of the new simulations that organizations are using are essentially computer-
based role-playing games, where applicants play the role of the job incumbent, con-
fronting the exact types of people and problems real-live job incumbents would face.
The simulations are just like traditional role-playing games (e.g., “The Sims”), and the
applicant’s reactions and behaviors are scored to see how well they match with what one
would expect from the ideal employee. For example, if one is considering applicants for
a wait staff job at a restaurant, the game Wasabi Waiter, designed by Knack.it, allows the
employer to watch how the applicant responds to finicky customers, uppity receptionists,
emotionally unstable chefs, and other predictably challenging situations that are likely
to take place in a very busy establishment.9 Because the content of these tests so closely
parallels the content of the job, one can safely make inferences from one to the other.
Although criterion-related validity is established by empirical means, content validity is
achieved primarily through a process of expert judgment.
The ability to use content validation in small sample settings makes it generally more
applicable than criterion-related validation. However, content validation has two lim-
itations. First, one assumption behind content validation is that the person who is to
be hired must have the knowledge, skills, or abilities at the time she is hired. Second,
because subjective judgment plays such a large role in content validation, it is critical to
minimize the amount of inference involved on the part of judges. Thus the judges’ rat-
ings need to be made with respect to relatively concrete and observable behaviors.
GENERALIZABILITY
Generalizability Generalizability is defined as the degree to which the validity of a selection method estab-
The degree to which lished in one context extends to other contexts. Thus, the SAT may be a valid predictor of
the validity of a someone’s performance (e.g., as a measure of someone’s GPA in an undergraduate program),
selection method
established in one
but, does this same test predict performance in graduate programs? If the test does not predict
context extends to success in this other situation, then it does not “generalize” to this other context.
other contexts. There are two primary “contexts” over which we might like to generalize: differ-
ent situations (jobs or organizations) and different samples of people. Just as reliability
is necessary but not sufficient for validity, validity is necessary but not sufficient for
generalizability.
It was once believed, for example, that validity coefficients were situationally
specific—that is, the level of correlation between test and performance varied as one
went from one organization to another, even though the jobs studied seemed to be identi-
cal. Subsequent research has indicated that this is largely false. Rather, tests tend to show
similar levels of correlation even across jobs that are only somewhat similar (at least for
tests of intelligence and cognitive ability). Correlations with these kinds of tests change
as one goes across widely different kinds of jobs, however. Specifically, the more com-
plex the job, the higher the validity of many tests. It was also believed that tests showed
differential subgroup validity, which meant that the validity coefficient for any test–job
performance pair was different for people of different races or genders. This belief was
also refuted by subsequent research, and, in general, one finds very similar levels of cor-
relations across different groups of people.10
Because the evidence suggests that test validity often extends across situations and
subgroups, validity generalization stands as an alternative for validating selection
methods for companies that cannot employ criterion-related or content validation. Valid-
ity generalization is a three-step process. First, the company provides evidence from
previous criterion-related validity studies conducted in other situations that shows that
a specific test (such as a test of emotional stability) is a valid predictor for a specific
job (like nurse at a large hospital). Second, the company provides evidence from job
analysis to document that the job it is trying to fill (nurse at a small hospital) is similar
in all major respects to the job validated elsewhere (nurse at a large hospital). Finally,
if the company can show that it uses a test that is the same as or similar to that used in
the validated setting, then one can “generalize” the validity from the first context (large
hospital) to the new context (small hospital).
UTILITY LO 6-2
Utility is the degree to which the information provided by selection methods enhances the Discuss how the par-
ticular characteristics
bottom-line effectiveness of the organization. In general, the more reliable, valid, and gener-
of a job, organization,
alizable the selection method is, the more utility it will have. On the other hand, many char- or applicant affect the
acteristics of particular selection contexts enhance or detract from the usefulness of given utility of any test.
selection methods, even when reliability, validity, and generalizability are held constant.
Figures 6.4a and 6.4b, for example, show two different scenarios where the correlation
between a measure of extroversion and the amount of sales revenue generated by a sample of Utility
The degree to which
sales representatives is the same for two different companies: Company A and Company B. the information pro-
Although the correlation between the measure of extroversion and sales is the same, Com- vided by selection
pany B derives much more utility or practical benefit from the measure. That is, as indicated methods enhances the
by the arrows proceeding out of the boxes (which indicate the people selected), the average effectiveness of select-
sales revenue of the three people selected by Company B (Figure 6.4b) is $850,000 coming personnel in real
organizations.
pared to $780,000 from the three people selected by Company A (Figure 6.4a).
The major difference between these two companies is that Company B generated twice
as many applicants as Company A. This means that the selection ratio (the percentage of
Company A Figure 6.4a

Utility of Selecting on
Extroversion Scores
when Selection Ratio
Is High
$900,000 $900,000
Sales Revenue (2013)
1
2
4
$800,000 $800,000
5
$700,000 7 $700,000
6 3
8
10
$600,000 9 $600,000
$500,000 $500,000
400 500 600 700 800

Extroversion Score (2012)
Figure 6.4b Company B

Utility of Selecting on
Extroversion Scores
when Selection Ratio
Is Low
$900,000 2 $900,000
Sales Revenue (2013) 1 $850,000

10 5
$800,000 3 $800,000
8
15 11 6
4
13
$700,000 16
7
$700,000
14 9
17
19
$600,000 12 $600,000
20
18
$500,000 $500,000
400 500 600 700 800

Extroversion Score (2012)
people selected relative to the total number of people tested) is quite low for Company B
(3/20) relative to Company A (3/10). Thus, the people selected by Company B have
higher amounts of extroversion than those selected by Company A; therefore, Company B
takes better advantage of the relationship between extroversion and sales. Thus, the util-
ity of any test generally increases as the selection ratio gets lower, so long as the addi-
tional costs of recruiting and testing are not excessive.
Many other factors relate to the utility of a test. For example, the value of the product or
service produced by the job incumbent plays a role: the more valuable the product
or service, the more value there is in selecting the top performers. For example, in a
high-tech company, there is tremendous value associated with a great team of software
engineers with a proven record of working productively together to create innovative
products. If a company tried to hire total strangers without this kind of track record
and build a team from scratch, it might take years to see any value from a set of indi-
vidual hires. Thus, many organizations in this industry are willing to pay top dollar to
hire entire intact teams. The term “acqui-hire” is used in this industry to describe this
practice, and in some cases, large companies are willing to pay up to $5 million to bring
an independent team into their fold. Ashley Vandy, an HR director at Facebook, notes,
“We are always looking for talent, and these deals are one way to bring great teams to
Facebook.”11
The utility of hiring the best talent is highlighted by recent evidence that suggests,
performance in jobs is not normally distributed, but instead takes the shape of a power
law. That is, most individual differences take on the form of a normal distribution, in the
sense that most people are in the middle, followed by a smaller group of people who are
a little bit above or below the mean, followed by an even smaller group of outliers far
above and below the mean. This belief in the normal distribution has traditionally been
extended to people’s belief about job performance as well, even though there has not
been a great deal of evidence collected to test this belief. However, a study examining
over 600,000 entertainers, politicians, amateur athletes, professional athletes, and scien-
tists has challenged this idea and instead suggests that job performance follows a power
law distribution. Figure 6.5 shows how a distribution that follows a power law differs
dramatically from a normal distribution, in the sense that there are actually very few high
performers and a large group of potentially poor performers. The implication of these
new findings for utility analysis is important because it implies that the dollar value of
a “highly productive worker” (e.g., someone who is one standard deviation above the
mean, perhaps selected based upon a validated test) and an “average worker” (e.g., at the
mean, perhaps selected at random) is much greater than one would expect if the distribu-
tion were normal.12
LEGALITY LO 6-3
The final standard that any selection method should adhere to is legality. All selection Describe the
government’s role in
methods should conform to existing laws and existing legal precedents. So for example, personnel selection
as we saw in the vignette that opened this chapter, Abercrombie & Fitch was found to decisions, particularly
illegally discriminate based upon religion because they failed to make reasonable accom- in the areas of
modations to Samantha Elauf. In a very similar case, Kentucky Fried Chicken, which constitutional law,
requires its workers to wear slacks, was charged with discrimination when it refused federal laws, executive
orders, and judicial
to allow Sheila Silver, a Pentecostal Christian, to wear a long dress at work, which her precedent.
religion required. These are hardly isolated incidents in the sense that cases based upon
religious discrimination have skyrocketed recently. According to the EEOC, in 2013
alone, there were over 3,700 religious discrimination claims brought against employ-
ers.13 Employers who are taken to court for illegal discrimination experience high costs
associated with litigation, settlements, and awards, and also suffer potential damage to
their social reputations as good employers, making recruitment more difficult. More-
over, although the threat of litigation is ever present, this is especially a problem during
economic recessions, when it is difficult to find a job. The number of discrimination
cases filed with the EEOC set a record of over 100,000 in 2011 alone.14
For example, a lawsuit leveled at Walmart sought damages of over $1 billion, and
charged that the retailer discriminated against women via a set of subjective and decentral-
ized interview processes that were rife with gender stereotypes that limited their advance-
ment opportunties.15 Although this case was eventually decided in Walmart’s favor for a
technical reason (the 1 million women plaintiffs failed to establish that they were com-
mon victims of a common policy), the reputational damage caused by all the testimony
Figure 6.5
Comparing a Normal
Distribution to a
Number of Workers
Power Law
Performance Level from Low to High

seriously wounded the company. Supreme Court Justice Ruth Ginsberg noted, “The plain-
tiffs’ evidence, including class members’ tales of their own experiences suggests gender
bias.” This kind of reputational damage can only hurt an employer in the labor market,
even if the employer prevails in court.16 In addition, the negative reputational effects asso-
ciated with being perceived as an employer who discriminates unfairly can even hurt the
company in the product market. For example, if Walmart is perceived as treating women
unfairly, this might be a turn-off for female customers some of whom may shop elsewhere.
This is exactly what was experienced by Chick-fil-A. Even though the firm had never
been charged with any form of employment discrimination, when the president of the
company made disparaging comments regarding gay marriage in 2012, there was an
immediate negative backlash against “hate chicken” that harmed sales. Even worse, it
threatened the company’s expansion plans and strategy to move into northern and urban
areas. The Mayor of Boston went so far as to send a letter to the company urging them to
back down from plans to locate in Boston, and he was quoted in the Boston Herald saying
that “he would make it very difficult” for the restaurant to come to town. Chicago Mayor
Rahm Emanual chimed in and stated that “Chick-fil-A’s values are not Chicago’s values”
and protest movements in New York and San Francisco were organized to oppose expan-
sion into those areas. All of this despite the fact that no one ever presented any evidence
or even charged the company with actual discrimination against gay customers or job
applicants.17
Federal Legislation
Three primary federal laws form the basis for a majority of the suits filed by job appli-
cants. First, the Civil Rights Act of 1991 (discussed in Chapter 3), an extension of the
Civil Rights Act of 1964, protects individuals from discrimination based on race, color,
sex, religion, and national origin with respect to hiring as well as compensation and
working conditions. Thus, the religious statute was grounds for Samantha Elauf’s law-
suit, but there are several other categories within this act that define other protected
groups. The 1991 act differs from the 1964 act in three important areas.
First, it defines employers’ explicit obligation to establish the business necessity of
any neutral-appearing selection method that has had adverse impact on groups speci-
fied by the law. This is typically done by showing that the test has significant criterion-
related or content validity. If the employer cannot show such a difference, which the
research suggests will be difficult, then the process may be ruled illegal. Ironically, for
example, the Consumer Finance Protection Bureau (CFPB) that was created as part of
the Dodd-Frank Act, which regulates banks and financial institutions to specifically pre-
vent discrimination in loan practices, recently discovered that its own promotion poli-
cies created adverse impact. An investigation into the CFPB’s promotion policies found
that 21% of the agency’s white employees received the highest performance rating com-
pared with just 10% of the African American employees and 9% of Hispanic employees.
Since this rating was used to make promotion decisions, it became a neutral-appearing
employment practice that created adverse impact, and thus, had to be justified.18 Because
adverse impact is determined for both races and ethnicities, as the “Evidence-Based HR”
box shows, the subjective nature of the “ethnicity” categorization process sometimes
makes determining adverse impact a complicated matter.
Second, the 1991 act allows the individual filing the complaint to have a jury decide
whether he or she may recover punitive damages (in addition to lost wages and benefits)
for emotional injuries caused by the discrimination. This can generate large financial settle-
ments as well as poor public relations that can hinder the organization’s ability to compete.
Finally, the 1991 act explicitly prohibits the granting of preferential treatment to
minority groups. Preferential treatment is often attractive because many of the most
valid methods for screening people, especially cognitive ability tests and work sample
tests, often are high in adverse impact.19 Thus, there is somewhat of a trade-off in terms
of selecting the highest scorers on validated tests on the one hand and creating diversity
in the workforce on the other hand.20
One potential way to “have your cake and eat it too” is to simply rank the scores of
different races or gender groups within their own groups, and then taking perhaps the
top 10% of scorers from each group, instead of the top 10% that would be obtained if
one ignored race or gender. Many feel that this practice is justified because it levels the
playing field in a context where bias works against African Americans. However, the
1991 act specifically outlaws this practice (sometimes referred to as race norming).
The reason for this is that adjusting scores in this way has been found to have a number
of negative effects, not only on the attitudes of white males who claim it causes reverse
discrimination,21 but on the proposed beneficiaries of such preferential treatment.
Two recent Supreme Court cases show that policies that may be construed as promot-
ing preferential treatment will not stand up in court. In the first case, voters in the state
of Michigan backed an initiative that made it illegal to engage in affirmative action for
minorities when it came to admissions to Michigan colleges. Because the majority of vot-
ers in this state were white, this initiative was challenged because of legal precedents that
protect minorities from being targeted for unfair treatment through the political process.
That is, taken to an extreme, if a majority of members of a state were white, it would not be
permissible to support a ballot that would prevent minorities from attending college at all,
since this would be patently unfair. The challenge to the Michigan initiative claimed that
the initiative was close to this, but this challenge was struck down by the Supreme Court,
which decided that this is within the rights of the electorate.22 The court did not necessar-
ily say that affirmative action was illegal in this case, but rather it was fair for the general
electorate to impose its will in this way, which leaves colleges trying to promote diversity
scrambling for other alternatives, one of which took place at the University of Texas.23
EVIDENCE-BASED HR
Although race is an immutable characteristic for many white, black, and Asian
Americans, this is much less clear-cut for Hispanic Americans. Hispanics do not
constitute a race, and therefore, the U.S. Census asks two separate questions: one
about ethnicity and one about race. The first question asks whether the person is of
Hispanic or Latin origin, and the second asks about race. In the 2000 census data,
37% of Hispanics, apparently dissatisfied with the choice between white, black, and
Asian, chose the category “Other.” However, in the 2010 Census data, 7% of the
35 million Americans of Hispanic origin changed their race from “Other” to “White.”
This shift was mainly due to young Hispanics who either did not answer the questions
for themselves in the 2000 survey or changed their self-image as they became older.
For HR managers, this shows some of the complications of trying to make sure
various selection procedures do not have adverse impact on various protected groups
when the very concept of group status is dynamically changing over time.
SOURCE: N. Cohn, “More Hispanics Declaring Themselves White,” The New York Times, May 21, 2014,
www.nytimes.com.
The second recent Supreme Court case involved the University of Texas (UT) and
illustrates how difficult it can be to achieve diversity goals while still upholding merit-
based selection and avoiding perceptions of reverse discrimination. Specifically, in order
to increase the percentage of African American and Hispanic students in the UT system,
the school made it a policy to accept the top 10% of the graduating class of every high
school. Because many high schools in Texas tend to be segregated by race and ethnic-
ity, this policy worked somewhat like race norming in ensuring that members of every
group found their way into college; so far, so good.24 To push the diversity gains even
further though, the admissions officers at UT noted that many African American stu-
dents in affluent suburban schools often were rejected for admission, even though they
had higher test scores than African American students from urban schools. When the
school tried to reach out and accept those students, however, this policy was challenged
and then struck down by the Supreme Court. The court reacted negatively to this policy
because it meant that a white student at an affluent school who had the same test score as
an African American at the same affluent school would be rejected whereas the African
American student would be accepted. The court decided that this was a clear case of
reverse discrimination based solely on race.25
Rather than employing race norming, employers can partially achieve both goals of
maximizing predicted future performance and diversity in several ways. First, aggressive
recruiting of members of protected groups allows an employer to generate a larger pool
of protected group members, and, by being highly selective within this larger group, the
scores of admitted applicants will more closely match those of all the other groups.26
Second, as we see later in this chapter, different selection methods have different degrees
of adverse impact, and multistage selection batteries that use different methods at differ-
ent stages can also help.27
Finally, one common approach that does not seem to work is to abandon the kinds of
compliance-driven, evidenced-based workforce utilization reviews that we discussed in
our last chapter, in favor of softer, “inclusion” initiatives that express the generic value of
diversity but fail to document goals and timetables statistically. Some organizations treat
diversity more like a marketing campaign than an HR initiative, and it is not uncommon
to see companies that won awards for their “inclusion programs” such as Texaco and
Bank of America, also later convicted of illegal discrimination. Some observers have
noted that there is an almost complete overlap of the lists of the top 50 companies for
inclusion and the top 50 companies for advertising expenditures, and the need to comple-
ment style with substance cannot be overlooked in this critical area.28 The simple truth
is that best predictors of whether a firm becomes truly diverse and avoids litigation is
whether (a) there is a specific person (e.g., a diversity compliance officer) whose sole job
is to monitor hiring statistics, (b) this person has the power to change hiring practices,
and (c) this person is held strictly accountable in their own performance appraisal for
achieving quantifiable results.29
The Age Discrimination in Employment Act of 1967 is also widely used in person-
nel selection. Court interpretations of this act also mirror those of the Civil Rights
Act, in the sense that if any neutral-appearing practice happens to have adverse impact
on those over 40, the burden of proof shifts to the employer, who must show business
necessity to avoid a guilty verdict.30 The act does not protect younger workers (thus
there is never a case for “reverse discrimination” here), and like the most recent civil
rights act, it allows for jury trials and punitive damages. This act outlaws almost all
“mandatory retirement” programs (company policies that dictate that everyone who
reaches a set age must retire).
Finally, the Americans with Disabilities Act (ADA) of 1991 protects individuals with
physical and mental disabilities (or with a history of the same), and requires that employ-
ers make “reasonable accommodation” to disabled individuals whose handicaps may
prevent them from performing essential functions of the job as currently designed. “Rea-
sonable accommodation” could include restructuring jobs, modifying work schedules,
making facilities accessible, providing readers, or modifying equipment. The ADA does
not require an organization to hire someone whose disability prevents him or her from
performing either critical or routine aspects of the job nor does it require accommodations
that would cause “undue hardship.” Technological advancements in the area of accommo-
dations, along with the general shift in jobs from those that are physically demanding to
those that are more mentally challenging, is increasing the percentage of jobs that disabled
workers can hold.31
There is also some degree of political pressure to increase the hiring of disabled
workers, and in 2014, the Department of Labor issued new rules aimed at government
contractors that decreed that they should set a goal of composing 7% of their work-
force with disabled employees. Thus, if you are applying for a job with a government
contractor you need to check a box that asks whether or not you are disabled. This
ruling was controversial because many disabled workers, especially those with non-
obvious physical impairments or mental impairments, are very unlikely to check that
box. This means that some employers may actually be meeting the goals but not be
able to show it due to employee reluctance to check the box.32 Indeed, when it comes
to boxes, as the “Competing through Sustainability” feature shows, the Department of
Labor has strong opinions about what boxes should be added as well as dropped from
job application forms.
Executive Orders
As noted in Chapter 3, the executive branch of the government also regulates hir-
ing decisions through the use of executive orders. Executive Order 11246 parallels
the protections provided by the Civil Rights Act of 1964 but goes beyond the 1964
act in two important ways. First, not only do the executive orders prohibit discrimi-
nation, they actually mandate that employers take affirmative action to hire quali-
fied minority applicants.33 Executive orders also allow the government to suspend
all business with a contractor while an investigation is being conducted (rather than
waiting for an actual finding), which puts a great deal of pressure on employers to
comply with these orders.
LO 6-4
List the common
methods used in
Types of Selection Methods selecting human
resources.
The first half of this chapter laid out the five standards by which we can judge selection
measures. In the second half of this chapter, we examine the common selection methods LO 6-5
used in various organizations and discuss their advantages and disadvantages in terms Describe the degree
of these standards. to which each of the
common methods used
in selecting human
resources meets the
INTERVIEWS demands of reliability,
A selection interview has been defined as “a dialogue initiated by one or more validity, generalizability,
persons to gather information and evaluate the qualifications of an applicant for utility, and legality.
Ban-the-Box Policies Attempt to Open Up Opportunities
A key to maintaining a sustain- from ever finding gainful embraced this
able workforce is to find some employment, and regrettably, guidance and now
meaningful role for every mem- the number of people affected only ask this question after there
ber of society and to prevent by this box is large and grow- has been a conditional job offer
it from becoming impossible ing over time. According to the made to the applicant. Tara
for large numbers of people to Federal Bureau of Investigation Raddohl, an HR representa-
find gainful employment. This (FBI), three decades of tougher tive for Walmart notes that “the
becomes very difficult, however, law enforcement and minimum removal of the box does not elim-
when the person in question has sentence guidelines have cre- inate the background check, but
a criminal record. Increased effi- ated a situation where nearly it offers those who have been
ciency and widespread use of 80 million Americans have previously incarcerated a chance
background checks have made criminal records. In 2012 alone, to get their foot in the door.”
arrests and convictions easier over 630,000 people were
to identify, and publicized cases released from state and federal DISCUSSION QUESTIONS
where employers were held lia- prisons, and then went looking 1. Is it fair to deny employment
ble for negligent hiring provide for work. Moreover, the fact that to all convicted felons, and if
both the opportunity and motiva- there are race differences in so, is this condemning such
tion to simply avoid hiring any- incarceration rates only makes individuals to a permanent life
one with a criminal background. matters more complicated. The of crime?
In a labor market where there EEOC, in an effort to help create 2. Is it fair to hold employers
are often far more applicants some opportunities for people liable for any crimes commit-
than openings, the simple deci- with less than perfect records, ted by employees with known
sion to not consider any person recently issued formal guid- criminal backgrounds, and if
who has a criminal record for ance and recommendation to so, is this also condemning
employment seems like an effi- employers to strike that box such individuals to a perma-
cient screening system. Thus, from formal applications. nent life of crime?
one often sees a specific box This ban-the-box movement SOURCES: J. Smialek, “Putting Released
on standard employment appli- does not mean that employers Prisoners Back to Work,” Bloomberg
cations that asks the question, cannot ask such a question; Businessweek, February 6, 2014, pp. 30–31;
C. G. Koch and M. V. Holden, “The Danger
“Have you ever been convicted however, the EEOC wants to of Putting So Many People in Prison,”
of a crime?” push that question farther down Chicago Tribune, January 28, 2015, www
This box has become the the line in the employment pro- .chicagotribune.com; J. R. Emshwiller and
G. Fields, “Decades Long Arrest Wave
new “scarlet letter” that forever cess. Large employers like Vexes Employers,” The Wall Street Journal,
excludes a number of Americans Target and Walmart have December 12, 2014, www.wsj.com.
employment.” The selection interview is the most widespread selection method

employed in organizations, and there have been literally hundreds of studies examin-
ing their effectiveness.34
Unfortunately, the long history of research on the employment interview suggests
that, without proper care, it can be unreliable, low in validity, and biased against a num-
ber of different groups. Moreover, interviews are relatively costly because they require at
least one person to interview another person, and these persons have to be brought to the
same geographic location. Finally, in terms of legality, the subjectivity embodied in the
240
process, as well as the opportunity for unconscious bias effects, often makes applicants
upset, particularly if they fail to get a job after being asked apparently irrelevant ques-
tions. In the end, subjective selection methods like the interview must be validated by
traditional criterion-related or content-validation procedures if they show any degree of
adverse impact.
Fortunately, more recent research has pointed to a number of concrete steps that one
can employ to increase the utility of the personnel selection interview. First, HR staff
should keep the interview structured, standardized, and focused on accomplishing a
small number of goals. That is, they should plan to come out of each interview with
quantitative ratings on a small number of dimensions that are observable (like interper-
sonal style or ability to express oneself) and avoid ratings of abilities that may be better
measured by tests (like intelligence). In addition to coming out of the interview with
quantitative ratings, interviewers should also have a structured note-taking system that
will aid recall when it comes to justifying the ratings.35
Second, interviewers should ask questions dealing with specific situations that are
likely to arise on the job, and use these to determine what the person is likely to do in
those situations. These types of situational interview items have been shown to have Situational Interview
quite high predictive validity.36 Situational judgment items come in two varieties, as An interview procedure
shown in Table 6.2. Some items are “experience-based” and require the applicant to where applicants are
confronted with specific
reveal an actual experience he or she had in the past when confronting the situation. issues, questions, or
Other items are “future-oriented” and ask what the person is likely to do when confront- problems that are likely
ing a certain hypothetical situation in the future. Research suggests that these types of to arise on the job.
items can both show validity but that experience-based items often outperform future-
oriented items. Experience-based items also appear to reduce some forms of impression
management, such as ingratiation, better than future-oriented items.37
Table 6.2
Examples of Experience-Based and Future-Oriented Situational Interview Items
Experience-based
Motivating employees: “Think about an instance when you had to motivate an employee to
perform a task that he or she disliked but that you needed to have done.
How did you handle that situation?”
Resolving conflict: “What was the biggest difference of opinion you ever had with a
co-worker? How did you resolve that situation?”
Overcoming resistance to “What was the hardest change you ever had to bring about in a past job,
change: and what did you do to get the people around you to change their thoughts
or behaviors?”
Future-oriented
Motivating employees: “Suppose you were working with an employee who you knew greatly
disliked performing a particular task. You needed to get this task com-
pleted, however, and this person was the only one available to do it. What
would you do to motivate that person?”
Resolving conflict: “Imagine that you and a co-worker disagree about the best way to handle
an absenteeism problem with another member of your team. How would
you resolve that situation?”
Overcoming resistance to “Suppose you had an idea for change in work procedures that would
change: enhance quality, but some members of your work group were hesitant to
make the change. What would you do in that situation?”
It is also important to use multiple interview-

ers who are trained to avoid many of the subjec-
tive errors that can result when one human being
is asked to rate another. For example, at Google,
there were definite concerns with demographic
similarity bias in interviews, because their own
analysis of local data was suggesting that man-
agers were hiring people who seemed just like
them. To eliminate this problem, Google now
compiles elaborate files for each candidate, and
then has all interviews conducted by groups
rather than individuals. Laszlo Bock, vice presi-
dent for Google’s People Operations, notes that
“we do everything to minimize the authority
and power of the lone manager in making hiring
decisions that are going to affect the entire com-
© Digital Vision RF pany.”38 Many companies find that a good way
When more than one person is able to interview a candidate to get “multiple eyes” on an applicant is to con-
for a position, there is significant advantage in removing duct digitally taped interviews, and then send
any errors or biases that a single individual might make the digitalized files (rather than the applicants)
in choosing the correct person for the job. In today’s around from place to place.
technological world, it is becoming easier for multiple people This is seen by some as a cost-effective
to give their input in an interview by watching a video tape or means of allowing numerous raters to evaluate
listening via conference call if they cannot be there in person. the candidate under standard conditions. The
use of video-based interviews began on college
campuses, where technology resources were
widely available. However, over time, private start-up companies began selling those
same services to the general public.39 Of course, many employers find that the lack of
true interaction that can take place in videos limits their value somewhat and, hence, the
use of face-to-face interactive technology like Skype is also on the rise.40
Regardless of the medium, anyone who will be conducting an employment inter-
view needs to be trained, and a relatively small amount of money spent on training up
front (in the $3,000 to $30,000 range) can save major expenses later in the process if it
prevents a lawsuit or a poor hiring decision that harms the organization.41 The goal of
most training programs is to limit the subjectivity of the process and research suggests
that it is best to ask interviewers to be “witnesses” of facts that can later be integrated
via objective formulas, as opposed to being “judges” allowed to idiosyncratically weigh
how various facts should be combined to form the final recommendation.42
In addition to being a witness, the interviewer sometimes has to be the prosecuting
attorney, because in some cases the interviewees may be motivated to try to present
an overly positive, if not outright false, picture of their qualifications. The role of
interviewer as prosecutor has been greatly facilitated recently by social media sites
that allow employers to gather a great deal of information on candidates just by look-
ing them up online. As the “Competing through Technology” box shows, some of this
search may even involve information that would be illegal to ask in an interview, and
the evidence clearly suggests employers use everything they can obtain from social
media to make decisions. Given the increasing role of social media in everyday life for
most new entrants into the labor pool, the ability to go beyond the formal interview
when obtaining information about applicants is only going to increase in the years
ahead.43
Facebook: Where Do Employers Go to Collect Illegal Information?
More than a third of U.S. employ- 15 employers and then created that employers
ers admit to searching social Facebook sites for each of these can obtain infor-
networking sites to obtain infor- fictitious persons. The Facebook mation. From a job applicant’s
mation about job applicants. sites provided religious informa- perspective, however, one might
More often than not, these tion that made it clear that the want to control what one can
searches focus mainly on issues person was Christian versus control, and hence it is wise to
related to drug use, unprofes- Muslim, but it was impossible to study your own Facebook page
sional behavior, or problems discern this in the résumé or the with at least as much scrutiny as
with previous employers or co- name attached to the résumé. some employer might.
workers. This kind of information On average, despite the fact
could clearly be job related and that the résumé revealed no DISCUSSION QUESTIONS
would be considered by most to information regarding religion, 1. How might you become
be effective due diligence. How- only 2% of the applicants who aware of the fact that an
ever, social media sites contain appeared to be Muslim on Face- employer went above and
all sorts of information that may book received callbacks versus beyond the materials you
not be job related, as well as 17% for applicants who appeared submitted when evaluating
information that employers would to be Christian. Thus, it appears you for employment?
be strictly prohibited from collect- that employers can and do 2. If you knew an employer
ing as part of the formal selection access information online searched information about
process. The question becomes: that they would not be legally you online, would this make
Do employers tap into social net- allowed to obtain in an interview. you more or less attracted to
works for information that they Clearly, the legal landscape work for that company?
would not be legally allowed to concerning the use of social SOURCES: R. Jacobson, “Facebook Snoop-
collect in an interview? media for screening purposes is ing on Job Candidates May Backfire on
In order to test this question, evolving and changing quickly, Employers,” Scientific American, January 13,
2014; J. Valentino-Devries, “Bosses May Use
researchers from Carnegie- and it is hard for regulators in the Social Media to Discriminate Against Job
Mellon University sent out information age to keep up with Seekers,” The Wall Street Journal,
4,000 fabricated résumés to all the new and different ways November 20, 2013, www.wsj.com.
REFERENCES, APPLICATION BLANKS, AND BACKGROUND CHECKS

Just as few employers would think of hiring someone without an interview, nearly all
employers also use some method for getting background information on applicants
before an interview. This information can be solicited from the people who know the
candidate through reference checks.
The evidence on the reliability and validity of reference checks suggests that these
are, at best, weak predictors of future success on the job. The main reason for this low
validity is that the evaluations supplied in most reference letters are so positive that it
is hard to differentiate applicants. This problem with reference letters has two causes.
First, the applicant usually gets to choose who writes the letter and can thus choose only
those writers who think the highest of her abilities. Second, because letter writers can
never be sure who will read the letters, they may justifiably fear that supplying damag-
ing information about someone could come back to haunt them. Thus, it is clearly not
in the past employers’ interest to reveal too much information beyond job title and years
of service. Another problem with reference checks is that applicants do not always tell
243
the truth when it comes to listing their references. In fact, 30% of the companies that
check references find false or misleading references on applications. Michael Erwin, a
career advisor at Career Builder, notes, “For some reason, people think companies aren’t
going to check their references and therefore they think they can get away with all sorts
of fabrications. In reality, 80% of companies do in fact check references prior to offering
someone an interview or prior to making an offer.44
The evidence on the utility of biographical information collected directly from job
applicants is much more positive, especially for certain outcomes like turnover.45 The
low cost of obtaining such information significantly enhances its utility, especially when
the information is used in conjunction with a well-designed, follow-up interview that
complements, rather than duplicates, the biographical information bank.
One of the most important elements of biographical information deals with educa-
tional background. In some cases, employers are looking for specialized educational back-
grounds reflected in functional degrees such as business or nursing or engineering, but
in other cases, employers are just looking for critical thinking and problem solving skills
that might be associated with any college degree.46 For example, Chip Kelly, the coach of
the Philadelphia Eagles football team, places more emphasis on drafting players who have
completed their college degrees than any other coach in the National Football League
(NFL). At a time when more and more of the best players come out of college early, this
may seem counterintuitive. Kelly feels that the complexity of his offensive and defen-
sive schemes demands someone who has proven they can successfully “hit the books,”
whether those are playbooks or textbooks.47 The evidence seems to back up this belief
in the sense that of the four teams in the NFL with the most fifth-year seniors, three of
them—Seattle, Denver, and New England—played in the Super Bowl in 2014 and 2015.
This focus on education is attributed to the nature of the economy, which increasingly
demands people with high levels of education. Indeed, it is ironic that despite relatively
high levels of employment, many employers find it impossible to find people with the
skills they need.48 The term “education gap” has been coined to capture the difference
between the average years of education required in a job listing in a given area, and the
average years of education in that same area. For the nation as a whole, the “education
gap” runs at about 5%, but in some cities like Las Vegas the number exceeds 10%. Areas
that have larger education gaps experience much higher rates of unemployment and are
usually the last to show signs of job recovery during an economic expansion.49
Again, as with the interview, the biggest concern with the use of biographical data
is that applicants who supply the information may be motivated to misrepresent them-
selves. Résumé fraud is on the rise and one survey indicated that roughly 45% of job
applications that were audited contained some amount of inaccurate material. One recent
and highly public example of this occurred at the Spokane chapter of the NAACP, which
is described in the “Integrity in Action” box.
In order to prevent embarrassing episodes, many employers hire outside companies to
do background checks on employees. For example, when Steve Masiello applied for a posi-
tion coaching basketball at the University of South Florida, a routine background check
revealed that he had lied on his application when he stated that he had earned a degree in
communications from the University of Kentucky in 2000. This came as an embarrassment
to Masiello’s current employer, Manhattan College, which also required a college degree for
any top coaching position, but apparently never checked on this when they hired Masiello.50
A similar failure to conduct a routine background check was partially to blame for the 2015
jailbreak at the Clinton Correctional Facility in New York City, where an employee helped
two convicted murderers escape.51 An investigation in the wake of this incident revealed
widespread lapses and failures to conduct adequate background checks at the prison.52
INTEGRITY IN ACTION
Race and Racial Identity: One and the Same?
The National Association for father. In addition to serving as like this sea-
the Advancement of Colored head of the Spokane NAACP, son’s trendy
People (NAACP) has never she was appointed by the city’s coat. You can always take it off
had a requirement that leaders mayor on a police oversight and black people can’t. . . there
within the organization had to committee on race relations. On is a shared history and a shared
be African American, and many the application for that position, common experience in the pres-
white Americans have served she checked the box “African ent that she can’t authentically
the association with distinction American,” and in an interview claim.”
in a variety of roles. However, with Spokane’s KERM television
in the summer of 2015, when station, Dolezal stated that “if I DISCUSSION QUESTIONS
it became clear that the head was asked, I would definitely say 1. What might motivate some-
of the Spokane chapter of the that yes, I consider myself to be one to claim identity to a
NAACP had been pretending black.” racial or ethnic group in which
to be black when in fact, both However, the fact that both he or she really does not
of her parents were white, this of her biological parents were belong?
sparked a national debate about 100% white means that checking 2. In an age where people are
what it means to be African the African American box on her increasingly of mixed parent-
American—specifically, whether employment application was a age, does a single check-the-
or not “identifying as black” is lie. The city of Spokane imme- box categorization system for
the same as being black. diately launched an ethics com- race still make sense?
Rachel Dolezal went to great mission to investigate the matter, SOURCES: C. Valdary, “What Ralph Ellison
lengths to appear to be black. and Dolezal eventually stepped Could Tell Rachel Dolezal,” The Wall Street
She attended Howard Univer- down from her post at the Journal, June 17, 2015, www.wsj.com; G.
Botelho, “Ex-NAACP Leader Rachel Dolezal:
sity, a traditional black college, NAACP. Although many within ‘I Identify As Black,’” CNN, June 17, 2015,
taught African American studies the NAACP recognized her valu- www.cnn.com; Z. Elinson, “Rachel Dolezal
at Eastern Washington Univer- able service to the association, Resigns As Head of Spokane NAACP Chapter,”
The Wall Street Journal, June 15, 2015,
sity, and often publically referred as one member noted, “You just www.wsj.com.
to a black friend of hers as her don’t get to put on blackness
Although the use of background checks is increasingly common in the United States,
they are rarely used in Europe. There are several reasons for these differences between
Europe and the United States. First, in terms of values and culture, in Europe, the appli-
cant’s right to privacy trumps the organization’s right to know. As noted by Andrew
Boling, partner at Baker and McKenzie, a Chicago-based HR outsourcing firm, “out-
side the United States, individual privacy rights enjoy the same protections that we give
to our First Amendment—in Europe what’s private, stays private.”53 Thus, a U.S. firm
that seeks an employee’s consent to do a background check is likely to be denied in
Europe, and performing the check without consent would be illegal in many countries.
Second, relative to the United States, one sees far fewer incidences of workplace
violence in Europe, and the rates of theft and fraud are also much lower. Similarly,
unlike Americans, Europeans tend to carry less debt, and hence background checks for
credit problems rarely turn up applicants whose financial situations are so dire that one
might be afraid of trusting them around money. At the height of the U.S. financial cri-
sis, for example, over 40% of people who were screened on credit card balances would
245
Privacy and Public Safety Collide on Germanwings Flight 9525
Germanwings Flight 9525 was report on any patients who are condition either
well on its journey from Bar- likely to engage in conduct that before or after
celona, Spain, to Düsseldorf, would result in serious harm to he was hired. The
Germany, when it crashed into themselves or others. However, question becomes—should they
the French Alps killing all 149 in Germany, the law emphasizes have—and will regulators and
people on board. Although privacy, and the laws of that consumers allow this to continue
every plane crash is a tragedy, country bar doctors from reveal- in the future or demand changes
two facts stood out in this case ing any medical information in how Europe balances privacy
that made it especially tragic. about their patients. German laws rights against the rights of public
First, it became clear that the place responsibility for reporting safety?
co-pilot, Andreas Lubitz, inten- mental health problems on the
tionally drove the plane into the individual, and the belief is that
DISCUSSION QUESTION
mountains as part of a suicide forcing mental health officials to
German and U.S. laws clearly
attempt. Lubitz locked the cabin “out” their patients merely drives
differ on the role of public
door after the pilot left the cock- mental illness underground. Peo-
reporting of mental illness.
pit, and ignored pleas from the ple with problems will not come
Which side do you think has the
rest of the flight crew while he forward for treatment for fear of
better argument, and, in your
crashed the plane. Second, it losing their jobs if their condition
opinion, how should a society
also became clear that prior to is reported.
balance the rights to privacy and
being hired at Germanwings, Clearly, this system broke
public safety?
Lubitz had been repeatedly down in the Andreas Lubitz
treated for mental illness and case. In fact, investigators found SOURCES: S. Meichtry and R. Wall, “German-
suicidal tendencies. a note in his apartment from a wings Investigation to Focus on How Industry
News of these two facts doctor that would have excused Vets Psychological Backgrounds of Pilots,” The
Wall Street Journal, March 31, 2015, www.wsj.
spurred a major debate regard- him from work for a time period com; N. Kulish and M. Eddy, “Germanwings
ing the selection of pilots, espe- that included the day of the Co-Pilot Was Treated for ‘Suicidal Tendencies,’
cially as this relates to uncovering fatal crash, but this note was Authorities Say,” The New York Times, March
30, 2015, www.nytimes.com; E. Goode, “Role
evidence of mental illness. In never shared with his employer. of Illness in Germanwings Crash Raises Worry
the United States, health pro- Thus, Germanwings claims that about Stigma,” The New York Times, March 30,
fessions are legally required to they had no knowledge of his 2015, www.nytimes.com.
have been rejected as viable hires given most standards adopted by companies that do
background checks. The percentage of similarly situated bad risks in Europe is simply
much lower.54
Third, although the greater deference to individual privacy would seem to put the
employer at a disadvantage, on the other side of the equation, the legal concept of neg-
ligent hiring is also largely unheard of in Europe. This reduces the need for employers
to show copious amounts of due diligence in order to protect themselves legally. As in
any country, individual employees in Europe may run afoul of the law or commit egre-
gious acts; however, this is an issue between the offender and the law, and one’s employ-
ing organization is rarely held legally responsible for their actions. As the “Competing
Through Globalization” box shows, this view may be changing in Europe, however, due
to the facts involving the crash of Germanwings Flight 9525 in 2015.
246
PHYSICAL ABILITY TESTS

Although automation and other advances in technology have eliminated or modified
many physically demanding occupational tasks, many jobs still require certain physi-
cal abilities or psychomotor abilities. In these cases, tests of physical abilities may be
relevant not only to predicting performance but to predicting occupational injuries and
disabilities as well.55 There are seven classes of tests in this area: ones that evaluate
(1) muscular tension, (2) muscular power, (3) muscular endurance, (4) cardiovascular
endurance, (5) flexibility, (6) balance, and (7) coordination.56
The criterion-related validities for these kinds of tests for certain jobs like firefight-
ing are quite strong.57 Unfortunately, these tests, particularly the strength tests, are likely
to have an adverse impact on some applicants with disabilities and many female appli-
cants. For example, roughly two-thirds of all males score higher than the highest-scoring
female on muscular tension tests.58
Because of this there are two key questions to ask in deciding whether to use these
kinds of tests. First, is the physical ability essential to performing the job and is it men-
tioned prominently enough in the job description? Neither the Civil Rights Act nor the
ADA requires employers to hire individuals who cannot perform essential job functions,
and both accept a written job description as evidence of the essential functions of the
job. Second, is there a probability that failure to adequately perform the job would result
in some risk to the safety or health of the applicant, co-workers, or clients? The “direct
threat” clause of the ADA makes it clear that adverse impact against those with disabili-
ties is warranted under such conditions.
Invoking this clause can sometimes cause controversy, as in 2014, when United Parcel
Service (UPS) cited this clause to support the decision to fire a worker who got preg-
nant because she could not lift packages weighing more than 20 pounds. UPS was sued,
because it routinely made accommodations for injured employees, and the same woman
who was fired for being pregnant would have been accommodated had she thrown her
back out. UPS eventually settled out of court and eliminated this policy, probably as much Cognitive Ability
Tests
for public relations reasons as well as for any other factor related to business necessity.59 Tests that include three
dimensions: verbal
comprehension, quan-
COGNITIVE ABILITY TESTS titative ability and rea-
Cognitive ability tests differentiate individuals based on their mental rather than physical soning ability.
capacities. Cognitive ability has many different facets, although we will focus only on
three dominant ones. Verbal comprehension refers to a person’s capacity to understand and Verbal
Comprehension
use written and spoken language. Quantitative ability concerns the speed and accuracy Refers to a person’s
with which one can solve arithmetic problems of all kinds. Reasoning ability, a broader capacity to understand
concept, refers to a person’s capacity to invent solutions to many diverse problems. and use written and
Some jobs require only one or two of these facets of cognitive ability. Under these condi- spoken language.
tions, maintaining the separation among the facets is appropriate. However, many jobs that
are high in complexity require most, if not all, of the facets, and hence one general test is Quantitative Ability
Concerns the speed
often as good as many tests of separate facets. Highly reliable commercial tests measuring and accuracy with
these kinds of abilities are widely available, and they are generally valid predictors of job which one can solve
performance in many different kinds of contexts, including widely different countries.60 The arithmetic problems of
validity of these kinds of tests is related to the complexity of the job, however, in that one all kinds.
sees higher criterion-related validation for complex jobs than for simple jobs.
One of the major drawbacks to these tests is that they typically have adverse impact Reasoning Ability
Refers to a person’s
on some minority groups. Indeed, the size of the differences is so large that some have capacity to invent solu-
advocated abandoning these types of tests for making decisions regarding who will be tions to many diverse
accepted for certain schools or jobs. This is somewhat ironic in the sense that these problems.
standardized tests were originally designed to be anti-elitist and to help identify talented
individuals who may not be high in socioeconomic status but were still very bright by
objective standards. However, over time, the tests have become a major hurdle to many
disadvantaged groups by restricting their college opportunities, and thus are now per-
ceived as elitist due to their adverse impact on minorities.61
The notion of race norming, alluded to earlier, was born of the desire to use these
high-utility tests in a manner that avoided adverse impact. Although race norming was
made illegal by the recent amendments to the Civil Rights Act, some have advocated the
use of banding to both achieve the benefits of testing and minimize its adverse impact.
The concept of banding suggests that similar groups of people whose scores differ by
only a small amount all be treated as having the same score. Then, within any band,
preferential treatment is given to minorities. Most observers feel preferential treatment
of minorities is acceptable when scores are tied, and banding simply broadens the defini-
tion of what constitutes a tied score. Like race norming, banding is very controversial,
especially if the bands are set too wide.62
As with all the selection measures we have seen so far, one is always concerned that
applicants may be tempted to cheat in order to score well on whatever instrument is used
to make selection decisions and that is also the case here. Cheating on tests is hardly a new
phenomenon, however. What is new is the degree to which the use of computerized testing
and social networking has changed the nature and scope of cheating. The term “question
harvesting” has been coined to capture the process whereby test takers use advanced tech-
nology to download questions or capture images of questions with digital cameras or other
devices while taking a test, and then transmit the content of the test wirelessly to people
outside the testing facility who then post the questions for future test takers.63 Cheating
scandals such as these become particularly controversial when allegations are based on
nationality. For example, the evidence of wrongdoing with respect to test scores reported
from China and South Korea grew so large in 2014 that the Educational Testing Service
withheld the scores for applicants from these countries until all the allegations could be
sorted out.64
PERSONALITY INVENTORIES
While ability tests attempt to categorize individuals relative to what they can do, person-
ality measures tend to categorize individuals by what they are like. The number of firms
employing personality tests as screens has ballooned over the years, from just 26% in
2000 to just under 60% in 2014.65 Research suggests that there are five major dimensions
of personality, known as “the Big Five”: (1) extroversion, (2) adjustment, (3) agreeable-
ness, (4) conscientiousness, and (5) openness to experience. Table 6.3 lists each of these
with a corresponding list of adjectives that fit each dimension.
Table 6.3
The Five Major 1. Extroversion Sociable, gregarious, assertive, talkative, expressive
Dimensions 2. Adjustment Emotionally stable, nondepressed, secure, content
of Personality 3. Agreeableness Courteous, trusting, good-natured, tolerant, cooperative,
Inventories forgiving
4. Conscientiousness Dependable, organized, persevering, thorough,
achievement-oriented
5. Openness to Curious, imaginative, artistically sensitive, broad-minded,
experience playful
Although it is possible to find reliable, commercially available measures of each of these

traits, the evidence for their validity and generalizability is mixed at best.66 For example,
conscientiousness, which captures the concepts of self-regulation and self-motivation, is
one of the few factors that displays any validity across a number of different job catego-
ries, and many real-world managers rate this as one of the most important characteristics
they look for in employees. People who are high in conscientiousness tend to show very
good self-control when pursuing work goals and are especially adept at overcoming chal-
lenges and obstacles relative to people low in this trait.67
Instead of showing strong direct and positive correlations with future performance
across all jobs, the validity coefficients associated with personality measures tend to be
job specific. For example, extroverts tend to excel in jobs likes sales or politics because
these jobs demand gregariousness and assertiveness, two of the central features shared
by all extroverts. In contrast, introverts are better at studying and working in isolation,
and hence they are best at jobs like accountant or research scientist because these jobs
demand patience and vigilance. Extroverts tend to enjoy working in team-oriented
environments more than introverts, but this does not always spill over into performance
differences for engaging in teamwork.68 Both extroverts and introverts can become
effective leaders, although they achieve effectiveness in different ways. Extroverts tend
to be top-down, autocratic and charismatic leaders who motivate followers by getting
them emotionally engaged. In contrast, effective introverted leaders tend to be more
bottom-up, participative leaders who listen to empowered employees and then engineer
reward structures so that people are working toward their own self-interests.69
One important element of staffing in team-based structures, however, relates to how the
selection of one team member influences the requirements associated with other team mem-
bers.70 In some cases, organizations might try to select people who have very similar values
and personality traits in order to create a strong team culture. When there is a strong team
culture, everyone shares the same views and traits, promoting harmony and cohesiveness.71
In other cases, people putting together a team go out of their way to make sure that the
people on the team have different values and personalities. The hope here is that a diver-
sity of opinion promotes internal debate and creativity.72 If one does take this approach
to staffing a team, it is critical that one also takes steps to make sure that there are not
strong “fault lines” within the group that create strong and opposing subgroups. Diver-
sity can be built into a team, and subgrouping problems avoided with judicious selec-
tion. For example, imagine a four-person group comprised of two men and two women,
two marketing experts and two engineers, and two people from the United States and two
people from France. One way this diversity could configure itself is such that the
two males were also both engineers and both from the United States, and the two women
were both marketing experts from France. In this configuration, the group has a strong
fault line because all three dimensions of diversity converge, and it is easy to predict how
this group might break apart into two subgroups. In contrast, the same level of diversity
could be configured in a group where one of the men was an engineer, but one of the
women was an engineer also. Similarly, one of the marketing experts was a man and
one was woman. Finally, one of the men was from France and one was from the United
States. In this second configuration, there is no strong fault line, and it is harder to see
how the group is likely to fall apart.73
The concept of “emotional intelligence” is also important in team contexts and has
been used to describe people who are especially effective in fluid and socially inten-
sive contexts. Emotional intelligence is traditionally conceived of having five aspects:
(1) self-awareness (knowledge of one’s strengths and weaknesses), (2) self-regulation
(the ability to keep disruptive emotions in check), (3) self-motivation (how to motivate
oneself and persevere in the face of obstacles), (4) empathy (the ability to sense and read
emotions in others), and (5) social skills (the ability to manage the emotions of other
people).74 Relative to standard measures of ability and personality, there has not been a
great deal of scientific research on emotional intelligence, and critics have raised both
theoretical and empirical questions about the construct. Theoretically, some have argued
that the construct is overly broad and confuses aspects of perception, ability, and tem-
perament that are best conceptualized as separate processes.75 Empirically, the data seem
to suggest that if one holds scores on the variables captured by the five-factor model of
personality and scores on tests of cognitive ability constant, there is very little, if any,
added predictive power attributable to emotional intelligence.76
Regardless of the nature of the context, the validity for almost all of the Big Five
factors in terms of predicting job performance also seems to be higher when the
scores are not obtained from the applicant but are instead taken from other people.77
The lower validity associated with self-reports of personality can be traced to three
factors. First, people sometimes lack insight into what their own personalities are
actually like (or how they are perceived by others), so their scores are inaccurate or
unreliable. Second, people’s personalities sometimes vary across different contexts.
Thus, someone may be very conscientious when it comes to social activities such as
planning a family wedding or a fraternity party, but less conscientious when it comes
to doing a paid job. Thus, contextualized measures that add the term “at work” to
standard personality items often perform better as predictors than standard noncon-
textualized measures. On average, “contextualizing” measures on personality tests
in this manner can boost their average validity coefficient from around .10 to .25.78
Third, with some traits like ability, validity coefficients are higher when one uses a
curvilinear prediction instead of just a straight linear prediction. That is, with a trait
like emotional stability, the best job performers often score in the middle range, and
for a lot of jobs, both being too nervous and being too calm can be problematic.79 This
kind of curvilinear finding is rarely found with ability measures, in the sense that
people who are “overqualified” on ability typically perform at the highest levels with
evidence of a drop-off at extreme levels.80
Finally, one factor that also limits the validity of personality items is that, unlike
cognitive ability scores, applicants find it easier to fake traits by providing socially
desirable responses to questions. Research suggests that when people fill out these
inventories when applying for a job, their scores on conscientiousness and emotional
stability are much higher relative to when they are just filling out the same question-
naires anonymously for research purposes.81 In addition to being “fake-able,” some
of the items that tap emotional stability start to get close to categories of mental ill-
ness that reflect protected groups according to the ADA, and some applicants have
legally challenged these sorts of screening devices on that score.82 Also, if people fail
a personality test and then take the same test again in the future, their scores seem to
drastically increase.83 Several steps can be used to try to reduce faking. For example,
if employers simply warn applicants that they are going to cross-check the applicants’
self-ratings with other people, this seems to reduce faking.84 Also, the degree to which
people can fake various personality traits is enhanced with questionnaires, and one
sees much less faking of traits when interviewers are assessing the characteristics.85
All of this reinforces the idea that it is better to obtain this information from people
other than the job applicant, and that it is better to use this information to reject low
scorers but not necessarily hire all higher scorers on the basis of self-reports alone.86
WORK SAMPLES
Work-sample tests attempt to simulate the job in a prehiring context to observe how the
applicant performs in the simulated job. The degree of fidelity in work samples can vary
greatly. In some cases, applicants respond to a set of standardized hypothetical case stud-
ies and role play how they would react to certain situations.87 Often these standardized
role plays employ interactive video technology to create “virtual job auditions.”88 Simu-
lations involving video-based role-plays seem to be more engaging and display higher
levels of predictive validity relative to paper-and-pencil approaches.89 In other cases, the
job applicants are brought to the employers’ location and actually perform the job for a
short time period as part of a “job tryout.”90
In some cases, employers will sponsor competitions where contestants (who at this
point are not even considered job applicants) vie for attention by going head-to-head
in solving certain job-related problems. These sorts of competitions have been com-
mon in some industries like architecture and fashion design, but their use is spreading
across many other business contexts. These competitions tend to be cost effective in
generating a lot of interest, and some have attracted as many as 1,000 contestants who
bring their talents to bear on specific problems faced by the employing organization.91
Competitions are particularly well-suited for assessing and “discovering” young people
who may not have extended track records or portfolios to evaluate. For example, “hack-
athons,” that is, competitions between computer programmers, were once only held on
campuses with college students. However, today these contests are increasingly being
won by high school dropouts who bypassed college altogether to focus exclusively on
programming and application development using web-based tools generally accessible
to a wider audience.92
As part of its own fight in the war for talent, Google sponsors an event called “Google
Code Jam,” which attracts more than 10,000 contestants a year from all over the world.
This one-day competition requires contestants work to solve some very difficult pro-
gramming problems under relatively high levels of time pressure. For example, finalists
have to develop software that would perform unique and difficult searches employing a
minimum number of “clicks” or develop a complex interactive war game from scratch
in under two hours. The winner of the contest receives $7,000 and a guaranteed job at
Google’s prestigious Research and Development Center, but, in fact, Google usually
winds up hiring more than half of the 50 finalists each year (but that is not guaranteed).
The finalists in this contest represent the best of the best in terms of the world’s top pro-
grammers, and as Robert Hughes, director of the Code Jam, notes, “Wherever the best
talent is, Google wants them.”93
With all these advantages of work-sample tests come three drawbacks. First, by their
very nature the tests are job-specific, so generalizability is low. Second, partly because
a new test has to be developed for each job and partly because of their nonstandardized
formats, these tests are relatively expensive to develop. It is much more cost-effective to
purchase a commercially available cognitive ability test that can be used for a number of
different job categories within the company than to develop a test for each job. Finally,
at least with respect to work-sample tests developed as contests and competitions, these
events tend to attract more male applicants than female applicants. In fact, for evening
occupations where roughly 50% of the job incumbents are women, only 15% of the peo-
ple who show up for competitions for such jobs are female, suggesting this is a practice
that could easily lead to adverse impact if not carefully monitored.94
In the area of managerial selection, work-sample tests are typically the cornerstone
Assessment Center in assessment centers. Generically, the term assessment center is used to describe a
A process in which wide variety of specific selection programs that employ multiple selection methods to
multiple raters evaluate
rate either applicants or job incumbents on their managerial potential. Someone attend-
employees’ perfor-
mance on a number of ing an assessment center would typically experience work-sample tests such as an in-
exercises. basket test and several tests of more general abilities and personality. Because
assessment centers employ multiple selection methods, their criterion-related validity
tends to be quite high. Assessment centers seem to tap a number of different character-
istics, but “problem-solving ability” stands out as probably the most important skill
tapped via this method.95
HONESTY TESTS AND DRUG TESTS

Many problems that confront society also exist within organizations, which has led
to two new kinds of tests: honesty tests and drug-use tests. Many companies formerly
employed polygraph tests, or lie detectors, to evaluate job applicants, but this changed
with the passage of the Polygraph Act in 1988. This act banned the use of polygraphs in
employment screening for most organizations. However, it did not eliminate the prob-
lem of theft by employees. As a result, the paper-and-pencil honesty testing industry
was born.
Paper-and-pencil honesty tests come in a number of different forms. Some directly
emphasize questions dealing with past theft admissions or associations with people
who stole from employers. Other items are less direct and tap more basic traits such
as social conformity, conscientiousness, or emotional stability.96 A large-scale indepen-
dent review of validity studies suggests they can predict both theft and other disruptive
behaviors. However, the reported correlations tend to be much higher when the research
studies were conducted by test publishers who market the tests relative to outside, objec-
tive parties with a less obvious conflict of interest. Thus, it is always a good idea for
organizations to check the predictive accuracy of these kinds of tests for themselves and
not rely solely on the results reported by test publishers.97
As is the case with measures of personality, some people are concerned that people
confronting an honesty test can fake their way to a passing score. The evidence suggests
that people instructed to fake their way to a high score (indicating honesty) can do so.
However, it is not clear that this affects the validity of the predictions made using such
tests. That is, it seems that despite this built-in bias, scores on the test still predict future
theft. Thus, the effect of the faking bias is not large enough to detract from the test’s
validity.98
As with theft, there is a growing perception of the problems caused by drug use
among employees. The major controversies surrounding drug tests involve not their
reliability and validity but whether they represent an invasion of privacy, an unreason-
able search and seizure, or a violation of due process. Urinalysis and blood tests are
invasive procedures, and accusing someone of drug use is a serious matter. Employers
considering the use of drug tests would be well advised to make sure that their drug-
testing programs conform to some general rules. First, these tests should be admin-
istered systematically to all applicants for the same job. Second, testing seems more
defensible for jobs that involve safety hazards associated with failure to perform.99
Test results should be reported back to the applicant, who should be allowed an avenue
of appeal (and perhaps retesting). Tests should be conducted in an environment that
is as unintrusive as possible, and results from those tests should be held in strict con-
fidence. Also, when testing current employees, the program should be part of a wider
organizational program that provides rehabilitation counseling.100 Finally, employers

who employ drug testing also have to recognize the changing legal status for drugs like
marijuana over time. Marijuana is legal for medicinal or recreational use in 23 states,
and many employers are backing off requirements associated with marijuana. Ironi-
cally, one such employer is the Federal Bureau of Investigation (FBI), which noticed
that many of the young applicants best skilled for tracking down cyber crimes also
have a history of marijuana use. James Comey, the director of the FBI, suggested the
agency may have to loosen its no-tolerance policy for marijuana in order to attract this
talent. Comey notes, “I have to hire a great workforce to compete with cyber criminals
and some of the best kids want to smoke weed on the way to the interview.”101 Thus,
the quest for deriving competitive advantage from one’s workforce sometimes takes
some odd twists.
A LOOK BACK
Diversity and Discrimination at Abercrombie & Fitch
The decisions that organizations make regarding who is going to be part of the
team and who is going to be turned away are some of the most important deci-
sions that a firm will make in terms of gaining a competitive advantage. In addi-
tion, as we saw in our opening vignette, these decisions also have a major impact
on the lives of individuals, and it may sometimes require flexibility to project a
particular brand image and also employ a diverse workforce. The importance of
these decisions means that they have to be based upon procedures that have
been empirically validated and not left to idiosyncratic judgments of untrained
individuals who may be subject to stereotyped biases. This chapter has summa-
rized hundreds of years of research and demonstrated a large and varied set of
tactics that firms can use to make the right hiring decisions when it comes to the
selection process.
QUESTIONS
1. Based on this chapter, what are the best methods of obtaining information
about job applicants?
2. What are the best characteristics to look for in applicants, and how does this
depend on the nature of the job?
3. If you could use only two of the methods described in this chapter and could assess
only two of the characteristics discussed, which would you choose, and why?
SUMMARY
In this chapter we examined the five critical standards with individually, it is important to note in closing that there is
which all personnel selection methods should conform: reli- no need to use only one type of test for any one job. Indeed,
ability, validity, generalizability, utility, and legality. We also managerial assessment centers use many different forms of
looked at nine different selection methods currently used in tests over a two- or three-day period to learn as much as pos-
organizations and evaluated each with respect to these five sible about candidates for important executive positions. As
standards. Table 6.4 summarizes these selection methods a result, highly accurate predictions are often made, and the
and can be used as a guide in deciding which test to use for validity associated with the judicious use of multiple tests is
a specific purpose. Although we discussed each type of test higher than for tests used in isolation.
Table 6.4
254
A Summary of Personnel Selection Methods
METHOD RELIABILITY VALIDITY GENERALIZABILITY UTILITY LEGALITY
Interviews Low when unstruc- Low if unstructured Low Low, especially because Low because of subjectivity
CHAPTER 6
tured and when and nonbehavioral of expense and potential interviewer bias;
assessing nonobserv- also, lack of validity makes job-
able traits relatedness low
Reference Low, especially when Low because of Low Low, although not expen- Those writing letters may be
checks obtained from letters lack of range in sive to obtain concerned with charges of libel
evaluations
Biographical High test–retest, High criterion- Usually job-specific, but High; inexpensive way to May have adverse impact; thus
information especially for verifi- related validity; have been successfully collect vast amounts of often develop separate scoring
able information low in content developed for many job potentially relevant data keys based on sex or race
Selection and Placement
validity types
Physical ability High Moderate Low; pertain only to Moderate for some physi- Often have adverse impact
tests criterion-related physically demanding cal jobs; may prevent on women and people with
validity; high con- jobs expensive injuries and disabilities; need to establish
tent validity for disability job-relatedness
some jobs
Cognitive ability High Moderate criterion- High; predictive for most High; low cost and wide Often have adverse impact
tests related validity; jobs, although best for application across diverse on race, especially for African
content validation complex jobs jobs in companies Americans, though decreasing
inappropriate over time
Personality High Low to moderate Low; few traits predictive Low, although inexpensive Low because of cultural and
inventories criterion-related for many jobs, except for jobs where specific sex differences on most traits,
validity for most conscientiousness traits are relevant and low job-relatedness in
traits; content general
validation
inappropriate
Work-sample High High criterion and Usually job-specific, but High, despite the rela- High because of low
tests content validity have been successfully tively high cost to develop adverse impact and high
developed for many job job-relatedness
types
Honesty tests Insufficient indepen- Insufficient inde- Insufficient independent Insufficient independent Insufficient history of litigation,
dent evidence pendent evidence evidence evidence but will undergo scrutiny
Drug tests High High High Expensive, but may yield May be challenged on invasion-
high payoffs for health- of-privacy grounds
related costs
KEY TERMS
Reliability, 225 Content validation, 231 Verbal comprehension, 247
Validity, 228 Generalizability, 232 Quantitative ability, 247
Criterion-related validity, 228 Utility, 233 Reasoning ability, 247
Predictive validation, 229 Situational interview, 241 Assessment center, 252
Concurrent validation, 229 Cognitive ability tests, 247
1. We examined nine different types of selection methods in 3. Distinguish between concurrent and predictive valida-
this chapter. Assume that you were just rejected for a job tion designs, discussing why the latter is preferred over
based on one of these methods. Obviously, you might be dis- the former. Examine each of the nine selection methods
appointed and angry regardless of what method was used to discussed in this chapter and determine which of these
make this decision, but can you think of two or three meth- would have their validity most and least affected by the
ods that might leave you most distressed? In general, why type of validation design employed.
might the acceptability of the test to applicants be an impor- 4. Some have speculated that in addition to increasing
tant standard to add to the five we discussed in this chapter? the validity of decisions, employing rigorous selection
2. Videotaping applicants in interviews is becoming an increas- methods has symbolic value for organizations. What
ingly popular means of getting multiple assessments of that message is sent to applicants about the organization
individual from different perspectives. Can you think of through hiring practices, and how might this mes-
some reasons why videotaping interviews might also be use- sage be reinforced by recruitment programs that occur
ful in evaluating the interviewer? What would you look for before selection and training programs that occur after
in an interviewer if you were evaluating one on videotape? selection?
Reviews of research about personality have identified five 14. I’d rather not talk about myself and my accomplishments.
common aspects of personality, referred to as the Big Five 15. I’d rather praise others than be praised myself.
personality traits. Find out which are your most prominent 16. I come into situations being fully prepared.
traits. Read each of the following statements, marking “Yes” 17. I pride myself on my sound judgment.
if it describes you and “No” if it does not. 18. I have a lot of self-discipline.
19. I try to do jobs carefully so they don’t have to be done again.
1. In conversations I tend to do most of the talking.
20. I like to keep everything in place so I know where it is.
2. Often people look to me to make decisions.
21. I enjoy performing under pressure.
3. I am a very active person.
22. I am seldom sad or depressed.
4. I usually seem to be in a hurry.
23. I’m an even-tempered person.
5. I am dominant, forceful, and assertive.
24. I am levelheaded in emergencies.
6. I have a very active imagination.
25. I feel I am capable of coping with most of my problems.
7. I have an active fantasy life.
8. How I feel about things is important to me. The statements are grouped into categories. Statements
9. I find it easy to feel myself what others are feeling. 1–5 describe extroversion, 6–10 openness to experience,
10. I think it’s interesting to learn and develop new hobbies. 11–15 agreeableness, 16–20 conscientiousness, and 21–25
11. My first reaction is to trust people. emotional stability. The more times you wrote “Yes” for the
12. I believe that most persons are basically well intentioned. statements in a category, the more likely you are to have the
13. I’m not crafty or shy. associated trait.
EXERCISING STRATEGY
Pink Quotas Aim at Cultural Change
Although women constitute roughly half of Italy’s popu- board positions in the United States and thus constitute an
lation, as a group, they comprise only 6% of corporate experienced pool of candidates from which to choose. In
board members in Italian companies. This is one of the addition, many European companies compete in U.S. prod-
lowest levels in Europe and can be traced to larger soci- uct markets, and thus, in addition to experience, American
etal issues. For example, labor force participation rates for women bring an intuitive understanding of U.S. consumers
Italian women stand at 46%, which is the lowest rate in that is not shared by many European women.
any major European country. This low rate can be attrib- Recruiting American women for a European board is often
uted to rigid labor laws that make it difficult for women to difficult, however. Part of this is attributable to the time com-
work part time, and thus many women leave the labor mar- mitment and overseas travel required by such positions, but
ket after having children, and never return. This attrition the very existence of the quota system itself is also a detri-
then “trickles up,” creating a situation where few women ment. Helena Morrissey, a veteran of several U.S. boards,
have acquired the skills and experience necessary to hold speaks for many when she notes, “I don’t support the Euro-
corporate board positions. pean plan to force female quotas on boards. I wouldn’t want to
In an effort to help reverse this trend, the Italian govern- be part of a board because I am filling a quota.” Many Italian
ment passed a new law that required all Italian listed and women share this feeling, but at the same time, see the need
state-owned companies to ensure that 33% of their board for change. Elisabetta Magistretti, who sits on three different
seats are held by women by 2014. This sort of law, often Italian corporate boards, captures this sentiment when she
referred to as a “Pink Quota,” is increasingly common in states, “It’s been disappointing for me as a woman to need a
Europe, but the rate set by the Italian government is much pitchfork to join a board, but without this new law companies
more aggressive than rates set in France (20% by 2014) and would have never thought about us. Now it is up to women to
the United Kingdom (25% by 2015). Also, unlike statutes in demonstrate they’re well-prepared for the job.”
Sweden and the Netherlands that promote voluntary compli-
ance, the Italian program establishes a mandate. As Joyce QUESTIONS
Bigio, a recently added member to the board at Fiat notes, 1. How does greater representation of women on corporate
“I have always been convinced of the need for affirmative boards promote both societal goals and competiveness
action. It is the only way to break into certain areas and cor- goals at the same time?
rect an imbalance.” 2. What long-term steps can be taken by countries and com-
Ironically, because this new demand for labor often runs panies to eliminate the need for quotas over time?
up against a short supply of European candidates, many
SOURCES: D. Brady, “Hard Choices,” Bloomberg Businessweek, October 1,
companies trying to come into compliance with these laws 2012, p. 88; J. S. Lublin, “Pink Quotas Alter Europe’s Boards,” The Wall Street
wind up bringing in American women to fill board posi- Journal, September 11, 2012, www.wsj.com; G. Zampano, “Italy to Push
tions. Women already occupy close to 20% of the corporate ‘Pink Quotas,’” The Wall Street Journal, June 5, 2012, www.wsj.com.
MANAGING PEOPLE
When Do the Unemployed Become Unemployable?
In the spring of 2012, some statistics associated with the U.S. unemployable. This creates an entire subclass of citizens that
economy were definitely showing signs of improvement. can never be hired, harming the competitive interests of both
Employers had stepped up hiring, layoffs had slowed, and employers and the larger society in which they are embedded.
the unemployment rate began to drop. One statistic that stub- There are three reasons why long-term unemployment
bornly refused to move, however, was the long-term unem- can scar potential job applicants for years. First, over time,
ployment rate, typically defined as someone who has been the nature of work changes and people who have been out-
out of work for over six months. In 2012, over 5.5 million side the workforce may no longer have the skills needed for
workers had been unemployed for over six months, and a current jobs. For example, Andrew Bricknell was an auto-
staggering 4 million had been out of work for 12 months. This motive designer for several years, prior to being laid off at
latter figure is important because research suggests that long- General Motors (GM). Bricknell struggled to find design
term bouts of unemployment can sometimes make people work after he was laid off and eventually took a bus-driving
job to make ends meet. When GM’s fortunes turned around not work if they could get away with it. Thus, rather than
in 2012, the company began hiring in many job categories, trying to directly assess conscientiousness with a personal-
including designers. However, by that time, car design had ity inventory or from references from past employers (who
migrated from drafting boards to more sophisticated com- become increasingly difficult to contact over extended time
puter platforms that Bricknell had never seen, and hence he periods) applicants are rejected based upon a presumption
was no longer qualified for his old job. of guilt. In reality, many individuals who have experienced
Second, even when the skills required for a job have not long-term unemployment want nothing more than to get
changed, some employers seem to believe that long-term back to meaningful employment, but they face a form of
unemployment implies a lack of skills. That is, instead of discrimination that is not covered by any type of law.
testing for skills, employers just make the assumption that
anyone out of work for an extended period of time must lack QUESTIONS
skills. For example, Amy Grimmer, an HR staffing special- 1. How might a systematic and comprehensive system
ist for a sales company, states openly that when trying to of testing and reference checking help eliminate some
fill sales positions, “We’re not looking at the unemployment sources of long-term unemployment?
pool. We feel like the sales people who are talented enough 2. On the other hand, in what sense does the solution to
would have already found positions.” this problem go beyond hiring practices of employers?
Finally, some employers seem to believe that regard- SOURCES: D. Akst, “How Employers See Prolonged Joblessness
less of one’s skill level, long-term unemployment reflects a (and Why),” The Wall Street Journal, September 27, 2012, http://blogs.wsj.
lack of conscientiousness and ambition on the part of a job com; B. Casselman, “Time Not on the Side of the Jobless,” The Wall Street
Journal, March 26, 2012, www.wsj.com; S. Murray and C. McWhirter, “Long-
applicant. In particular, if someone applies for a job only term Unemployment Ripples Through One Town,” The Wall Street Journal,
after their unemployment benefits expire, some employers January 18, 2012; D. Bennett, “Do the Unemployed Get a Second Act?”
believe that the person is lazy and would actually prefer to Bloomberg Businessweek, September 19, 2011, pp. 64–70.
Kinaxis Chooses Sales Reps with Personality
Kinaxis is a software company headquartered in Ottawa, could help Dolan and Opus pinpoint the characteristics of
Ontario, that sells to clients around the world. Its specialty someone likely to succeed in sales at Kinaxis. Based on
is software for supply chain management—all the processes analysis of all the results, Opus created a benchmark of traits
and relationships through which companies obtain supplies associated with success in the job.
as needed and get their products to customers on time and Representatives from Opus also discussed the test results
at minimal cost. This is a sophisticated type of product, with each candidate, giving each one a chance to disagree
tailored to a company’s specific needs. Therefore, Kinaxis with the scores. No one did. Dolan observed that all the
depends on salespeople who understand how businesses candidates scored high in assertiveness and extroversion—
work, who listen carefully to identify needs, and who pro- not surprising for people in sales. In addition, two of them
vide excellent customer service to maintain long-term busi- scored above the benchmark in conformity and below the
ness relationships. benchmark in dominance. Those results suggested to Dolan
Recently, Bob Dolan, vice president for sales at Kinaxis, that these candidates might be so eager to please that they
needed to hire a sales team to serve clients in North Amer- would be quick to give in to whatever customers requested—
ica. The company had just one salesperson serving the conti- a pattern that could become costly for the company. Dolan
nent, and Dolan wanted to add four more. He received about eliminated those two candidates.
100 resumes and wanted to select from these. He started by That meant Dolan still had eight candidates to fill four
reviewing the resumes against job requirements and selected positions. He asked each one to give him the names of major
20 candidates for a first round of interviews. The interview accounts he or she had signed up in the previous two years.
process helped Dolan cut the list of candidates in half, so he Four candidates were able to come up with three or four
needed another way to narrow his options. large clients. Those were the candidates Dolan hired.
Dolan decided his next step would be personality test- Since then, Dolan says his experience with personal-
ing. He hired a firm called Opus Productivity Solutions ity testing has only reinforced his belief that this selection
to administer a test called PDP ProScan to the remaining method helps Kinaxis identify the best candidates. For
10 candidates. In addition, Dolan himself took the test and example, one sales rep had scored low on “pace,” indicating
had his current sales rep do the same. The existing sales- that the individual might lack the patience needed for the
person was doing an excellent job, so the results of his test slow cycles required to close a sale of a complex software
system. Dolan hoped the issue could be overcome if he pro- best order? What, if anything, would you change about
vided enough coaching, but in fact, the sales rep sometimes the order of the methods used?
behaved impatiently, annoying prospects. After three years 2. What were the advantages to Kinaxis of using personal-
of trying to help him grow into the job, Dolan laid him off. ity tests to help select sales representatives? What were
The company’s commitment to careful selection is the disadvantages?
expressed on its website: “As a growing and determined 3. Given the information gathered from the selection
company, we’re always looking for people eager to push the methods, what process did Dolan use to make his selec-
limits of each day of what’s possible.” Kinaxis was recently tion decision? What improvements can you recommend
named one of Canada’s top employers for young people. to this process for decisions to hire sales reps in the
future?
QUESTIONS SOURCES: Susan Greco, “Personality Testing for Sales Recruits,” Inc.,
1. What selection methods did Bob Dolan use for hiring March 1, 2009, www.inc.com; and Kinaxis website, Corporate Overview and
salespeople? Did he go about using these methods in the Careers pages, www.kinaxis.com, accessed June 30, 2015.
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Training
7
C H A P T E R
LEARNING OBJECTIVES
LO 7-1 Discuss how training, informal learning, and knowledge

management can contribute to continuous learning
and companies’ business strategy. page 265
LO 7-2 Explain the role of the manager in identifying training

needs and supporting training on the job. page 267
LO 7-3 Conduct a needs assessment. page 269
LO 7-4 Evaluate employees’ readiness for training. page 275
LO 7-5 Discuss the strengths and weaknesses of presentation,

hands-on, and group training methods. page 282
LO 7-6 Explain the potential advantages of e-learning for training. page 289
LO 7-7 Design a training session to maximize learning. page 296
LO 7-8 Choose appropriate evaluation design and training outcomes based

on the training objectives and evaluation purpose. page 297
LO 7-9 Design a cross-cultural preparation program. page 300
LO 7-10 Develop a program for effectively managing diversity. page 303
262
>>>
Learning Helps Make the Sale at Keller Williams
At Keller Williams, the largest real estate franchise in increased commissions by 118% compared to agents
North America, the vision is to be the real estate com- who haven’t taken the program.
pany of choice for agents, franchisees, and customers. Mega Agent Expansion (MAE) helps top-
Keller Williams strives to train its agents better than performing agents understand how and when to
any other company in the world so they can delight expand into new markets. MAE includes instructor-
customers, build their business, and have financial led classes, webinars, expert interviews, productivity
success. Just as location is a key factor in attracting resources, and coaching. The program helps par-
buyers to purchase a home or commercial property, ticipants understand all aspects of expanding their
training is a reason for Keller Williams’ ability to reach business including how to centralize lead generation
its business goals, which include adding 8,000 agents, and administration and develop a workable business
increasing agents’ commissions by 20%, and ensuring plan. They have access to a social media network for
that over 90% of its franchise offices are profitable. learning and sharing as well as monthly opportuni-
Keller Williams’ CEO believes that training is critical for ties to ask questions of Keller Williams’ top expan-
the company to attract new agents because it helps sion agents. Growth Initiative (GI) is a distant learning
them quickly become productive, resulting in sales and consulting program that trains managers how
and commissions. Training involves both online and to effectively recruit and retain agents. The program
classroom instruction where learning occurs through includes weekly one-hour seminars, requires manag-
interacting with instructors and coaching and oppor- ers to make two recruiting appointments each day,
tunities for agents to collaborate, which helps them five days a week, and helps managers share best
learn from each other by sharing knowledge and practices through an online community and a dedi-
practices. Keller Williams’ commitment to training and cated Facebook page. In addition to its training pro-
its role in the success of the business was recognized grams Keller Williams invested in building a training
by the top ranking it received in back-to-back years in and education center at its corporate headquarters
Training magazine’s Top 125. The company earned the in Austin, Texas. The center manages all aspects of
distinction of being ranked #1 in 2015 and #2 in 2014. learning and develops new courses, learning tools,
Keller Williams has several different training and videos. Recently, the center developed apps that
programs that support agents and the business. provide short training opportunities that agents can
Business Objective: A Life By Design (BOLD) is a access anytime and anywhere through their smart-
seven-week training program during which agents phone, laptop, or notebooks.
are taught mindset exercises and language tech- Keller Williams doesn’t just invest time and money
niques, and in which they participate in lead gen- into training, it also takes steps to ensure its effective-
eration activities. The course focuses on personal ness. To keep training standards high and improve
well-being as well as business skills. During some learning every trainer and instructor must take several
classes in the program agents engage in “real play,” “Train the Trainer” courses before they can teach
calling customers with instructors providing guidance any courses. Different types of evaluation data are
and support. This allows the agents to generate busi- collected and shared with agents and managers.
ness while learning. BOLD graduates have increased Because all of training is voluntary, one measure of
sales volumes by 80%, closed sales by 86%, and its value is participation. This includes tracking how
CONTINUED
263
much time employees spend in training (82 average for the year. Keller Williams also tracks metrics such
per-person hours of formal, planned training) and the as the average days a property is on the market. The
number of employees and franchisees trained each average days on the market is lower than their com-
year in instructor-led courses (100,000) and online petitors, providing evidence that training is helping
courses (26,000). The return on investment (ROI) of agents close deals quicker and provide better service.
many courses is calculated. For example, BOLD costs
SOURCES: L. Freifeld, “Keller Williams Is at Home at No. 1,” Training,
$799 per student but the average agent who partici- January/February 2015, pp. 28–34; L. Freifeld, “Keller Williams Is on the
pated in the course earned an additional $55,000 Move,” Training, January/February 2014, pp. 40–42.
Introduction
As the chapter opener shows, training contributes to Keller Williams’ focus on its
employees and customers. Training helps Keller Williams’ employees develop skills
they need to succeed in their current jobs and develop for future positions. From
Keller Williams’ perspective, training is strategic because it leads to consistent service
that attracts and retains customers, high-quality agents, and positive revenues. Keller
Williams recognizes that there is stiff competition for consumers’ real estate business—
success requires smart, motivated employees who can delight customers.
Why is the emphasis on strategic training important? Companies are in business to make
money, and every business function is under pressure to show how it contributes to busi-
ness success or face spending cuts and even outsourcing. To contribute to a company’s suc-
cess, training activities should help the company achieve its business strategy. (Consider
how Keller Williams’ training contributed to development of employees selling skills.)
There is both a direct and an indirect link between training and business strategy and
goals. Training can help employees develop skills needed to perform their jobs, which
directly affects the business. Giving employees opportunities to learn and develop cre-
ates a positive work environment, which supports the business strategy by attracting
talented employees as well as motivating and retaining current employees.
Why do Keller Williams and many other companies believe that an investment in
training can help them gain a competitive advantage? Training can
∙ Increase employees’ knowledge of foreign competitors and cultures, which is critical
for success in foreign markets.
∙ Help ensure that employees have the basic skills to work with new technology, such
as robots and computer-assisted manufacturing processes.
∙ Help employees understand how to work effectively in teams to contribute to prod-
uct and service quality.
∙ Ensure that the company’s culture emphasizes innovation, creativity, and learning.
∙ Ensure employment security by providing new ways for employees to contribute to the
company when their jobs change, their interests change, or their skills become obsolete.
∙ Prepare employees to accept and work more effectively with each other, particularly
with minorities and women.1
In this chapter, we emphasize the conditions through which training practices can
help companies gain competitive advantage and how managers can contribute to effec-
tive training and other learning intiatives. The chapter begins by discussing a systematic
and effective approach to training design. Next we review training methods and training
evaluation. The chapter concludes with a discussion of training issues including cross-
cultural preparation, managing diversity, and socializing employees.
264
CHAPTER 7 Training 265
Training: Its Role in Continuous LO 7-1

Discuss how training,
Learning and Competitive Advantage informal learning, and
knowledge manage-
As we discussed in Chapter 1, intangible assets including human capital, customer capi- ment can contribute
tal, social capital, and intellectual capital help companies gain competitive advantage. to continuous learning
and companies’ busi-
Recognizing that formal training, informal learning, and knowledge management are ness strategy.
important for the development of intangible assets, many companies now consider
training one part of a larger emphasis on continuous learning. Figure 7.1 shows that
Continuous
formal training and development, informal learning, and knowledge management are Learning
the key features of a continuous learning philosophy that focuses on performance and A learning system that
supports the business strategy. Continuous learning refers to a learning system that requires employees to
requires employees to understand the entire work system and they are expected to understand the entire
acquire new skills, apply them on the job, and share what they have learned with other work process and
expects them to acquire
employees.2 new skills, apply them
Training refers to a planned effort by a company to facilitate learning of job-related on the job, and share
competencies, knowledge, skills, and behaviors by employees. The goal of training is for what they have learned
employees to master the knowledge, skills, and behaviors emphasized in training and with other employees.
apply them to their day-to-day activities. Traditionally, companies have relied on formal
training through a course, program, or event to teach employees the knowledge, skills, Training
and behaviors they need to successfully perform their jobs. Formal training refers to A planned effort to
facilitate the learning of
training and development programs, courses, and events that are developed and orga- job-related knowledge,
nized by the company. Typically employees are required to attend or complete these skills, and behavior by
programs, which can include face-to-face training programs (such as instructor-led employees.
courses) as well as online programs. U.S. companies make substantial investments in
formal training. One estimate is that U.S. organizations spend over $61 billion on formal Formal Training
employee training and development.3 We will discuss development in Chapter 9, Training and develop-
“Employee Development.” ment programs and
courses that are devel-
Despite companies’ significant investments in formal training and development activ-
oped and organized by
ities, informal learning is also important for facilitating knowledge and skill acquisition.4 the company.
Figure 7.1
Key Features of
Continuous Learning
Focus on
Performance
Knowledge
Management Supports Business
Strategy Formal Training
and
Development
Continuous
Learning
Informal Learning
266 CHAPTER 7 Training
Informal Learning Informal learning refers to learning that is learner initiated, involves action and doing,
Learning that is learner is motivated by an intent to develop, and does not occur in a formal learning setting.5
initiated, involves action
Informal learning occurs without an instructor, and its breadth, depth, and timing
and doing, is motivated
by an intent to develop, are controlled by the employee. It occurs on an as-needed basis and may involve an
and does not occur in a employee learning alone or through face-to-face or technology-aided social interactions.
formal learning setting. Informal learning can occur through many different ways, including casual unplanned
interactions with peers, e-mail, informal mentoring, or company-developed or publicly
available social networking websites such as Twitter or Facebook. The application of
social media from a marketing strategy to a learning strategy and the availability of Web
2.0 technologies such as social networks, microblogs, and wikis allow employees easy
access to social learning through collaboration and sharing with one or two or more
people.6 One estimate is that informal learning may account for up to 75% of learning
within organizations!
Both formal training and informal learning contribute to the development of intangi-
ble assets but especially human capital. Human capital includes knowledge (know what),
advanced skills (know how), system understanding and creativity (know why), as well as
motivation to deliver high-quality products and services (care why).7 One reason why
informal learning may be especially important is that it may lead to the effective devel-
Explicit Knowledge opment of tacit knowledge, which can be contrasted with explicit knowledge.8 Explicit
Knowledge that is well knowledge refers to knowledge that is well documented, easily articulated, and easily
documented and eas- transferred from person to person. Examples of explicit knowledge include processes,
ily transferred to other
persons.
checklists, flowcharts, formulas, and definitions. Explicit knowledge tends to be the pri-
mary focus of formal training. Tacit knowledge refers to personal knowledge based on
individual experiences that make it difficult to codify. It is best acquired through infor-
Tacit Knowledge
Knowledge based on mal learning. The characteristics of the formal training environment may limit the extent
personal experience to which tacit knowledge can be acquired, such as the relatively short duration of class-
that is difficult to codify. room or online training and limited opportunities for practice. Thus, informal learning is
central to the development of tacit knowledge. Well-designed formal training programs
can help employees acquire explicit knowledge. But to acquire tacit knowledge employ-
ees need to interact with peers, colleagues, and experts and have learning experiences
that are not usually found in formal training. Informal learning does not replace formal
training. Formal training is still needed to prepare employees for their jobs and help
them progress to future positions. Informal learning complements training by helping
employees gain tacit knowledge that formal training cannot provide.
Knowledge Knowledge management refers to the process of enhancing company performance by
Management designing and implementing tools, processes, systems, structures, and cultures to
Process of enhancing improve the creation, sharing, and use of knowledge.9 Knowledge management contrib-
company performance
by using tools, pro-
utes to informal learning. McAfee, a security company, uses a software program (Jive)
cesses, systems, and which gives employees and customers the ability to access discussions, videos, and
cultures to improve the blogs.10 The software recommends relevant content and identifies individuals who can
creation, sharing, and help with specific issues. As a result, knowledge sharing has improved between cus-
use of knowledge. tomer support, sales, and research and development functions. Customer satisfaction rat-
ings have improved 25% and call volume has decreased even as the company has added
customers.
It is important for all aspects of continuous learning, including training, knowledge
management, and informal learning, to contribute to and support the business strategy.
Continuous learning needs to address performance issues that lead to improved busi-
ness results. To do so requires that the emphasis on continuous learning aligns with
the business strategy, has visible support from senior managers and involves leaders as
instructors and teachers, creates a culture or work environment that encourages learning,
provides a wide range of learning opportunities including training, informal learning,

knowledge management, and employee development, uses traditional methods and inno-
vative technologies to design and deliver learning, and measures the effectiveness and
overall business impact of learning.11
Consider how Jiffy Lube embraces a continuous learning philosophy that supports
the business strategy.12 Jiffy Lube’s strategic goals focus on developing growth oppor-
tunities for franchisees and providing a world-class customer experience. Jiffy Lube’s
customer value proposition is that every driver deserves to be free from the anxiety of
keeping his or her vehicle in excellent shape. This requires that service technicians are
knowledgable about and able to provide high quality and necessary services to drivers. At
Jiffy Lube this means that service technicians need to be trained and certified. Training
is provided through Jiffy Lube University (JLU). One estimate is that employees partici-
pated in more than 2 million learning hours. Learning for employees and franchisees is
offered using face-to-face and virtual instruction, as well as online self-paced modules.
JLU evaluates the success of learning efforts many ways including learner feedback,
franchisee surveys, the number of training courses completed, earned certifications, and
customer service scores from mystery shoppers.
Jiffy Lube recognizes the value of continuous learning and informal learning. Recently,
every employee, including the company president, was required to complete courses at
JLU plus spend at least one day at a Jiffy Lube service center. The courses included
orientation and safety and training for the Courtesy Technician, Upper Bay Technician,
Customer Service Advisor, and Team Lead positions and products. Jiffy-Lube also has
established partnerships with colleges to allow service center employees to transfer cred-
its from courses earned through JLU to earn an undergrad certificate in Management
Foundations. Learners and managers can access online a roadmap which shows how
training is helping them advance their careers. Also, recognizing that its service center
employees typically are 18- to 25-year-olds who are actively involved in social media,
Jiffy-Lube provides video cameras so that store employees can capture best practices
and ideas. These videos have focused on customer service, team building, operational
excellence, and safety. Jiffy-Lube trainers edit the videos and make them available to all
employees on YouTube.
Designing Effective Formal

Training Activities
A key characteristic of training activities that contribute to competitiveness is that they
are designed according to the instructional design process.13 Training design process Training Design
refers to a systematic approach for developing training programs. Instructional System Process
Design (ISD) and the ADDIE model (analysis, design, development, implementation, A systematic approach
for developing training
evaluation) are two specific types of training design processes you may know. Figure 7.2 programs.
presents the six stages of this process, which emphasizes that effective training practices
involve more than just choosing the most popular or colorful training method.
The first stage is to assess needs to determine if training is needed. The second stage
involves ensuring employees have the readiness for training, and they have the motiva- LO 7-2
tion and basic skills to master training content. Stage 3 addresses whether the training Explain the role of the
manager in identify-
session (or the learning environment) has the factors necessary for learning to occur. ing training needs and
Stage 4 is to ensure that trainees apply the content of training to their jobs. This requires supporting training on
support from managers and peers for the use of training content on the job as well as the job.
Figure 7.2 Needs assessment

The Training Process
Organizational analysis
Person analysis
Task analysis
Ensuring employees’ readiness for training
Attitudes and motivation

Basic skills
Creating a learning environment

Identification of learning Feedback
objectives and training Observation of others
outcomes Administering and
Meaningful coordinating
material
program
Feedback Practice
Ensuring transfer of training
Self-management strategies
Peer and manager support
Selecting training methods
Presentational methods
Hands-on methods
Evaluating training programs
Identification of training outcomes

and evaluation design
Cost-benefit analysis
getting the employee to understand how to take personal responsibility for skill improve-
ment. Stage 5 involves choosing a training method. As we shall see in this chapter, a
variety of training methods are available ranging from traditional on-the-job training to
newer technologies such as social media. The key is to choose a training method that will
provide the appropriate learning environment to achieve the training objectives. Stage 6
is evaluation—that is, determining whether training achieved the desired learning out-
comes and/or financial objectives.
The training design process should be systematic yet flexible enough to adapt to busi-
ness needs. Different steps may be completed simultaneously. Also feedback from each
stage in the training progress can be useful for the other stages. For example, if transfer
of training is difficult, then the learning environment should overemphasize practice and
feedback. Keep in mind that designing training unsystematically will reduce the ben-
efits that can be realized. For example, choosing a training method before determining
training needs or ensuring employees’ readiness for training increases the risk that the
method chosen will not be the most effective one for meeting training needs. Also, train-
ing may not even be necessary and may result in a waste of time and money! Employees
may have the knowledge, skills, or behavior they need but simply not be motivated to use
them. Next we will discuss important aspects of the training design process.
NEEDS ASSESSMENT
The first step in the instructional design process, needs assessment, refers to the process LO 7-3
used to determine if training is necessary. Figure 7.3 shows the causes and outcomes Conduct a needs
resulting from needs assessment. As we see, many different “pressure points” suggest assessment.
that training is necessary. These pressure points include performance problems, new
technology, internal or external customer requests for training, job redesign, new legisla- Needs Assessment
The process used to
tion, changes in customer preferences, new products, or employees’ lack of basic skills determine if training is
as well as support for the company’s business strategy (e.g., growth, global business necessary.
expansion). Note that these pressure points do not guarantee that training is the correct
solution. Consider, for example, a delivery truck driver whose job is to deliver anesthetic
gases to medical facilities. The driver mistakenly hooks up the supply line of a mild
anesthetic to the supply line of a hospital’s oxygen system, contaminating the hospital’s
oxygen supply. Why did the driver make this mistake, which is clearly a performance
problem? The driver may have done this because of a lack of knowledge about the appro-
priate line hookup for the anesthetic, anger over a requested salary increase that his
manager recently denied, or mislabeled valves for connecting the gas supply. Only the
Figure 7.3
The Needs Assessment Process
Reasons or “pressure points” What is the context? Outcomes
Organization eceives training

analysis
In what
Task do they
analysis need training decision
standards training?
Person
owth or analysis
contraction redesign
Who needs training?

lack of knowledge can be addressed by training. The other pressure points require
addressing issues related to the consequence of good performance (pay system) or the
design of the work environment.
Needs assessment typically involves organizational analysis, person analysis, and task
analysis.14 Organizational analysis considers the context in which training will occur.
Organizational That is, organizational analysis involves determining the business appropriateness of
Analysis training, given the company’s business strategy, its resources available for training, and
A process for determin- support by managers and peers for training activities.
ing the business appro-
priateness of training.
Person analysis helps identify who needs training. Person analysis involves (1) deter-
mining whether performance deficiencies result from a lack of knowledge, skill, or abil-
Person Analysis ity (a training issue) or from a motivational or work-design problem; (2) identifying who
A process for determin- needs training; and (3) determining employees’ readiness for training. Task analysis
ing whether employees includes identifying the important tasks and knowledge, skills, and behaviors that need
need training, who to be emphasized in training for employees to complete their tasks.
needs training, and In practice, organizational analysis, person analysis, and task analysis are usually
whether employees are
ready for training.
not conducted in any specific order. However, because organizational analysis is con-
cerned with identifying whether training fits with the company’s strategic objectives and
whether the company wants to devote time and money to training, it is usually conducted
Task Analysis
The process of iden- first. Person analysis and task analysis are often conducted at the same time because it
tifying the tasks, is often difficult to determine whether performance deficiencies are a training problem
knowledge, skills, and without understanding the tasks and the work environment.
behaviors that need What outcomes result from a needs assessment? As shown in Figure 7.3, needs assess-
to be emphasized in
ment shows who needs training and what trainees need to learn, including the tasks in
training.
which they need to be trained plus knowledge, skill, behavior, or other job requirements.
Needs assessment helps determine whether the company will purchase training from a
vendor or consultant or develop training using internal resources.
MasTec is a construction company that engineers, procures, constructs, and main-
tains the infrastructures for electric transmission and distribution, oil and natural gas
pipelines, and communications companies.15 The company wanted to develop an online
learning management system through which employees could access training and devel-
opment courses. MasTec conducted a needs assessment to identify questions such as
what technology and functionality were needed to support new training programs and to
identify unique employee needs. As a result, the development team started by conduct-
ing a shareholder analysis. This involved considering who would be involved in the pro-
cess, understanding how to partner with them, and what type of information they could
offer. This further involved meeting with safety team leaders, trainers, and construction
crew members, observing employees performing their jobs, and attending existing train-
ing classes. The team recorded every need and request made throughout this process. As
a result of this analysis they identified four goals for the learning management system.
These goals included increased accessibility of training content, increased flexibility
and variety in how training was delivered and completed, improved training registering
process for employees, and reporting tools that make training requirements, participa-
tion, and completion visible to employees, their managers, and the employee develop-
ment group.
ORGANIZATIONAL ANALYSIS
Three factors need to be considered before choosing training as the solution to any pres-
sure point: the support of managers and peers for training activities, the company’s strat-
egy, and the training resources available.
Support of Managers and Peers

Various studies have found that peer and manager support for training is critical. The
key factors to success are a positive attitude among peers and managers about participa-
tion in training activities; managers’ and peers’ willingness to tell trainees how they can
more effectively use knowledge, skills, or behaviors learned in training on the job; and
the availability of opportunities for the trainees to use training content in their jobs.16
If peers’ and managers’ attitudes and behaviors are not supportive, employees are not
likely to apply training content to their jobs.
Company Strategy
In Chapter 2 we discussed the importance of business strategy for a company to gain
a competitive advantage and earlier in this chapter we discussed how Jiffy Lube relies
on learning to support the company’s mission and strategy. As Figure 7.1 highlights,
training should help companies achieve the business strategy. Table 7.1 shows possible
strategic initiatives and their implications for training practices.
It is important to identify the prevailing business strategy and goals to ensure that
the company allocates enough of its budget to training, that employees receive train-
ing on relevant topics, and that employees get the right amount of training.17 Umpqua
Table 7.1
Examples of Strategic Initiatives and Their Implications for Training Practices
STRATEGIC TRAINING AND

DEVELOPMENT INITIATIVES IMPLICATIONS
Improve Customer Service
customers
decision-making authority
Improve Employee Engagement
personal growth opportunities
needs in current job as well as growth opportunities

Enhance Innovation and Creativity
employees
(e.g., resource guides, websites)
collaboration, creativity, and knowledge sharing

Growth in Global Markets
leadership positions
SOURCE: Based on S. Tannenbaum, “A Strategic View of Organizational Training and Learning,” in Creating, Implementing and Managing
Effective Training and Development, ed. K. Kraiger (San Francisco: Jossey-Bass, 2002), pp. 10–52.
INTEGRITY IN ACTION
Connecting Learning to Business Success
The STIHL Group develops, pro- service. Employees can attend sets necessary to
duces, and markets power tools Tooling University, an online pro- meet increased
including chain saws, blowers, gram to develop their technical demands for its products and
trimmers, and edgers. The tools, skills, and supervisor training and services. Whyte also believes
which are distributed through leadership development programs that training and development
40,000 dealers in more than 160 are used for developing effective programs aren’t just for fun.
countries, are used in forestry managers. Consumers can access They need to be meaningful with
and landscape maintenance and blogs and YouTube videos on the measurable results. He points to
construction by homeowners, company’s website to learn how record sales in 20 out of the past
lumberjacks, firefighters, and the to use STIHL’s power tools. 21 years and awards recognizing
military. Fred Whyte, president of Whyte believes that the “peo- STIHL as one of the best manu-
STIHL Inc., recognizes that learn- ple make the business.” When facturing companies as evidence
ing and development are neces- STIHL introduced automation of training effectiveness.
sary to help all of the company’s and robots in its factory, Whyte
stakeholders—employees, decided to enhance employ- DISCUSSION QUESTIONS
wholesale distributors, retailers, ees’ skills rather than resort to 1. How is learning and training
and consumers—work safely layoffs. Employees were trained strategic at STIHL Group?
and productively. to repair or operate robots or 2. What did Fred Whyte do that
At the retail level, STIHL pro- for other positions. During the was most important for send-
vides training programs that recession, instead of layoffs, ing the message that training
help dealers understand how to employees worked in different was strategic at STIHL Group?
sell and service the equipment. jobs around the factory. This Explain.
STIHL iCademy provides online cost more in the short term, SOURCES: Based on T. Bingham and Pat
Galagan, “Training Powers Up at STIHL,” T + D,
programs covering topics such as but when business picked up January 2014, pp. 29–33; C. Gambill, “Creat-
troubleshooting, in-store market- after the recession STIHL had ing Learning Solutions to Satisfy Customers,”
ing, selling skills, and customer retained employees with the skill T + D, January 2014, pp. 35–39.
Bank, a small Oregon regional bank, strives to provide a customer experience unlike
any other bank.18 Its concept of service is called “slow banking,” which is about getting
to know customers and building relationships with them. The physical layout of the
banks encourages customers to take their time and bank associates to get to know and
understand their customers. There are couches, free Wi-Fi, coffee, and interactive video
screens showing community activities as well as highlighting the financial products the
bank offers. Umpqua wants customers to be impressed by the relaxing surroundings
and bank associates to be empowered to do whatever it takes to deliver a great customer
experience. Training plays an important role in developing employees’ service skills and
reinforcing the company’s service culture. New hires receive extensive training so they
can perform every banking function. Associates receive regular training in courses in
partnership with Ritz-Carlton Hotel, a model company for customer service. Courses
include “Creating a Culture of Service Excellence” and “Radar On, Antenna Up,” which
focuses on fulfilling customers’ unexpressed needs. Umpqua also sends employees out
to other companies to experience how they are providing customer service and asks
them to report back any practices that the bank isn’t currently using to satisfy customers.
The “Integrity in Action” box highlights what business leaders might reasonably expect
from their training and development or learning function.
272
Training Resources
It is necessary to identify whether the company has the budget, time, and expertise
for training. For example, if the company is installing computer-based manufacturing
equipment in one of its plants, it has three possible strategies to have computer-literate
employees. First, the company can use technical experts on staff to train all affected
employees. Second, the company may decide that it is more cost-effective to identify
computer-literate employees by using tests and work samples and replace or reassign
employees who lack the necessary skills. Third, if it lacks time or expertise, the company
may decide to purchase training from an outside consultant or organization.
Table 7.2 provides examples of questions to ask vendors and consultants to help eval-
uate whether they can meet the company’s training needs.
PERSON ANALYSIS
Person analysis helps the manager identify whether training is appropriate and which
employees need training. In certain situations, such as the introduction of a new technol-
ogy or service, all employees may need training. However, when managers, customers,
or employees identify a problem (usually as a result of a performance deficiency), it is
often unclear whether training is the solution.
A major pressure point for training is poor or substandard performance—that is, a
gap between employees’ current performance and their expected performance. Poor per-
formance is indicated by customer complaints, low performance ratings, or on-the-job
accidents or unsafe behavior. Another potential indicator of the need for training is if
the job changes so current performance levels need improvement or employees must
complete new tasks.
From a manager’s perspective, to determine if training is needed, for any performance
problem you need to analyze characteristics of the performer, input, output, conse-
quences, and feedback. How might this be done? You should ask several questions to
determine if training is the likely solution to a performance problem.19
Assess whether
1. The performance problem is important and has the potential to cost the company a
significant amount of money from lost productivity or customers.
Table 7.2
How do your products and services fit our needs? Questions to
How much and what type of experience does your company have in designing and Ask Vendors and
delivering training? Consultants
What are the qualifications and experiences of your staff?
Can you provide demonstrations or examples of training programs you have developed?
Can you provide references of clients for whom you worked?
What evidence do you have that your programs work?
How long will it take to develop the training program?
How much will your services cost?
What instructional design methods do you use?
What about recurring costs, such as costs related to administering, updating, and main-
taining the training program?
Do you provide technical support?
SOURCES: Adapted from R. Zemke and J. Armstrong, “Evaluating Multimedia Developers,” Training Magazine,
November 1996, pp. 33–38; B. Chapman, “How to Create the Ideal RFP,” Training, January 2004, pp. 40–43;
M. Weinstein, “What Vendors Wished You Knew,” Training, February 2010, pp. 122–125.
2. Employees do not know how to perform effectively. Perhaps they received little or
no previous training or the training was ineffective (person characteristics).
3. Employees cannot demonstrate the correct knowledge or behavior. Perhaps they
were trained but they infrequently or never used the training content (knowledge,
skills, etc.) on the job (input problem).
4. Performance expectations are clear (input) and there are no obstacles to perfor-
mance such as faulty tools or equipment (output).
5. There are positive consequences for good performance, whereas poor performance
is not rewarded. For example, if employees are dissatisfied with their compensa-
tion, their peers or a union may encourage them to slow down their pace of work
(consequences).
6. Employees receive timely, relevant, accurate, constructive, and specific feedback
about their performance (feedback).
7. Other solutions such as job redesign or transferring employees to other jobs are too
expensive or unrealistic.
If employees lack the knowledge and skill to perform and the other factors are sat-
isfactory, training is likely the effective solution. If employees have the knowledge and
skill to perform, but input, output, consequences, or feedback are inadequate, training
may not be the best solution. For example, if poor performance results from faulty equip-
ment, training cannot solve this problem, but repairing the equipment will! If poor per-
formance results from lack of feedback, then employees may not need training, but their
managers may need training on how to give performance feedback.
TASK ANALYSIS
A task analysis, which we defined earlier in the chapter, identifies the conditions in
which tasks are performed. The conditions include identifying equipment and the envi-
ronment the employee works in, time constraints (deadlines), safety considerations, or
performance standards. Task analysis results in a description of work activities, includ-
ing tasks performed by the employee and the knowledge, skills, and abilities required
to successfully complete the tasks. A job is a specific position requiring the completion
of specific tasks. A task is a statement of an employee’s work activity in a specific job.
The four steps in a task analysis include identifying the job(s) to be analyzed, developing
a list of tasks performed on the job, validating or confirming the tasks, and identifying
the knowledge, skills, abilities, and other factors (e.g., equipment, working conditions)
needed to successfully perform each task.20
For example, consider how KLA-Tencor conducted a needs assessment for its service
engineers.21 KLA-Tencor supplies process controls and equipment to the semiconductor
industry. KLA-Tencor service engineers need to diagnose and repair its customers’ com-
plex machines that use advanced laser, optical, and robotic technologies. The engineers
need to main proficiency in their current skills as well as add new skills to keep pace
with new technology used in the company’s equipment. This is critical for KLA-Tencor
to quickly solve equipment problems, which if unresolved, can result in millions of dol-
lars of lost revenue for its customers. Providing effective service is critical for the com-
pany to keep current customers and develop new business. In fact, one of the company’s
values is “Indispensable” (the others values are Perseverance, Drive to Be Better, High
Performance Teams, and Honest, Forthright, and Consistent).
KLA-Tencor uses a skills management process (the Right People, Right Knowledge
process) to monitor its workforce skills and use this information to change its training
programs. The process involves developing a task list, training on the task, practicing
on-the-job training to gain certification, and conducting an annual skills assessment. To

conduct the skills assessment a survey was sent to all of KLA-Tencor’s more than 1,000
service engineers. For each task the engineers were asked to rate their capabability of
doing the task on a scale from “I don’t know how” to “I can teach it to others.” Also, they
were asked to evaluate how frequently they performed the task from “Never” to “More
than two times per year.” Based on their responses, they were assigned a training task.
More than 200 courses were created to train the engineers. To ensure that the training was
completed, both engineers and their managers were held accountable. This helped achieve
a 95% completion rate within one year after training was assigned. The skills assess-
ment data was also used to identify gaps in current training, resulting in more than 2,000
changes in courses and certification programs. The skills assessment is done annually to
ensure service engineers’ skills keep up to date with new technology and products.
ENSURING EMPLOYEES’ READINESS FOR TRAINING

The second step in the training design process is to evaluate whether employees are LO 7-4
ready for training. Readiness for training refers to employee characteristics that provide Evaluate employees’
readiness for training.
employees with the desire, energy, and focus necessary to learn from training. The
desire, energy, and focus is referred to as motivation to learn.22 Various research studies
have shown that motivation to learn is related to knowledge gain, behavior change, or Readiness for
skill acquisition in training programs.23 Table 7.3 presents factors that influence motiva- Training
Employee characteris-
tion to learn and the actions that strength them. Motivation to learn influences mastery tics that provide them
of all types of training content, including knowledge, behavior, and skills. Managers with the desire, energy,
need to ensure that employees’ motivation to learn is as high as possible. They can do and focus necessary to
this by ensuring employees’ self-efficacy; understanding the benefits of training; being learn from training.
aware of training needs, career interests, and goals; understanding work environment
characteristics; and ensuring employees’ basic skill levels.
Motivation to Learn
The “Competing through Sustainability” box shows efforts to develop the skills of the The desire of the
“hidden workforce” and in return get motivated and committed employees. trainee to learn the
content of a training
program.
CREATING A LEARNING ENVIRONMENT
Learning permanently changes behavior. For employees to acquire knowledge and skills
in the training program and apply this information in their jobs, the training program
must include specific learning principles. Educational and industrial psychologists and
instructional design specialists have identified several conditions under which employ-
ees learn best.24 Table 7.4 shows the events that should take place for learning to occur
in the training program and their implications for instruction.
Consider how several companies are creating a positive learning environment using a
variety of training methods.25 Feedback about a learning program at Mindtree Limited,
a global information technology solutions company, suggested that trainees were not
transferring learning to the job. The program was redesigned to ensure that employees
would learn skills such as analyzing the impact of change and how to successfully inte-
grate, review, and resolve coding problems. The new program includes four phases each
with clear objectives and expected outcomes. Trainees are actively involved in learning
through the use of project simulations in which they work in teams, under the supervi-
sion of a more experienced technical employee, to fix defects, address change requests,
and implement new features. Trainees are evaluated and provided feedback throughout
the program on their analysis, design, coding, and documentation skills, turnaround
time, and collaboration skills. Nemours, a children’s health system, emphasizes family-
centered care. Nemours partners with parents and children to help deliver care in both
Table 7.3
Factors That Influence Motivation to Learn
FACTOR DESCRIPTION ACTIONS TO ENHANCE OR IMPROVE
Self-efficacy Employee belief that they can Show employees training success of their peers.
successfully learn content of the
training program. Communicate that purpose of training is to
improve, not identify, area of incompetence.
Communicate purpose and activities
involved in training.
Emphasize that learning is under their
personal control.
Benefits or conse- Job-related, personal, career Realistic communication about short- and
quences of training benefits that can result from long-term benefits from training.
attending training.
Awareness of Knowledge of skill strengths Communicate why they were asked to attend
training needs and weaknesses. training program.
Share performance appraisal information.
Encourage trainees to complete self-evaluation of
all strengths and weaknesses.
Allow employees to participate in choice of
training to attend.
Work environment Proper tools and equipment, Give employees opportunities to practice and
materials, supplies, budget time. apply skills to their work.
Managers’ and peers’ willingness Encourage employees to provide feedback to
to provide feedback and rein- each other.
force use of training content. Encourage trainees to share training experiences
and situations where use of training content was
beneficial.
Acknowledge use of training content in
their work.
Provide resources necessary for training content
to be used in their work.
Basic skills Cognitive ability, reading, Ensure trainees have prerequisite skills needed
and writing skills. for understanding and learning training content.
Provide remedial training.
Use video or other visual training methods.
Modify training program to meet trainees’ basic
skill levels.
Goal orientation Goals held by employees in a Create a learning goal orientation by
learning situation. deemphasizing competition between trainees,
allowing trainees to make errors and to experi-
ment with new knowledge, skills, behavior during
training, and setting goals-based learning and
experimenting.
Conscientiousness Tendency to be reliable, Communicate need for learning.
hardworking, self-disciplined, and
persistent.
SOURCES: Based on J. Colquitt, J. LePine, and R. Noe, “Toward an Integrative Theory of Training Motivation: A Meta-Analytic Path Analysis of
20 Years of Research,” Journal of Applied Psychology 85 (2000), pp. 678–707; and R. Noe and J. Colquitt, “Planning for Impact Training:
Principles of Training Effectiveness,” in K. Kraiger (ed.), Creating, Implementing, and Managing Effective Training and Development
(San Francisco: Jossey-Bass, 2002), pp. 53–79.
Youth Training Programs Provide Talent
Founded by CEO Gerald Cherta- admitted to the program, for the checks, and test-
vian, Year Up’s mission is to cre- first six months students coming. Over 250 compa-
ate opportunities for low income plete skills training programs in nies have employed one or more
youth ages 18 to 24 by providing areas with high demands for jobs of Year Up’s 8,500 alumni. In
them with the skills, experience, including information technol- 2013 over 80% of Year Up alumni
and support that will help them ogy helpdesk/desktop support, went on to find employment or
to reach their potential through financial operations, software pursue higher education within
professional careers and higher quality assurance, or project man- four months of graduation.
education. With locations across agement. Also, they are trained
the country, including Buffalo, in important soft skills such as DISCUSSION QUESTION
Philadelphia, Boston, and San business communications and Which of the factors influencing
Francisco, Year Up has been rec- customer service skills. Then motivation to learn (see Table 7.3)
ognized by various publications they are placed in a six-month should managers carefully con-
and groups as one of the best internship in one of Year Up’s sider to ensure that low income
organizations for using busi- 250 diverse partner companies youth hired from Year Up are
ness excellence to create social including American Express, successful—that is, they remain
change. NASA, LinkedIn, and T-Mobile. engaged in their work, stay with
Year Up is an intensive one- They receive coaching, feedback, the company, and are good
year training and education and guidance from advisors, performers?
program that admits students mentors, and internship manag- SOURCES: Based on http://www.yearup.org,
into the program who are moti- ers. The interns are screened website for Year Up; and “Making Change Hap-
vated to achieve. After they are using interviews, reference pen: 2013 Annual Report,” accessed April 9, 2015.
inpatient and outpatient settings, design facilities, educate staff, and develop and evalu-
ate policies and programs. Nemours provides high-quality educational opportunities
for associates, continuing medical education for physicians, nurses, and other allied
health professionals through internships, residency programs, fellowship training, and
graduate medical education. Its pediatric emergency medical skills course for first year
fellows involves role playing. The role playing scenarios often involve patient and fam-
ily interactions. These can be difficult because they can be emotionally complex such
as when difficult news must be provided to patients’ families. Experienced clinicians
observe and mentor the fellows and provide feedback on their communications and
interpersonal skills.
ENSURING TRANSFER OF TRAINING

Transfer of training refers to on-the-job use of knowledge, skills, and behaviors learned Transfer of Training
in training. As Figure 7.4 shows, transfer of training is influenced by manager sup- The use of knowledge,
port, peer support, opportunity to use learned capabilities, technology support, and skills, and behaviors
learned in training on
self-management skills. As we discussed earlier, learning is influenced by the learn- the job.
ing environment (such as meaningfulness of the material and opportunities for prac-
tice and feedback) and employees’ readiness for training (for example, their
self-efficacy and basic skill level). If no learning occurs in the training program,
transfer is unlikely.
277
Table 7.4
Conditions for Learning and Their Importance
CONDITIONS FOR LEARNING IMPORTANCE AND APPLICATION TO TRAINING
Need to know why they Employees need to understand the purpose or objectives of the
should learn training program to help them understand why they need training and
what they are expected to accomplish.
Meaningful training content Motivation to learn is enhanced when training is related to helping
learner (such as related to current job tasks, problems, enhancing
skills, or dealing with jobs or company changes). The training context
should be similar to the work environment.
Opportunities for practice Trainees need to demonstrate what is learned (knowledge, skill,
behavior) to become more comfortable using it and to commit it to
memory. Let trainees choose their practice strategy.
Feedback Feedback helps learner modify behavior, skill, or use knowledge to
meet objectives. Videotape, other trainees, and the trainer are useful
feedback sources.
Observe, experience, and Adults learn best by doing. Gain new perspectives and insights by
interact with training content, working with others. Can learn by observing the actions of models
other learners, and the instructor or sharing experiences with each other in communities of practice or
through social networking. Interact and manipulate content through
reading or using tools that allow for building ideas and solving
problems, such as worksheets and online interactions.
Good program coordination Eliminate distractions that could interfere with learning, such as cell-
and administration phone calls. Make sure the room is properly organized, comfortable,
and appropriate for the training method (e.g., movable seating for
team exercises). Trainees should receive announcements of the
purpose of training, place, hour, and any pretraining materials such as
cases or readings.
Commit training content Facilitate recall of training content after training. Examples include
to memory using concept maps showing relationships among ideas, using mul-
tiple types of review (writing, drawing, role-plays), teaching key words,
providing a visual image, or asking trainees to reflect on what they
learned. Limit instruction to manageable units or chunks that don’t
exceed memory limits; review and practice over multiple days (over-
learning). Use short quizzes or other activities to help trainees retrieve
what they learned and emphasize its importance.
SOURCES: Based on R. M. Gagne, “Learning Processes and Instruction,” Training Research Journal 1 (1995/1996), pp. 17–28; M. Knowles, The Adult
Learner, 4th ed. (Houston: Gulf, 1990); A. Bandura, Social Foundations of Thought and Action (Englewood Cliffs, NJ: Prentice Hall, 1986); E. A. Locke
and G. D. Latham, A Theory of Goal Setting and Task Performance (Englewood Cliffs, NJ: Prentice Hall, 1990); B. Mager, Preparing Instructional
Objectives, 2nd ed. (Belmont, CA: Lake, 1984); B.J. Smith and B. L. Delahaye, How to Be an Effective Trainer, 2nd ed. (New York: John Wiley and Sons,
1987); K. A. Smith-Jentsch, F. G. Jentsch, S. C. Payne, and E. Salas, “Can Pretraining Experience Explain Individual Differences in Learning?” Journal
of Applied Psychology 81 (1996), pp. 110–16; and H. Nuriddin, “Building the Right Interaction,” T + D, March 2011, pp. 32–35; R. Feloni, “This Simple
Daily Exercise Boosts Employee Performance,” Business Insider India, accessed July 29, 2014, www.businessinsider.in.com; G. Di Stefano, F. Gino,
G. Pisano, and B. Staats, “Learning by Thinking: How Reflection Aids Performance,” Harvard Business School Working Paper, 14-093 (March 25,
2014); M. Plater, “Three Trends Shaping Learning,” Chief Learning Officer, June 2014, pp. 44–47; A. Kohn, “Use It or Lose It,” T + D, February 2015,
pp. 56–61; J. Karpicke and Henry Roediger III, “The Critical Importance of Retrieval for Learning” Science, February 2008, pp. 966–68.
Manager Support
Manager support refers to the degree to which trainees’ managers (1) emphasize the
importance of attending training programs and (2) stress the application of training con-
tent to the job. Table 7.5 shows what managers should do to support training.
Opportunity to Figure 7.4

use learned Technological Work Environment
capability support Characteristics
Transfer Influencing Transfer
of of Training
training
Self-management Manager
skills support
Peer support
At Ingersoll Rand, to ensure that top managers understand and support the role that Manager Support
training and development can play in the company, a “ladder of engagement” model was Degree to which train-
ees’ managers empha-
created.26 Top managers are engaged in training and development in many different
size the importance of
ways, including providing input into learning program development, serving as trainers attending training pro-
or co-trainers, visiting courses as an executive speaker, or serving as advisory council grams and stress the
members for Ingersoll Rand’s corporate university. application of training
The greater the level of manager support, the more likely that transfer of training will content to the job.
occur.27 The basic level of support that a manager should provide is acceptance, that is,
allowing trainees to attend training. The highest level of support is to participate in train-
ing as an instructor (teaching in the program). Managers who serve as instructors are
more likely to provide lower-level support functions such as reinforcing use of newly
learned capabilities, discussing progress with trainees, and providing opportunities to
practice. Managers can also facilitate transfer through use of action plans. An action plan Action Plan
Document summariz-
is a written document that includes the steps that the trainee and manager will take to
ing what the trainee
ensure that training transfers to the job. The action plan includes (1) a goal identifying and manager will do
what training content will be used and how it will be used (project, problem); (2) strate- to ensure that training
gies for reaching the goal, including resources needed; (3) strategies for getting feedback transfers to the job.
Table 7.5
Understand the content of the training. How Managers Can
Know how training relates to what you need employees to do. Support Training
In performance appraisals, evaluate employees on how they apply training
to their jobs.
Support employees’ use of training when they return to work.
Ensure that employees have the equipment and technology needed to use training.
Prior to training, discuss with employees how they plan to use training.
Recognize newly trained employees who use training content.
Give employees release time from their work to attend training.
Explain to employees why they have been asked to attend training.
Give employees feedback related to skills or behavior they are trying to develop.
If possible, be a trainer.
SOURCES: Based on S. Bailey, “The Answer to Transfer,” Chief Learning Officer, November 2014, pp. 33–41; R. Hewes,
“Step by Step,” T + D, February 2014, pp. 56–61; R. Bates, “Managers as Transfer Agents,” in E. Holton III and
T. Baldwin (eds.), Improving Learning Transfer in Organizations (San Francisco: Jossey-Bass, 2003), pp. 243–70; and
A. Rossett, “That Was a Great Class, but . . .” Training and Development, July 1997, p. 21.
(such as meetings with the manager); and (4) expected outcome (what will be differ-
ent?). The action plan includes a schedule of specific dates and times when the manager
and trainee agree to meet to discuss the progress being made in using learned capabili-
ties on the job. To help ensure learning and transfer of training, Spectrum Health, a
nonprofit health system in Michigan uses a coaching guide to ensure skills are reinforced
by a manager.28 When an employee is scheduled to attend training his or her manager is
sent a coaching guide describing the training objectives and questions that managers are
supposed to ask employees, such as “What are you supposed to get out of the training?”
In addition, after employees attend training, managers are asked to have another conver-
sation with the employee to reinforce and apply what was learned.
At a minimum, special sessions should be scheduled with managers to explain the
purpose of the training and set expectations that they will encourage attendance at the
training session, provide practice opportunities, reinforce use of training, and follow up
with employees to determine the progress in using newly acquired capabilities.
Peer Support
Transfer of training can also be enhanced by creating a support network among the train-
Support Network ees.29 A support network is a group of two or more trainees who agree to meet and dis-
Trainees who meet to cuss their progress in using learned capabilities on the job. This could involve face-to-face
discuss their progress meetings or communications via e-mail, Twitter, or other social networking tools. Train-
in using learned capa-
bilities on the job.
ees can share successful experiences in using training content on the job; they can also
discuss how they obtained resources needed to use training content or how they coped
with a work environment that interfered with use of training content.
Websites or newsletters might be used to show how trainees are dealing with trans-
fer of training issues. Available to all trainees, the newsletter or website might feature
interviews with trainees who were successful in using new skills or provide tips for using
new skills. Managers may also provide trainees with a mentor—a more experienced
employee who previously attended the same training program. The mentor, who may be
a peer, can provide advice and support related to transfer of training issues (such as how
to find opportunities to use the learned capabilities).
Opportunity to Use Learned Capabilities

Opportunity to Opportunity to use learned capabilities (opportunity to perform) refers to the extent to
Perform which the trainee is provided with or actively seeks experience with newly learned knowl-
Trainee is provided edge, skill, and behaviors from the training program.30 Opportunity to perform is influ-
with or actively seeks
experience using newly
enced by both the work environment and trainee motivation. One way trainees can use
learned knowledge, learned capabilities is through assigned work experiences (problems or tasks) that require
skills, or behavior. their use. The trainees’ manager usually plays a key role in determining work assign-
ments. Opportunity to perform is also influenced by the degree to which trainees take
personal responsibility to actively seek out assignments that allow them to use newly
acquired capabilities. Trainees given many opportunities to use training content on the job
are more likely to maintain learned capabilities than trainees given few opportunities.31
Performance
Support Systems
Computer applications Technological Support: Performance Support
that can provide (as
requested) skills train- and Knowledge Management Systems
ing, information access, Performance support systems are computer applications that can provide, as requested,
and expert advice. skills training, information access, and expert advice.32 Performance support may be
used to enhance transfer of training by giving trainees an electronic information source

that they can refer to as needed as they attempt to apply learned capabilities on the job.
Companies provide performance support in different ways.33 Coca-Cola Sabo, a
South African bottling company, provides on-demand learning materials using YouTube
videos accessible on smartphones and tablet computers that focus on tasks such as the
way to stack products correctly inside coolers. SNI, a company that supplies negotiations
skills training, provides its clients with a checklist of seven negotiating tactics they can
pull up on their smartphones. Although these tactics are covered in training, the check-
list is available to aid clients’ recall and transfer of skills to real negotiation situations.
Rather than train employees on infrequently performed tasks, ADP provides employees
with “Learning Bytes,” two-minute learning solutions demonstrating how to perform
these tasks. The Learning Bytes have helped to reduce calls into ADP’s service center.
As we discussed earlier in the chapter, many companies are using knowledge man-
agement systems to improve the creation, sharing, and use of knowledge. NASA needs
to manage knowledge to ensure its space missions are successful.34 At NASA knowl-
edge management means sharing solutions and expertise across employees, teams,
projects, programs, centers, and missions. This includes scientific, engineering, and
technical knowledge and business processes as well as know-how including techniques
and procedures. To manage knowledge NASA uses online tools including collaboration
sites, video and document libraries, search and tagging tools, case studies and publica-
tions, processes to identify and retain lessons learned, knowledge networks, and social
exchanges such as forums and workshops.
Knowledge management systems often include communities of practice. Communities Communities of
of practice are groups of employees who work together, learn from each other, and Practice
develop a common understanding of how to get work accomplished. Groups of employees
who work together,
Chicago-based Grant Thornton LLP, part of the Global Six accounting organizations, learn from each other,
developed and deployed a knowledge management system known as “K-Source.”35 and develop a com-
K-Source was designed to help meet key business goals of growing sales, improving mon understanding
customer service, supporting company values, and increasing efficiency of internal of how to get work
services. K-Source includes an online community of practice for every line of service accomplished.
offered by the company, industry group, and geographic area. Employees are encour-
aged to contribute to K-Source by a knowledge manager who solicits their participation
as well as by including it as part of their performance evaluation goals. Using K-Source,
employees can create personal profiles, set up personalized news feeds from financial
websites, access courses, e-books and webcasts, and participate in online discussions.
Self-Management Skills
Training programs should prepare employees to self-manage their use of new skills and
behaviors on the job.36 Specifically, within the training program, trainees should set
goals for using skills or behaviors on the job, identify conditions under which they might
fail to use them, identify the positive and negative consequences of using them, and
monitor their use of them. Also, trainees need to understand that it is natural to encoun-
ter difficulty in trying to use skills on the job; relapses into old behavior and skill pat-
terns do not indicate that trainees should give up. Finally, because peers and supervisors
on the job may be unable to reward trainees using new behaviors or to provide feedback
automatically, trainees need to create their own reward system and ask peers and manag-
ers for feedback.
As you should have realized by now, learning and transfer of training are closely
related. If training does not facilitate learning there is nothing to transfer to the job.
Similarly, if employees do learn, transfer of training will not occur if the work environ-
ment does not support or actively discourages applying what was learned. Consider how
Verizon, the telecommunication company, facilitates both learning and transfer through
its instructor-led virtual classrooms which bring training to many of its geographi-
cally dispersed employees.37 Recognizing the importance of keeping learners actively
involved with each other and the training content, Verizon has implemented a number
of new learning strategies. The training which supports its business customer service
billing process combines leader-led discussions with interactive assignments that par-
ticipants complete in groups in virtual breakout rooms. Webinars include online polling
to keep learners engaged. Its information technology classes include labs and simulated
technical equipment for practice and instruction. For retail training, Verizon’s Virtual
Trainer (VT) brings the trainer to the retail store virtually with initial training provided
by VT. VT is then supported by a document completed by the learner and used as a
job aid to reinforce training, a discussion guide used by managers to discuss examples,
ideas, content, and activities, and a scenario and coaching form that gives the learner the
opportunity to apply skills after training.
SELECTING TRAINING METHODS

LO 7-5 A number of different methods can help employees acquire new knowledge, skills, and
Discuss the strengths behaviors. Figure 7.5 provides an overview of the use of training methods across all size
and weaknesses of companies. The instructor-led classroom still remains the most frequently used training
presentation, hands-
method. However, it is important to note that the use of online learning, mobile learning,
on, and group training
methods. social learning, and use of blended learning, i.e., a combination of approaches, for train-
ing continues to increase. Expectations are that this trend with continue.
Figure 7.5 Percentage of training hours delivered by each method

Overview of Use of Mobile (cell phones,
Training Methods iPods, tablets, PDAs) Social Learning
1% (social networks, blogs,
discussion groups)
4%
Online or
Computer-Based
28%
Instructor-Led
Classroom
Virtual 45%
Classroom
15%
Blended
Learning
29%
SOURCE: Data from “2014 Industry Report,” Training, November/December 2014, pp. 16–29.
Adopting Training Practices for Global Businesses
Consider how globalization employees working in 200 cit- dinner table to
has affected the training prac- ies and 56 countries around the the airline’s stan-
tices of Philips, Accenture, and world. To bring expertise to its dards by clicking
Etihad Airways. Philips is the multiple worldwide locations, and dragging pictures rather
Dutch technology company that Accenture has created a global than reading instructions.
focuses on health care, lighting, network of virtual classrooms
and consumer lifestyle products. that can connect to each other. DISCUSSION QUESTIONS
Philips’ learning function has This means that experts located 1. What are the advantages
to serve employees in more in one location can now share and disadvantages of using
than 100 different countries. their skills with employees in virtual classrooms for train-
As a result, the company has locations around the world who ing a global workforce? How
developed a standard global need those skills. Training flight would you overcome the
learning approach that is locally attendants to act as a team in an disadvantages?
appropriate. Philips has global emergency is one of the biggest 2. How might you have to adapt
standards in place to ensure challenges facing global air- online or e-learning programs
learning is high quality but each lines. Etihad Airways, a Persian that include text, video, and
business unit is encouraged to Gulf airline, operates in English, discussion groups moder-
tailor learning to match learn- but it is the second language ated by a trainer for a global
ers’ needs at the location. For for almost all employees. As a audience?
example, in India and China result, Etihad revised its train- SOURCES: Based on K. Kuehner-Hebert,
employees are encouraged to ing program to include more “Philips: A Learning Organization Trans-
learn using one-on-one coach- visual learning for its employees, formed,” Chief Learning Officer, October 2014,
pp. 22–25; F. Kalman, “Accenture: Staying
ing, but in Europe employees who come from 113 different Ahead of the Curve,” Chief Learning Officer,
are more receptive to learning countries. Interactive computer June 2014, pp. 24–25; S. McCartney, “A Future
delivered online. Accenture programs teach flight attendants Model for Flight Crews,” The Wall Street Jour-
nal, December 4, 2014, pp. D1–D2.
employs approximately 281,000 how to set a business-class
One estimate is that nearly 40% of executives plan to use tablets such as the iPad in
their new training and development initiatives.38 These devices are expected to be used
for learning and performance support but also for coaching and mentoring employees,
mobile gaming, and microblogging (e.g., Twitter).
Regardless of the training method, for training to be effective it needs to be based on
the training design model shown in Figure 7.2. Needs assessment, a positive learning
environment, and transfer of training are critical for training program effectiveness. The
“Competing through Globalization” box shows how globalization affects the choice of
training methods.
Presentation Methods
Presentation methods refer to methods in which trainees are passive recipients of infor- Presentation
mation. Presentation methods include traditional classroom instruction, distance learning, Methods
Training methods in
and audiovisual training. They can include the use of personal computers, smartphones, which trainees are
and tablet computers such as iPads. These methods ideal for presenting new facts, infor- passive recipients of
mation, different philosophies, and alternative problem-solving solutions or processes. information.
283
Instructor-Led Classroom Instruction. Classroom instruction typically involves hav-

ing the trainer lecture a group. In many cases the lecture is supplemented with question-
and-answer periods, discussion, or case studies. Classroom instruction remains a popular
training method despite new technologies such as interactive video and computer-assisted
instruction. Traditional classroom instruction is one of the least expensive, least time-
consuming ways to present information on a specific topic to many trainees. The more
active participation, job-related examples, and exercises that the instructor can build into
traditional classroom instruction, the more likely trainees will learn and use the informa-
tion presented on the job. For example, PPL Electric Utilities uses a classroom session
to introduce its storm damage assessors to devices used to identify damage, patrolling
techniques, and reporting.39 Then the assessors participate in a simulation involving a
downed power line and are asked to perform a patrol and provide a written assessment of
the power line. Assessors are also invited to participate in an annual storm drill.
Distance learning is used by geographically dispersed companies to provide informa-
tion about new products, policies, or procedures as well as skills training and expert lec-
tures to field locations.40 Distance learning features two-way communications between
Teleconferencing people.41 First, it can include teleconferencing. Teleconferencing refers to synchronous
Synchronous exchange exchange of audio, video, and/or text between two or more individuals or groups at two
of audio, video, or text or more locations. Trainees attend training programs in training facilities in which they
between individuals or
groups at two or more
can communicate with trainers (who are at another location) and other trainees using the
locations. telephone or personal computer. Second, distance learning can include a virtual class-
room. A third type of distance learning also includes individualized, personal-computer–
based training.42 Employees participate in training anywhere they have access to a
Webcasting personal computer. This can also include webcasting, which involves face-to-face instruc-
Classroom instruction tion provided online through live broadcasts. Course material, including video, can be
provided online via live distributed using the company’s intranet. Trainers and trainees interact using e-mail, bul-
broadcasts.
letin boards, and conferencing systems. Distance learning can also allow trainees to
respond to questions posed during the training program using a keypad.
Distance learning usually includes a link so that trainees viewing the presentation can
call in questions and comments to the trainer. Also, satellite networks allow companies
to link up with industry-specific and educational courses for which employees receive
college credit and job certification. IBM, Digital Equipment, and Eastman Kodak are
among the many firms that subscribe to the National Technological University, which
broadcasts courses throughout the United States that technical employees need to obtain
advanced degrees in engineering.43
An advantage of distance learning is that the company can save on travel costs. It also
allows employees in geographically dispersed sites to receive training from experts who
would not otherwise be available to visit each location.
The major disadvantage of distance learning is the potential for lack of interaction
between the trainer and the audience. To help ensure distance learning is effective, a
high degree of interaction between trainees and the trainer is necessary.44 That’s why
establishing a communications link between employees and the trainer is important.
Also, on-site instructors or facilitators should be available to answer questions and mod-
erate question-and-answer sessions.
Audiovisual Training. Audiovisual training includes overheads, slides, and video. It

has been used for improving communications skills, interviewing skills, and customer-
service skills and for illustrating how procedures (such as welding) should be followed.
Video is, however, rarely used alone. Learners may not be required to attend a class.
They can work independently, using materials in workbooks, DVDs, or on the Internet.
PowerPoint or other presentational software and video or audio

clips can also be used to show learning points, real-life experi-
ences, and examples. Audiovisual training can easily be made
available on desktop computers, smartphones, and tablet com-
puters. These devices allow users to access the materials at any
time or place. They also allow instruction to include video clips,
podcasts, charts and diagrams, learning points, and lectures. This
helps facilitate learning though appealing to a variety of the users’
senses and both communicating and demonstrating knowledge,
skills, and behaviors. For example, a restaurant called Flippin’
© Jetta Productions/Getty Images
Pizza provides training via an iPad app.45 Trainees can use the app
to link to a series of short videos each with a lesson in cooking or Mobile technology is useful not only for
entertainment but can also be used for
customer service.
employees who travel and need to be
Sales representatives at Coca-Cola Bottling Company Con- in touch with the office. Smartphones,
solidated (CCBCC) are responsible for business development and tablets, and other digital devices also
customer relationships.46 Most of their time is spent traveling to give employees the ability to listen to and
meet customer needs or visiting prospects for new business. To participate in training programs at their
help sales reps better manage their workload and meet their sales leisure.
quotas, CCBCC developed an online learning program. Sales reps
can use an iPad to access an app that links to the program’s content as well as videos on
key concepts and action planning templates. The program’s content covers how to get
work done, how to work smart, and how to handle information overload. The app also
includes editable PDF files that allow sales reps working with their managers during on-
the-job coaching sessions to create and update action plans. The app is frequently used
by sales reps, and its use has contributed to a 20% increase in daily sales calls.
The use of audio visual training has a number of advantages. First, users have con-
trol over the presentation. They can review, slow down, or speed up the lesson, which
permits flexibility in customizing the session depending on trainees’ expertise. Sec-
ond, trainees can be exposed to equipment, problems, and events that cannot be eas-
ily demonstrated in a classroom. Another advantage is that learners get a consistent
presentation.
Most problems from these methods result from having too much content for the trainee
to learn, overuse of humor or music, and drama that distracts from the key learning points.47
Hands-on Methods
Hands-on methods are training methods that require the trainee to be actively involved in Hands-on Methods
learning. Hands-on methods include on-the-job training, simulations, business games Training methods that
and case studies, behavior modeling, interactive video, and web-based training. These actively involve the
trainee in learning.
methods are ideal for developing specific skills, understanding how skills and behaviors
can be transferred to the job, experiencing all aspects of completing a task, and dealing
with interpersonal issues that arise on the job.
On-the-Job
ON-THE-JOB TRAINING (OJT) Training (OJT)
On-the-job training (OJT) refers to new or inexperienced employees learning through Peers or managers
training new or inexpe-
observing peers or managers performing the job and trying to imitate their behavior.
rienced employees who
OJT can be useful for training newly hired employees, upgrading experienced employ- learn the job by obser-
ees’ skills when new technology is introduced, cross-training employees within a depart- vation, understanding,
ment or work unit, and orienting transferred or promoted employees to their new jobs. and imitation.
OJT takes various forms, including apprenticeships and internships. (Both are dis-
cussed later in this section.) OJT is an attractive training method because, compared to
other methods, it needs less investment in time or money for materials, trainer’s salary,
or instructional design. Managers or peers who are job knowledge experts are used as
instructors. OJT must be structured to be effective. Table 7.6 shows the principles of
structured OJT.
Apprenticeship Apprenticeship is a work-study training method with both on-the-job training and
A work-study training classroom training. To qualify as a registered apprenticeship program under state or fed-
method with both on- eral guidelines, at least 144 hours of classroom instruction and 2,000 hours, or one year,
the-job and classroom
training.
of on-the-job experience are required.48 Apprenticeships can be sponsored by individual
companies or by groups of companies cooperating with a union. The majority of appren-
ticeship programs are in the skilled trades, such as plumbing, carpentry, electrical work,
and bricklaying.
The hours and weeks that must be devoted to completing specific skill units are
clearly defined. OJT involves assisting a certified tradesperson (a journeyman) at the
work site. The on-the-job training portion of the apprenticeship follows the guidelines
for effective on-the-job training.49
A major advantage of apprenticeship programs is that learners can earn pay while
they learn. This is important because programs can last several years. Learners’ wages
usually increase automatically as their skills improve. Also, apprenticeships are usu-
ally effective learning experiences because they involve learning why and how a task
is performed in classroom instruction provided by local trade schools, high schools, or
community colleges. Apprenticeships also usually result in full-time employment for
trainees when the program is completed. From the company’s perspective, apprentice-
ship programs meet specific business needs and help to attract talented employees.
At its manufacturing facility in Toledo, Ohio, Libbey Glass has apprenticeship pro-
grams in mold making, machine repair, millwrighting, and maintenance repair.50 Each
Table 7.6
Principles of On-the-Job Training
PREPARING FOR INSTRUCTION

1. Break down the job into important steps. 3. Decide how much time you will devote to
2. Prepare the necessary equipment, materials, OJT and when you expect the employees to
and supplies. be competent in skill areas.
ACTUAL INSTRUCTION
1. Tell the trainees the objective of the task and 6. Have the trainees do the entire task and praise
ask them to watch you demonstrate it. them for correct reproduction.
2. Show the trainees how to do it without 7. If mistakes are made, have the trainees practice
saying anything. until accurate reproduction is achieved.
3. Explain the key points or behaviors. (Write out the 8. Praise the trainees for their success in learning the
key points for the trainees, if possible.) task.
4. Show the trainees how to do it again.
5. Have the trainees do one or more single parts of
the task and praise them for correct reproduction
(optional).
SOURCES: Based on W. J. Rothwell and H. C. Kazanas, “Planned OJT Is Productive OJT,” Training and Development Journal, October 1990,
pp. 53–55; P. J. Decker and B. R. Nathan, Behavior Modeling Training (New York: Praeger Scientific, 1985).
apprentice requires the support of a journeyman for each work assignment. The pro-
gram also requires apprentices to be evaluated every 1,000 hours to meet Department
of Labor standards. The reviews are conducted by a committee including representa-
tives of management and department journeymen. The committee also develops tests
and other evaluation materials. The committee members cannot perform their normal
duties during the time they are reviewing apprentices so their workload has to be spread
among other employees or rescheduled for some other time. The benefits of the program
include the development of employees who are more receptive to change in the work
environment, the ability to perform work at Libbey instead of having to outsource jobs
to contract labor, and an edge for Libbey in attracting talented employees who like the
idea that after completing an apprenticeship they are eligible for promotions to other
positions in the company, including management positions. Also, the apprenticeship
program helps Libbey tailor training and work experiences to meet specific needs in
maintenance repair, which is necessary to create and repair production mold equipment
used in making glass products.
One disadvantage of apprenticeship programs is that there is no guarantee that jobs
will be available when the program is completed. Another disadvantage is that employ-
ers may not hire apprentices because they believe apprentices are narrowly trained in
one occupation or with one company, and program graduates may have only company-
specific skills and may be unable to acquire new skills or adapt their skills to changes in
the workplace.
An internship is on-the-job learning sponsored by an educational institution or is part Internship
of an academic program. Students are placed in paid positions where they can gain expe- On-the-job learning
riences related to their area of study. For example, Ford, Whirlpool, and Rolls-Royce use sponsored by an edu-
cational institution, or
interns in human resources and engineering positions. If they perform well many compa- part of an academic
nies offer interns full-time positions after they complete their studies. program.
Simulations. A simulation is a training method that represents a real-life situation, with Simulation
trainees’ decisions resulting in outcomes that mirror what would happen if the trainee A training method that
were on the job. Simulations, which allow trainees to see the impact of their decisions in represents a real-life
situation, allowing
an artificial, risk-free environment, are used to teach production and process skills as trainees to see the
well as management and interpersonal skills. Simulations are used for training pilots, outcomes of their deci-
cable installers, and call center employees. sions in an artificial
Flight simulators including full motion and high-resolution graphics are recent environment.
additions to pilot training in the commercial helicopter industry.51 The simulators are
intended to improve helicopters’ safety record. On average more than one major heli-
copter accident occurs each day somewhere in the world. Training accidents using actual
helicopters account for approximately one-fourth of all commercial crashes. Buying or
leasing a simulator can cost millions of dollars while contracting costs range between
$1,000 and $1,500 dollars per hour. But the cost is much less than the hourly cost of tak-
ing helicopters out of service to teach pilots. Also, in addition to cost savings the simula-
tors allow pilots to focus on important safety issues and emergency procedures that are
impossible to replicate in an actual helicopter.
Avatars refer to computer depictions of humans that are being used as imaginary coaches, Avatars
co-workers, and customers in simulations.52 Typically, trainees see the avatar who appears Computer depictions
throughout the training course. For example, a sales training course at CDW Corporation, a of humans that can
be used as imaginary
technology products and service company, guides trainees through mock interviews with coaches, co-workers,
customers. The avatar introduces the customer situation, and the trainee hears the customer and customers in
speaking in a simulated phone conversation. The trainee has to determine with help from simulations.
the avatar what is happening in the sales process by reading the customer’s voice.
Virtual Reality A way to enhance simulations is through virtual reality. Virtual reality is a computer-
Computer-based based technology that provides trainees with a three-dimensional learning experience.
technology that pro-
vides trainees with
Using specialized equipment or viewing the virtual model on the computer screen, train-
a three-dimensional ees move through the simulated environment and interact with its components.53 Tech-
learning experience. nology is used to stimulate multiple senses of the trainee.54 Devices relay information
Trainees operate in from the environment to the senses. For example, audio interfaces, gloves that provide a
a simulated environ- sense of touch, treadmills, or motion platforms are used to create a realistic, artificial
ment that responds
to their behaviors and
environment. Devices also communicate information about the trainee’s movements to a
reactions. computer. These devices allow the trainee to experience the perception of actually being
in a particular environment.
PPD is a global contract research organization that is involved in drug discovery,
development, lifecycle management, and laboratory services. PPD uses a virtual 3D
learning environment to deliver its clinical foundations program.55 PPD created a virtual
doctor’s office, reception, and training and conference rooms. Both trainees and instruc-
tors communicate and interact using avatars. Excel, PowerPoint, and video can also be
used along with the virtual universe. PPD found that virtual training improved the cost-
effectiveness, speed, and employees’ accessibility to training. Eight percent of trainees
who participated in virtual programs preferred it to classroom training and 95% believed
they were more engaged than in traditional instruction.
As you can see from the example, simulations can be effective for several reasons.56
First, trainees can use them on their desktop, eliminating the need to travel to a central
training location. Second, simulations are meaningful, get trainees involved in learning,
and are emotionally engaging (they can be fun!). This helps increase employees’ willing-
ness to practice, retain, and improve their skills. Third, simulators provide a consistent
message of what needs to be learned; trainees can work at their own pace; and, compared
to face-to-face instruction, simulators can incorporate more situations or problems that a
trainee might encounter. Fourth, simulations can safely put employees in situations that
would be dangerous in the real world. Fifth, simulations have been found to result in
positive outcomes such as training being completed in a shorter time compared to tradi-
tional training courses, and providing a positive return on investment. Disadvantages of
simulations include their cost and need for constant updating. This is because simulators
must have identical elements found in the work environment. The simulator needs to
respond exactly as the equipment (or customer) would under the conditioned response
given by the trainee.57
Business Games and Case Studies. Situations that trainees study and discuss (case
studies) and business games in which trainees must gather information, analyze it, and
make decisions are used primarily for management skill development. There are many
sources of case studies including Harvard Business School and the Darden Business
School at University of Virginia.
Games stimulate learning because participants are actively involved and they mimic
the competitive nature of business. The types of decisions that participants make in
games include all aspects of management practice, including labor relations (such as
agreement in contract negotiations), marketing (the price to charge for a new product),
and finance (financing the purchase of new technology). A realistic game or case may
stimulate more learning than presentation methods (such as classroom instruction)
because it is more meaningful. KLA-Tencor uses case studies as part of a program known
as “The Situation Room” to help managers learn how to deal with common leadership
problems.58 A group of between 8 and 20 managers get together face-to-face or virtually
each month for one year and read one of twelve 350- to 400-word case studies. The case
is based on a real situation or problem that occurred at KLA-Tencor. The situation needs
to be broad enough for most managers to have experienced the situation, issue, or prob-
lem, but specific enough to be useful. After they read the case, the managers are given
three minutes to write their response to the situation. Participants share their responses
and their peers provide feedback. If a peer doesn’t like the response they can provide an
alternative. After all participants have shared their responses four teams are formed and
they are given “homework.” Between the first and next session, participants are expected
to meet for an hour in their teams and review content, models, methodology, and or tools
that they have been exposed to in prior courses. Based on this review they are asked to
provide a response to the situation. During the second session each of the participants
share their prepared responses and discuss them. Based on what they learned from both
the first and second session, participants are asked to prepare a personal response focus-
ing on how they will handle this situation if they encounter it on their job. The outcomes
of the sessions are documented on the company’s knowledge management system so
practices can be shared with other managers facing similar challenges.
CMS Energy uses an online game (The Resolver) to teach employees about conflicts
of interest.59 For example, employees understand that accepting bribes is illegal, but they
might not understand all of the different types of bribes. The Resolver begins with clinking
champagne glasses and receiving tickets for a sporting event. In the game players interact
with different characters and make decisions. Each decision they make affects different
people including colleagues, friends, and family members. Those affected by each deci-
sion discuss how the player’s decision affects them. Teams of five employees are formed
to compete against each other. During game play, the team format facilitates conversations
and questions among team members about ethics and conflicts of interest. When the com-
petition ends team members can see how they rank against others on an electronic online
leaderboard. This stimulates further employee conversations about how they responded to
the scenarios and what they should have done differently to earn more points.
Cases may be especially appropriate for developing higher-order intellectual skills
such as analysis, synthesis, and evaluation. These skills are often required by managers,
physicians, and other professional employees. Cases also help trainees develop the will-
ingness to take risks given uncertain outcomes, based on their analysis of the situation.
To use cases effectively, the learning environment must let trainees prepare and discuss
their case analyses. Also, face-to-face or electronic communication among trainees must
be arranged. Because trainee involvement is critical for the effectiveness of the case
method, learners must be willing and able to analyze the case and then communicate and
defend their positions.
Behavior Modeling. Research suggests that behavior modeling is one of the most effec-
tive techniques for teaching interpersonal skills.60 Each training session, which typically
lasts four hours, focuses on one interpersonal skill, such as coaching or communicating
ideas. Each session presents the rationale behind key behaviors, a DVD of a model per-
forming key behaviors, practice opportunities using role-playing, evaluation of a mod-
el’s performance in the videotape, and a planning session devoted to understanding how LO 7-6
Explain the poten-
the key behaviors can be used on the job. In the practice sessions, trainees get feedback
tial advantages of
regarding how closely their behavior matches the key behaviors demonstrated by the e-learning for training.
model. The role-playing and modeled performance are based on actual incidents in the
employment setting in which the trainee needs to demonstrate success. E-Learning
Instruction and delivery
E-Learning. E-Learning, computer-based training (CBT), online learning, and web- of training by comput-
based training refer to instruction and delivery of training by computer through the ers through the Internet
Internet or the web.61 To enhance learning all of these training methods can include and or company intranet.
integrate into instruction text, interaction using simulations and games, video, collabora-
tion using blogs, wikis, and social networks, and hyperlinks to additional resources. In
some types of CBT training content is provided standalone using software or DVDs with
no connection to the Internet. Trainees can still interact with the training content, answer
questions, and choose responses regarding how they would behave in certain situations,
but they cannot collaborate with other learners. For example, Wipro Technologies devel-
oped a tool they call a Unified Learning Kit (ULK), a portable laptop programmable
computer that enables new employees to experiment in engineering subjects.62 One ULK
can teach more than 10 different technical subjects related to hardware and software
engineering.
Online learning, e-learning, and web-based training all include delivery of instruc-
tion using the Internet or web. The training program can be accessed using a password
through the public Internet or the company’s private intranet. There are many potential
features that can be included in online learning to help trainees learn and transfer train-
ing to their jobs. For example, online programs that use video may make it an interactive
experience for trainees. That is, trainees watch the video and have the opportunity to use
the keyboard or touch the screen to answer questions, provide responses to how they
would act in certain situations, or identify the steps they would take to solve a problem.
Interactive video is especially valuable for helping trainees learn technical or interper-
sonal skills.
Greyhound Lines, the transportation company, has geographically dispersed employ-
ees including supervisors, field representatives, counter and customer service staff,
and bus drivers who work around the clock every day of the year.63 Greyhound uses
e-learning to give employees access to leadership, business, and customer service skills
courses when they need them.
Effective e-learning is grounded on a thorough needs assessment and complete learn-
Repurposing ing objectives. Repurposing refers to directly translating an instructor-led, face-to-face
Directly translating training program online. Online learning that merely repurposes an ineffective training
instructor-led training program will remain ineffective. Unfortunately, in their haste to develop online learning,
online.
many companies are repurposing bad training! The best e-learning combines the advan-
tages of the Internet with the principles of a good learning environment. Effective online
learning takes advantage of the web’s dynamic nature and ability to use many positive
learning features, including linking to other training sites and content through the use of
hyperlinks, and allowing the trainee to collaborate with other learners. Online learning
also gives learner control over the pace of learning, exercises, and use of links to other
material and peer and expert networks. Online learning allows activities typically led by
the instructor (presentation, visuals, slides), trainees (discussion, questions), and group
interaction (discussion of application of training content) to be incorporated into training
without trainees or the instructor having to be physically present in a training room.
Massive Open Effective online learning gives trainees meaningful content, relevant examples, and the
Online Courses ability to apply content to work problems and issues. Also, trainees can practice and
(MOOCs) receive feedback through problems, exercises, assignments, and tests.
Online learning
Massive open online courses (MOOCs) are a new type of e-learning. Massive open
designed to enroll large
numbers of learners online courses (MOOCs) is learning that is designed to enroll large number of learners
who have access to (massive), is free and accessible to anyone with an internet connection (open), takes
the Internet, and com- place online using videos of lectures, interactive course work including discussion
posed of interactive groups, and wikis (online), and has specific start and completion dates, quizzes and
coursework including
assessment, and exams (courses).64 MOOCs cover a wide variety of subject matter
video lectures, discus-
sion groups, wikis, and including chemistry, math, physics, computer science, philosophy, mythology, health
assessment quizzes. policy, cardiac arrest and resuscitation, and even poetry. Popular providers of MOOCs
include Coursera, edX (nonprofit founded by Harvard and MIT), and Udacity (a for-
profit company founded by a Stanford University Research professor and founder of
Google X Labs). The courses are often developed in partnership with colleges and uni-
versities, and recently, private companies. For example, edX is working with UPS,
Procter & Gamble, and Walmart to design computer science and supply-chain manage-
ment courses. Learners can take the course and complete a test that will earn them a
certificate.65
MOOCs have several advantages and disadvantages.66 Their low cost, accessibility,
and wide range of topics make them attractive to learners. They include many features
that facilitate learning and transfer: learning is interactive, learner-controlled, involves
social interaction, and emphasizes application. Learning happens through engaging short
lectures combined with interaction with course materials, interaction with other students
and the instructor. It emphasizes applying knowledge and skills using role plays, cases,
and projects. It is semi-synchronous meaning learners receive the same assignments,
video lectures, readings, quizzes, and discussions, but they can complete the coursework
on their own time. Also, many MOOCs offer college credit or certificates of completion
which provide incentives for learning and formal acknowledgement. However, despite
claims that MOOCs will revolutionize training and education, they have significant dis-
advantages. The interaction with the course of those who enroll in MOOCs tends to drop
off after the first two weeks of the course, course completion rates are low (10–20%),
and most students who complete the courses don’t take the credential exam. MOOCs
may also be inappropriate for courses where synchronous or real-time collaboration or
interaction is needed.
Social Media. Social media refer to online and mobile technology used to create inter- Social Media
active communications allowing the creation and exchange of user-generated content.67 Online and mobile
They include blogs (a webpage where entries can be posted and readers can comment), technology used to
create interactive
wikis (a website with content created and edited by users), networks such as Facebook communications.
and LinkedIn, microsharing sites such as Twitter, and shared media such as YouTube.
Many companies are considering using tablets such as the iPad for training because of
their ease of use, colorful easy-to-read display, ability to connect to the web, access to
social media, and availability of powerful apps. For example, Farmers Insurance Group
supplies smartphones to its claim representatives.68 They can use the smartphone to
access product cards to learn about insurance policies, review requirements for settling
atypical insurance claims, or learn about changes in policies. At Sonic, the fast-food
restaurant, recipes and employee activities are constantly changing due to a rotating
menu.69 Sonic managers can use their smartphones to review food preparations with a
team member, view a video, access store reports, contact experts, and post questions and
answers to an online learning community. Apps refer to applications designed specifi-
cally for smartphones and tablet computers. Apps are primarily being used to supple-
ment training, manage the path or sequence of training, and help employees maintain
training records.70 The “Competing through Technology” box highlights how social
media and apps are being used for training.
Blended Learning. Because of the limitations of e-learning related to technology (e.g.,
insufficient bandwidth, lack of high-speed web connections), because of trainee prefer-
ence for face-to-face contact with instructors and other learners, and because of employ- Blended Learning
ees’ inability to find unscheduled time during their workday to devote to learning from Delivering content and
instruction with a com-
their desktops, many companies are moving to a hybrid, or blended, learning approach. bination of technology-
Blended learning refers to combining technology methods, such as e-learning or social based and face-to-face
media, with face-to-face instruction, for delivery of learning content and instruction. methods.
Using Social Media and Apps for Learning
Evans Analytical Group (EAG), can access on the intranet are how to handle
a high-tech analytical services provided to help employees information over-
company, is using social media understand how to use the tools load. The app also includes edit-
to reduce the time it takes to and their value. able PDF files that allow sales
locate subject matter experts Sales representatives at reps working with their manag-
and to connect its globally dis- Coca-Cola Bottling Company ers during on-the-job coaching
persed employees. Employees Consolidated (CCBCC) are sessions to create and update
use Twitter, LinkedIn, or the responsible for business devel- action plans.
company intranet to find and opment and customer relation-
collaborate with subject matter ships. Most of their time is spent
DISCUSSION QUESTION
experts, acquire and contribute traveling to meet customer
As shown in Figure 7.1, continu-
knowledge, and discuss applica- needs or visiting prospects for
ous learning is supported by
tions of knowledge and skills new business. To help sales reps
knowledge management, infor-
learned in training. Employees better manage their workload
mal learning, and formal training
are encouraged to use blogs and meet their sales quotas,
and development. For which
and wikis by linking their usage CCBCC developed an online
of these features of a continu-
to their performance appraisals, learning program. Sales reps
ous learning strategy are social
publicly recognizing employees can use an iPad to access an
learning and apps most effec-
with the highest weekly usage app that links to the program’s
tive? Explain why.
rates, and CEO endorsements content as well as videos on
of their importance at company key concepts and action plan- SOURCE: Based on J. Thomas, “At EAG,
meetings. Training videos, tutori- ning templates. The program’s Learning’s All About the Chatter,” Chief Learn-
ing Officer, February 2015, pp. 42–43, 49;
als, and frequently asked ques- content covers how to get work P. Harris, “Relying on Street Smarts,” T + D,
tions (FAQs) that employees done, how to work smart, and October 2014, pp. 92–94.
Farmers Insurance uses a blended learning approach to deliver effective learning to its
multigenerational employees and insurance agents who are located across the country.71
Farmers’ training programs integrate face-to-face instruction, print, online, video, audio,
virtual simulations, and coaching. Technology is used for delivering knowledge and
instructor-led training is used for skill development.
Learning Learning Management System. A learning management system (LMS) refers to a tech-
Management nology platform that can be used to automate the administration, development, and
System (LMS) delivery of all of a company’s training programs. An LMS can provide employees, man-
Technology platform
that automates the
agers, and trainers with the ability to manage, deliver, and track learning activities.72
administration, devel- LMSs are becoming more popular for several reasons. An LMS can help companies
opment, and delivery reduce travel and other costs related to training, reduce time for program completion,
of a company’s training increase employees’ accessibility to training across the business, and provide adminis-
program. trative capabilities to track program completion and course enrollments. An LMS allows
companies to track all of the learning activity in the business. MasTec’s utility services
group uses an LMS to help manage its training programs.73 MasTec wanted to be able to
make training content available to employees who work in rural areas as well as in cities.
Also, they wanted to make it easier for employees to register for training and managers
to approve their enrollment, and to see training requirements, participation rates, and
training completion. Using MasTec’s online LMS, employees can log in and view
292
training courses and curriculum, access e-learning and videos, and schedule instructor-
led courses. Employees can also access company safety bulletins and enroll in U.S.
Department of Labor apprenticeship programs. Managers can request reports that show
training requirements and which employees have met them. They can display course
completion dates, training quiz scores, and expiration dates for compliance training that
employees may have completed.
Group- or Team-Building Methods

Group- or team-building methods are training methods designed to improve team or Group- or Team-
group effectiveness. Training is directed at improving the trainees’ skills as well as team Building Methods
effectiveness. In group-building methods, trainees share ideas and experiences, build Training techniques
that help trainees share
group identity, understand the dynamics of interpersonal relationships, and get to know ideas and experiences,
their own strengths and weaknesses and those of their co-workers. Group techniques build group identity,
focus on helping teams increase their skills for effective teamwork. All involve examina- understand the dynam-
tion of feelings, perceptions, and beliefs about the functioning of the team; discussion; ics of interpersonal
and development of plans to apply what was learned in training to the team’s perfor- relationships, and get
to know their own
mance in the work setting. Group-building methods fall into three categories: experien- strengths and weak-
tial programs, team training, and action learning. nesses and those of
their co-workers.
Experiential Programs. Experiential programs involve gaining conceptual knowledge
and theory; taking part in a behavioral simulation or activity; analyzing the activity; and
connecting the theory and activity with on-the-job or real-life situations.74 Experiential
For experiential training programs to be successful, several guidelines should be fol- Programs
lowed. The program needs to tie in to a specific business problem. The trainees need Training programs in
which trainees gain
to be moved outside their personal comfort zones but within limits so as not to reduce knowledge and theory,
trainee motivation or ability to understand the purpose of the program. Multiple learning participate in behavioral
modes should be used, including audio, visual, and kinesthetic. When preparing activi- simulations, analyze
ties for an experiential training program, trainers should ask trainees for input on the the activity, and con-
program goals. Clear expectations about the purpose, expected outcomes, and trainees’ nect the theory and
activity with on-the-job
role in the program are important. Finally, training programs that include experiential situations
learning should be linked to changes in employee attitudes, behaviors, and other busi-
ness results.
DaVita Healthcare Partners provides kidney-related health care services such as dial-
ysis.75 DaVita contracted with a training provider to develop a three-hour experiential
learning activity that would be collaborative, have a sense of purpose, and reinforce the
company’s values of teamwork, fulfillment, and fun. The goals of the program were to
understand the importance or why of work, understand how team members relate to
patients and to each other, and how to address challenges. The activity started with a dis-
cussion of the importance of communicating and collaborating for successful teamwork
on the job. Employees were divided into three member teams and given the task of build-
ing prosthetic hands that would be donated to organizations serving amputees. Building
the prostheses provided an opportunity for the achievement of the program’s goals. The
employees built more than 14,000 prostheses during the three-hour activity. The activity
concluded with a discussion of ways to apply what they learned to their jobs at DaVita.
Adventure learning, a type of experiential program, develops teamwork and leader- Adventure Learning
ship skills using structured outdoor activities.76 Adventure learning appears to be best Learning focused on
the development of
suited for developing skills related to group effectiveness, such as self-awareness, prob-
teamwork and leader-
lem solving, conflict management, and risk taking. Adventure learning may involve ship skills by using
strenuous, challenging physical activities such as dogsledding or mountain climbing. It structured outdoor
can also use structured individual and group outdoor activities such as climbing walls, activities.
going through rope courses, making trust falls, climbing ladders, and traveling from one
tower to another using a device attached to a wire that connects the two towers.
To improve their leadership skills and teamwork, lawyers at Weil, Gotshal, & Manges
in New York worked with New York City firefighters to learn how to hook up a fire
hose, set the water pressure, and extinguish fires.77 At the fire academy four-person
teams rushed into burning buildings, rescued passengers in simulated subway accidents
or other emergency drills. The FDNY program, Firefighter for a Day Team Challenge,
was created to help teams develop decision-making and problem solving skills.
Adventure learning can also include demanding activities that require coordination
and place less of a physical strain on team members. For example, Cookin’ Up Change
is one of many team-building courses offered around the United States by chefs, cater-
ers, hotels, and cooking schools.78 These courses have been used by companies such as
Honda and Microsoft. The underlying idea is that cooking classes help strengthen com-
munications and networking skills by requiring team members to work together to create
a full-course meal (a culinary feast!). Each team has to decide who does what kitchen
tasks (e.g., cooking, cutting, cleaning) and prepares the main course, salads, or dessert.
Often team members are required to switch assignments in midpreparation to see how
the team reacts to change.
For adventure learning programs to succeed, the exercises should be related to the
types of skills that participants are expected to develop. Also, after the exercises, a
skilled facilitator should lead a discussion about what happened in the exercise, what
was learned, how the exercise relates to the job situation, and how to set goals and apply
what was learned on the job.79
Does adventure learning work? Participants often report that they gained a greater
understanding of themselves and the ways they interact with their co-workers. One key
to the success of an adventure learning program may be the insistence that whole work
groups participate together so that group dynamics that inhibit effectiveness can emerge
and be discussed.
The physically demanding nature of adventure learning and the requirement that
trainees often have to touch each other in the exercises may increase the company’s
risk for negligence claims due to personal injury, intentional infliction of emotional dis-
tress, and invasion of privacy. Also, the Americans with Disabilities Act (discussed in
Chapter 3) raises questions about requiring employees with disabilities to participate in
physically demanding training experiences.
Team Training. Team training coordinates the performance of individuals who work
together to achieve a common goal. Such training is an important issue when informa-
tion must be shared and individuals affect the overall performance of the group. For
example, in the military as well as the private sector (think of nuclear power plants
or commercial airlines), much work is performed by crews, groups, or teams. Success
depends on coordination of individual activities to make decisions, team performance,
Cross-Training and readiness to deal with potentially dangerous situations (like an overheating nuclear
Team members under- reactor).
stand and practice each Team training strategies include cross-training and coordination training.80 In cross-
other’s skills.
training team members understand and practice each other’s skills so that members are
prepared to step in and take another member’s place. Coordination training trains the
Coordination team in how to share information and decisions to maximize team performance. Coordi-
Training
Trains the team in how
nation training is especially important for commercial aviation and surgical teams, who
to share information monitor different aspects of equipment and the environment but must share information
and decisions. to make the most effective decisions regarding patient care or aircraft safety and
performance. Team leader training refers to training the team manager or facilitator. This Team Leader
may involve training the manager how to resolve conflict within the team or help the Training
Training the team man-
team coordinate activities or other team skills.
ager or facilitator.
United Airlines (UAL) had its supervisors “lead” ramp employees in attending Pit
Instruction & Training (Pit Crew U), which focuses on the preparation, practice, and
teamwork of NASCAR pit crews. United used the training to develop standardized meth-
ods to safely and efficiently unload, load, and send off its airplanes.81 Pit Instruction &
Training, located outside of Charlotte, North Carolina, has a quarter-mile race track and
a pit road with places for six cars. The school offers programs to train new racing pit
crews, but most of its business comes from companies interested in having their teams
work as safely, efficiently, and effectively as NASCAR pit crews. The training was part
of a multimillion-dollar investment that includes updating equipment and providing lug-
gage scanners. The purpose of the training is to reinforce the need for ramp teams to
be orderly and communicate, to help standardize tasks of ramp team members, to help
shorten the time an airplane is serviced at the gate, and to improve morale.
The keys for safety, speed, and efficiency for NASCAR pit crews is that each member
knows what tasks to do (change tires, use air gun, add gasoline, clean up spills) and,
when the crew has finished servicing the race car, moves new equipment into position
anticipating the next pit stop. The training involved the ramp workers actually working
as pit crews. They learn how to handle jacks, change tires, and fill fuel tanks on race
cars. They are videotaped and timed just like real pit crews. They receive feedback from
professional pit crew members who work on NASCAR teams and trainers. Also, the
training requires them to deal with circumstances they might encounter on the job. For
one pit stop, lug nuts had been sprinkled intentionally in the area where the car stops to
see if the United employees would notice them and clean them up. On their jobs ramp
employees are responsible for removing debris from the tarmac so it doesn’t get sucked
into jet engines or harm equipment. For another pit stop, teams had to work with fewer
members, as sometimes occurs when ramp crews are understaffed due to absences.
Action Learning. In action learning teams or work groups get an actual business prob- Action Learning
lem, work on solving it and commit to an action plan, and are accountable for carrying Teams work on an
out the plan.82 Typically, action learning involves between 6 and 30 employees; it may actual business prob-
lem, commit to an
also include customers and vendors. There are several variations on the composition of action plan, and are
the group. In one variation the group includes a single customer for the problem being accountable for carry-
dealt with. Sometimes the groups include cross-functional team members (members ing out the plan.
from different company departments) who all have a stake in the problem. Or the group
may involve employees from multiple functions who all focus on their own functional
problems, each contributing to helping solve the problems identified.
Consider how Sony and Kirin Brewery used action learning teams to provide solu-
tions to urgent and complex business problems.83 Sony was losing income because of
sales revenue losses due to consumers’ increased use of downloaded music such as
iTunes. An action learning team of seven managers all from different countries met for a
week in London, England, to identify ways to increase revenue. The solution they devel-
oped was a services contract in which Sony Music would distribute music and arrange
artists’ tours, market their merchandise, and help get their music placed in movies and
television shows. This solution led to millions of dollars in revenue and helped Sony sign
contracts with music artists from other record labels. Leaking beer cans and stale beer
were examples of the types of quality problems that Kirin Brewery was experiencing,
resulting in decreased sales and undermining of customer relationships. An action learn-
ing team with representatives from customer service, sales, manufacturing, and quality
control was given the problem to develop a strategy for producing a higher quality can.
The action learning team developed a redesigned beer can resulting in reduced manufac-
turing time, lower costs, and fewer customer complaints.
Action learning is often part of quality improvement processes such as Six Sigma
training and Kaizen. Kaizen, the Japanese word for improvement, is one of the underly-
ing principles of lean manufacturing and total quality management (we discussed lean
Kaizen thinking in Chapter 1). Kaizen refers to practices participated in by employees from all
Practices participated in levels of the company that focus on continuous improvement of business processes.84
by employees from all Just Born, the company that makes Mike and Ikes and Peeps, uses the Wow . . . Now
levels of the company
that focus on con-
Improvement Process, a customized Kaizen process to improve business processes and
tinuous improvement of results.85 The Wow . . . Now Improvement Process includes training employees how to
business processes. identify improvement opportunities, collect data, make improvements, measure results,
and based on the results refine practices. As the Wow . . . Now Improvement Process
illustrates, Kaizen involves considering a continuous cycle of activities including plan-
ning, doing, checking, and acting (PDCA). Statistical process controls such as cause-
and-effect diagrams and scattergrams are used by employees to identify causes of
problems and potential solutions.
Advice for Choosing a Training Method

LO 7-7 Given the large number of training methods available to you, this task may seem diffi-
Design a training cult. One way to choose a training method is to compare methods. The first step in
session to maximize choosing a method is to identify the type of learning outcome that you want training to
learning.
influence. These outcomes include verbal information, intellectual skills, cognitive strat-
egies, attitudes, motor skills, or some combination. Training methods may influence one
or several learning outcomes.
Also, you should take into account that, there is considerable overlap between learn-
ing outcomes across the training methods. Group-building methods are unique because
they focus on individual as well as team learning (e.g., improving group processes). If
you are interested in improving the effectiveness of groups or teams, you should choose
one of the group-building methods (e.g., action learning, team training, adventure learn-
ing). Second, comparing the presentation methods to the hands-on methods illustrates
that most hands-on methods provide a better learning environment and transfer of train-
ing than do the presentation methods. The presentation methods are also less effective
than the hands-on methods. E-learning or blended learning can be an effective training
method for geographically dispersed trainees. E-learning and other technology-driven
training methods have higher development costs, but travel and housing cost savings
will likely offset development costs over time. To take advantage of the positive features
of both face-to-face and technology-based instruction, you should consider a blended
learning approach. For example, Nationwide Mutual Insurance uses several different
methods to train new agents.86 An interactive game is used to help agents understand the
lifecycle of an insurance policy. It includes an animated simulation using different cus-
tomer profiles. New agents watch and listen to experienced agents interacting and com-
municating with customers both face-to-face and over the phone. They also engage in
self-directed learning including calling competitors to get an insurance quote and evalu-
ating their experience. A final but important consideration is the training budget. If you
have a limited budget for developing new training methods, use structured on-the-job
training—a relatively inexpensive yet effective hands-on method. If you have a larger
budget, you might want to consider hands-on methods that facilitate transfer of training,
such as simulators.
EVALUATING TRAINING PROGRAMS

Training evaluation can provide useful information including the program’s strengths LO 7-8
and weaknesses, identifying which learners benefited most and least from participating, Choose appropriate
determining the program’s financial benefits and costs, and allowing the comparison of evaluation design and
training outcomes
the benefits and costs of different programs.
based on the training
Examining the outcomes of a program helps in evaluating its effectiveness. These objectives and evalua-
outcomes should be related to the program objectives, which help trainees understand tion purpose.
the purpose of the program. Training outcomes can be categorized as cognitive out-
comes, skill-based outcomes, affective outcomes, results, and return on investment.87 Training Outcomes
Table 7.7 shows the types of outcomes used in evaluating training programs and what is A way to evaluate the
measured and how it is measured. effectiveness of a train-
HCL Technologies, an IT consulting firm, grew during the last three years despite ing program based on
cognitive, skill-based,
the economic recession and competition.88 To be successful HCL employees must stay affective, and results
current on new tools and mobile and web technologies. To ensure that its employees’ outcomes.
skills are up-to-date, HCL developed a technical academy that provides online learning,
classroom instruction, on the job experiences, and mentoring. To facilitate employees’
continuous improvement employees are encourage to complete technical certifications
through taking courses and learning through virtual online labs which simulate real tech-
nical environments. Ninety percent of the learning programs are developed internally.
HCL invested millions of dollars in learning and through this investment the company
believes it can stay ahead of the competition and grow the business. HCL has found
that employees who finish certification programs generate more billable hours, stay
employed with the company longer, and are more satisfied.
Table 7.7
Outcomes Used in Evaluating Training Programs
OUTCOME WHAT IS MEASURED HOW MEASURED EXAMPLE
Cognitive outcomes
knowledge
interview
Skill-based outcomes
Affective outcomes
training
other cultures
Results
system or performance
records
Return on investment
comparison of costs
and benefits of the
program
Which training outcomes measure is best? The answer depends on the training objec-
tives. For example, if the instructional objectives identified business-related outcomes
such as increased customer service or product quality, then results outcomes should be
included in the evaluation. Both reaction and cognitive outcomes are usually collected
before the trainees leave the training site. As a result, these measures do not help deter-
mine the extent to which trainees actually use the training content in their jobs (transfer
of training). Skill-based, affective, and results outcomes measured following training
can be used to determine transfer of training—that is, the extent to which training has
changed behavior, skills, or attitudes or directly influenced objective measures related to
company effectiveness (such as sales).
Evaluation Designs
As shown in Table 7.8, a number of different evaluation designs can be applied to
training programs. Table 7.8 compares each evaluation design on the basis of who is
involved (trainees and/or a comparison group that does not receive training), when out-
come measures are collected (pretraining, posttraining), the costs, the time needed to
conduct the evaluation, and the strength of the design for ruling out alternative expla-
nations for the results (e.g., are improvements due to factors other than the training?).
In general, designs that use pretraining and posttraining measures of outcomes and
include a comparison group reduce the risk that factors other than training itself are
responsible for the evaluation results. This builds confidence to use the results to make
decisions. The trade-off is that evaluations using these designs are more costly and
time-consuming to conduct than evaluations not using pretraining or posttraining mea-
sures or comparison groups.
For example, if a manager is interested in determining how much employees’ com-
munications skills have changed as a result of a behavior-modeling training program,
a pretest/posttest comparison group design is necessary. Trainees should be randomly
assigned to training and no-training conditions. These evaluation design features give
the manager a high degree of confidence that any communication skill change is
the result of participating in the training program.89 This type of evaluation design
is also necessary if the manager wants to compare the effectiveness of two training
programs.
Table 7.8
Comparison of Evaluation Designs
MEASURES
DESIGN GROUPS PRETRAINING POSTTRAINING COST TIME STRENGTH
Posttest only Trainees No Yes Low Low Low

Pretest/posttest Trainees Yes Yes Low Low Medium
Posttest only with Trainees and No Yes Medium Medium Medium
comparison group comparison
Pretest/posttest with Trainees and Yes Yes Medium Medium High
comparison group comparison
Time series Trainees Yes Yes, several Medium Medium Medium
EVIDENCE-BASED HR
Sometimes naturally occurring comparison groups are available which provide the
opportunity to use the pretest/posttest with comparison group or posttest with com-
parison group evaluation designs. This can occur because of the realities of schedul-
ing employees to attend training (all employees cannot attend training at the same
time) or when new training is implemented. For example, some employees may be
scheduled to receive training later than others. The employees who do not initially
receive training can be considered the comparison group. Outcomes can be measured
and comparisons made between the employee group who received training and the
employees who are waiting to receive the training. Consider how Mountain American
Credit Union evaluated the effectiveness of a revised sales training program. Moun-
tain American tracked the average monthly sales of 30 new employees during their
first two months of employment. Ten of the 30 employees attended training before it
was revised (they called this the Traditional Group). Twenty employees attended the
program after it was revised (the Express Group). The revised program included more
interactions with a variety of customers with different needs. Monthly sales were
compared between the Express Group and the Traditional Group. Sales in the Express
Group exceeded sales in the Traditional Group in both the first (11.4 versus 3.5 aver-
age sales) and second month (34.83 versus 5.5) of employment.
SOURCE: Based on “Mountain American Credit Union: Flow Philosophy Training,” Training, January/February
2015, p. 103.
Many companies are interested in determining the financial benefits of learning,

including training courses and programs and development activities (development activ-
ities are discussed in the next chapter). One way to do this is by determining return on
investment (ROI). Return on investment (ROI) refers to the estimated dollar return from Return on
each dollar invested in learning. Keep in mind that ROI is not a substitute for outcomes Investment (ROI)
that also provide an indication of the success or usefulness of learning such as trainees’ Refers to the estimated
dollar return from
reactions, knowledge acquisition, or behavior change. Also, ROI is best suited for out- each dollar invested in
comes that can be quantified such as quality, accidents, or turnover, otherwise you will learning.
have to make a well-considered educated guess about the value of the outcome (e.g.,
how do you value increased leadership skills?).
Determining the Financial Benefits of Learning

To make an ROI analysis follow these steps:90
1. Identify outcomes (e.g., quality, accidents).
2. Place a value on the outcomes.
3. Determine the change in performance after eliminating other potential influences
on training results.
4. Obtain an annual amount of benefits (operational results) from training by compar-
ing results after training to results before training (in dollars).
5. Determine the training costs (direct costs + indirect costs + development
costs + overhead costs + compensation for trainees).
6. Calculate the total savings by subtracting the training costs from benefits (opera-
tional results).
7. Calculate the ROI by dividing benefits (operational results) by costs. The ROI
gives an estimate of the dollar return expected from each dollar invested in
training.
ROI can be measured and communicated based on a percentage or a ratio. For exam-
ple, assume that a new safety training program results in a decline of 5% in a company’s
accident rate. This provides a total annual savings (the benefit) of $150,000 in terms of
lost workdays, material and equipment damage, and workers’ compensation costs. The
training program costs $50,000 to implement (including both direct and indirect costs).
To calculate the ROI you need to subtract the training costs from the benefits, divide by
the costs, and multiply by 100. That is, ROI = [(150,000 – 50,000) ÷ 50,000] × 100% =
200%. The ROI for this program is 200%. Another way to think about ROI is to consider
it as a ratio based on the return for every dollar spent. In this example, the company
gained a net benefit of $2 for every dollar spent. This means the ROI is 2:1. Tata Con-
sultancy Service LTD, a global information technology services company headquartered
in India, measures ROI for its technology training programs.91 To calculate the ROI,
revenues earned as a result of training are calculated based on the billing rates of partici-
pants who attend the training and use the new skills. Then, training costs are subtracted
from the revenues. ROI for the technical programs is 483%.
Special Training Issues

LO 7-9 To meet the competitive challenges of sustainability, globalization, and technology dis-
Design a cross-cultural cussed in Chapter 1, companies must successfully deal with several special training
preparation program. issues. The special training issues include preparing employees to work in different
cultures abroad, managing workforce diversity, and socializing and orienting new
employees.
CROSS-CULTURAL PREPARATION
As we mentioned in Chapter 1, companies today are challenged to expand globally.
Because of the increase in global operations, employees often work outside their country
Expatriate of origin or work with employees from other countries. An expatriate works in a country
Employee sent by his other than his or her country of origin. The most frequently selected locations for expa-
or her company to man- triate assignments include the United States, China, Africa, and India.92 At Ernst &
age operations in a dif-
ferent country.
Young, about 2,600 of over 167,000 employees are on an international assignment at any
one time including 270 Americans in 30 countries including Brazil, China, India, Russia,
and South Africa.93 Many U.S. companies are using expatriate assignments as a training
tool. For example, employees who want top management positions, such as chief finan-
cial officer, need to understand how cultural norms and the political environment influ-
ence the movements in currencies and commodities in order to build effective global
financial plans.94
Guardian Industries, a glass manufacturer in Michigan, has expats in 18 different
countries.95 Guardian’s expat retention rate is close to 90% which is likely due to how it
treats the expats during and after their assignments. Guardian values expat experience by
looking at these employees first when considering whom to fill open positions. While on
their assignments, Guardian stays in contact with the expats. Expat assignments can be of
varying lengths depending on business needs. One former expat spent 13 years in Saudia
Arabia and Thailand moving from department head to plant manager. The expat and
his family asked to return to the U.S. but the company had no plant manager openings.
The expat was willing to take a lower-level position to learn things he didn’t yet know
about the business. When a plant manager position became available it was offered to
him. We discuss international human resource management in detail in Chapter 15. Here
the focus is on understanding how to prepare employees for expatriate assignments.
Cross-cultural preparation educates employees (expatriates) and their families who Cross-Cultural
are to be sent to a foreign country. To successfully conduct business in the global mar- Preparation
ketplace, employees must understand the business practices and the cultural norms of The process of educat-
ing employees (and
different countries. their families) who are
given an assignment in
a foreign country.
Steps in Cross-Cultural Preparation
To succeed overseas, expatriates (employees on foreign assignments) need to be
1. Competent in their areas of expertise.
2. Able to communicate verbally and nonverbally in the host country.
3. Flexible, tolerant of ambiguity, and sensitive to cultural differences.
4. Motivated to succeed, able to enjoy the challenge of working in other countries,
and willing to learn about the host country’s culture, language, and customs.
5. Supported by their families.96
One reason why U.S. expatriates’ often fail is that companies place more emphasis on
developing employees’ technical skills than on preparing them to work in other cultures.
This has resulted in failed overseas assignments which means companies don’t fully cap-
italize on business opportunities and incur costs for replacing employees who leave the
company after returning to the United States.97 Cross-cultural preparation is especially
important because North American companies plan to increase the length of expatriate
assignments from two to five years.98 Research suggests that the comfort of an expatri-
ate’s spouse and family is the most important determinant of whether the employee will
complete the assignment.99 Studies have also found that personality characteristics are
related to expatriates’ desire to terminate the assignment and performance in the assign-
ment.100 Expatriates who were extroverted (outgoing), agreeable (cooperative and toler-
ant), and conscientious (dependable, achievement oriented) were more likely to want to
stay on the assignment and perform well. This suggests that cross-cultural training may
be effective only when expatriates’ personalities predispose them to be successful in
assignments in other cultures.
The key to a successful foreign assignment is a combination of training and career
management for the employee and family.
Predeparture Phase
Before departure, employees need to receive language training and an orientation to the
new country’s culture and customs. It is critical that the family be included in orientation
programs.101 Expatriates and their families need information about housing, schools,
recreation, shopping, and health care facilities in the areas where they will live. Expa-
triates also must discuss with their managers how the foreign assignment fits into their
career plans and what types of positions they can expect upon return.
Cross-cultural training methods include presentational techniques, such as lectures
that expatriates and their families attend on the customs and culture of the host country,
immersion experiences, or actual experiences in the home country in culturally diverse
communities.102 Experiential exercises, such as miniculture experiences, allow expatri-
ates to spend time with a family in the United States from the ethnic group of the host
country. For example, an Indian trainer took 20 managers from Advanced Micro Devices
on a two-week immersion trip during which the group traveled to New Delhi, Bangalore,
and Mumbai, meeting with business persons and government officials.103 The program
required six months of planning, including providing the executives with information
on foods to eat, potential security issues, and how to interact in business meetings. For
example, Indians prefer a relatively indirect way into business discussions, so the man-
agers were advised to discuss current events and other subjects before talking business.
Research suggests that the degree of difference between the United States and the host
country (cultural novelty), the amount of interaction with host country citizens and host
nationals (interaction), and the familiarity with new job tasks and work environment (job
novelty) all influence the “rigor” of the cross-cultural training method used.104 Hands-on
and group-building methods are most effective (and most needed) in assignments with a
high level of cultural and job novelty that require a good deal of interpersonal interaction
with host nationals.
On-Site Phase
On-site training involves continued orientation to the host country and its customs
and cultures through formal programs or through a mentoring relationship. Expatri-
ates should be encouraged to develop social relationships both inside and outside of
the workplace.105 Expatriates and their families may be paired with an employee from
the host country who helps them understand the new, unfamiliar work environment
and community.106 Companies are also using the web to help employees on expatriate
assignments get answers to questions.107 Expatriates can use a website to get answers
to questions such as, How do I conduct a meeting here? or What religious philosophy
might have influenced today’s negotiation behavior? Knowledge management software
allows employees to contribute, organize, and access knowledge specific to their expatri-
ate assignment.
A major reason that employees refuse expatriate assignments is that they can’t afford
to lose their spouse’s income or are concerned that their spouse’s career could be derailed
by being out of the workforce for a few years.108 Some “trailing” spouses decide to use the
time to pursue educational activities that could contribute to their long-term career goals.
But it is difficult to find these opportunities in an unfamiliar place. GlaxoSmithKline’s
International Service Center, which handles all of its relocations from or to the United
States, offers a buddy system for spouses to connect with others who have lived in the
area for the past several years.109 General Motors offers career continuation services
which reimburse spouses $2,500 each year during the expatriate assignment for main-
taining professional licenses or certifications. The World Bank manages an Internet site
dedicated for expatriates where spouses can post resumes and ask for job leads.
Repatriation Phase
Repatriation Repatriation prepares expatriates for return to the parent company and country from the
The preparation of foreign assignment. Expatriates and their families are likely to experience high levels of
expatriates for return stress and anxiety when they return because of the changes that have occurred since their
to the parent company
and country from a
departure. Employees should be encouraged to self-manage the repatriation process.110
foreign assignment. Before they go on the assignment they need to consider what skills they want to develop
and the types of jobs that might be available in the company for an employee with those
skills. Because the company changes and colleagues, peers, and managers may leave
while the expatriate is on assignment, they need to maintain contact with key company
and industry contacts. Otherwise, on return the employees’ reentry shock will be height-
ened when they have to deal with new colleagues, a new job, and a company culture that
may have changed. This includes providing expatriates with company newsletters and
community newspapers and ensuring that they receive personal and work-related mail
from the United States while they are on foreign assignment. It is also not uncommon for
employees and their families to have to readjust to a lower standard of living in the
United States than they had in the foreign country, where they may have enjoyed maid
service, a limousine, private schools, and clubs. Salary and other compensation arrange-
ments should be worked out well before employees return from overseas assignments.
Aside from reentry shock, many expatriates decide to leave the company because the
assignments they are given upon returning to the United States have less responsibility,
challenge, and status than their foreign assignments.111 For example, after completing
five overseas assignments in operations and human resources positions in Indonesia and
China, a manager for Walmart Stores left the company because he missed the responsi-
bility and authority he had in these assignments.112 He couldn’t find a similar position
with Walmart when he completed his last international assignment. As a result, he took a
job at Kimberly-Clark’s international division as vice president of human resources. As
noted earlier, career planning discussions need to be held before the employees leave the
United States to ensure that they understand the positions they will be eligible for upon
repatriation. At Xerox, expatriates are assigned a sponsor who helps ensure the assign-
ment is a good fit and helps them transition back to the United States.113
Royal Dutch Shell, a joint Dutch and United Kingdom oil and gas company, has one
of the world’s largest expatriate workforces. To avoid expatriates who feel undervalued
and leave the company, Royal Dutch gets involved with expatriates and their career.
Inclusion
Resource planners track workers abroad, helping to identify their next assignment. Refers to creating an
Most expatriates know their next assignment three to six months before the move, and environment in which
all begin the next assignment with a clear job description. Expatriates who have the employees share a
potential to reach top-level management positions are placed in the home office every sense of belonging,
third assignment to increase their visibility to company executives. Expatriates are also mutual respect, and
commitment from others.
assigned technical mentors who evaluate their skills and help them improve their skills
through training at Royal Dutch’s training center.
LO 7-10
Develop a program for
effectively managing
MANAGING WORKFORCE DIVERSITY AND INCLUSION diversity.
Diversity can be considered any dimension that differentiates a person from another.114
For example at Verizon diversity means embracing differences and variety including Diversity Training
age, ethnicity, education, sexual orientation, work style, race, gender, and more. Inclusion Refers to learning
refers to creating an environment in which employees share a sense of belonging, mutual efforts that are designed
respect, and commitment from others so they can perform their best work.115 Inclusion to change employee
attitudes about diversity
allows companies to capitalize not only on the diversity of their employees but also on and or/develop skills
their customers, suppliers, and community partners. needed to work with a
Diversity training refers to learning efforts that are designed to change employee atti- diverse workforce.
tudes about diversity and or/develop skills needed to work with a diverse workforce.
However, training alone is insufficient to capitalize on the strengths of a diverse work- Managing Diversity
force.116 Managing diversity and inclusion involves creating an environment that allows and Inclusion
all employees to contribute to organizational goals and experience personal growth. This The process of creating
environment includes access to jobs as well as fair and positive treatment of all employ- an environment that
allows all employees to
ees. The company must develop employees who are comfortable working with people contribute to organiza-
from a wide variety of ethnic, racial, and religious backgrounds. Managing diversity tional goals and experi-
may require changing the company culture. It includes the company’s standards and ence personal growth.
norms about how employees are treated, competitiveness, results orientation, innova-
tion, and risk taking. The value placed on diversity is grounded in the company culture.
For example, BAE Systems requires that middle managers and executives take a two-
hour class on unconscious bias.117 Unconscious bias means that based on their back-
ground and experiences, managers might unintentionally make employment decisions
that give preference to individuals with certain characteristics such as the color of their
skin, age, body type, or personality. Trainees watch videos, participate in exercises, and
discuss research to help them understand why unconscious bias occurs and how to over-
come it. In addition to this training BAE Systems also takes steps to manage diversity
and inclusion.118 For example, BAE has changed the composition of the interview panels
used to hire middle managers. The interview panels now include women and people of
color as well as white males. As a result, the number of women and people of color in
managers’ roles has increased about 10%.
Diversity may enhance performance when organizations have an environment that
promotes learning from diversity. Research shows that diversity training has a small to
medium effect on affective (attitudes), cognitive (acquiring knowledge), and behavioral
outcomes.119 There is no evidence to support the direct relationship between diversity
and business.120 Rather, a company will see the success of its diversity efforts only if it
makes a long-term commitment to managing diversity. Successful diversity requires that
it be viewed as an opportunity for employees to (1) learn from each other how to better
accomplish their work, (2) be provided with a supportive and cooperative organizational
culture, and (3) be taught leadership and process skills that can facilitate effective team
functioning. Diversity is a reality in labor and customer markets and is a social expecta-
tion and value. Managers should focus on building an organizational environment, on
human resource practices, and on managerial and team skills that all capitalize on diver-
sity. As you will see in the discussion that follows, managing diversity requires difficult
cultural change, not just slogans on the wall!
Consider Sodexo’s diversity effort.121 Sodexo is the leading food and facilities man-
agement company in the United States, Canada, and Mexico, daily serving 10 million
customers. With employees in 80 countries representing 128 nationalities connecting
with customers on a daily basis, a policy of inclusion is not an option or a choice—it is a
business necessity. Sodexo is focused on gender representation, generational opportuni-
ties in the workplace, people with disabilities, and ethnic minority representation. As a
result, diversity and inclusion are core elements of the business strategy. Sodexo believes
that diversity and inclusion is a fundamental business objective focused on employees
(e.g., work culture, recruitment, talent development, work life effectiveness), custom-
ers, clients, and shareholders (e.g., supplier diversity, cross-market diversity council,
diversity consulting), and communities (e.g., Sodexo Foundation, Community Partners).
For example, some of the objectives include understanding and living the business case
for diversity and inclusion; increasing awareness of how diversity relates to business
challenges; creating and fostering a diverse work environment by developing manage-
ment practices that drive hiring, promotion, and retention of talent; engaging in rela-
tionship management and customer service to attract and retain diverse clients and
customers; and partnering with women and minority businesses to deliver food and
facility management services. Diversity and inclusion are core competencies at Sodexo.
Diversity and inclusion are part of employees’ training and managers’ annual perfor-
mance review; new employee orientation emphasizes Sodexo’s values and expectations
regarding diversity and inclusion.
Sodexo separates Equal Employment Opportunity (EEO) and legal compliance
training from diversity training. At Sodexo, diversity training is part of the managing
diversity strategy. Every three years, employees are required to take EEO and affirma-
tive action refresher courses. Top management is also involved in and committed to
managing diversity. The senior executives program includes ongoing classroom train-
ing that is reinforced with community involvement, sponsoring employee groups, and
mentoring diverse employees. Executives are engaged in learning the business case for
diversity and are personally held accountable for the company’s diversity agenda. Every
manager takes an eight-hour introductory class (Spirit of Diversity). Sodexo’s diversity
training involves learning labs focused on skill building and diversity awareness. Exam-
ples of these learning labs include Generations in the Workplace, Disability Awareness
Training, Cross-Cultural Communications, and Improving Team Effectiveness through
Inclusion. The company’s learning and development team develops customized learning
solutions for different functions and work teams. For example, a course related to selling
to a diverse client base was developed and offered to the sales force, and a cross-cultural
communications program was provided for recruiters.
In addition to diversity training activities, Sodexo has six employee network groups—
such as the African American Leadership Forum, People Respecting Individuality,
Diversity, and Equality (PRIDE), Honoring Our Nation’s Finest with Opportunity and
Respect (HONOR), and the Intergenerational Network Group (IGEN). These network
groups provide forums for helping employees feel a sense of community, learning from
each other, developing their careers, and sharing input and ideas to support the compa-
nys’ diversity efforts. Sodexo’s “Champions of Diversity” program rewards and recog-
nizes employees who advance diversity and inclusion.
To emphasize the importance of diversity for the company, at Sodexo each manager
has a diversity scorecard that evaluates their success in recruitment, retention, promo-
tion, and development of all employees. The scorecard includes both quantitative goals
as well as evaluation of behaviors such as participating in training, mentoring, and doing
community outreach. A proportion of their pay bonuses is determined by success in
these areas.
Sodexo has found that its diversity training and efforts to manage diversity are hav-
ing a positive impact on business results. Its mentoring program has led to increased
productivity, engagement, and retention of women and people of color. There was an
estimated return on investment of $19 for every dollar spent on the program. Sodexo
also has been awarded several new business contracts and retained clients because of
its involvement in managing diversity. Sodexo has also been recognized for its diversity
and inclusion efforts, which helps attract talented employees by signaling that the com-
pany cares about the well-being of all of its employees. Sodexo has been ranked number
2 on the 2012 DiversityInc Top 50 Companies for Diversity list. This marks the third
consecutive year that Sodexo has been ranked number 2. Sodexo is also recognized as a
top company for executive women and ranked among the top 10 companies for Latinos,
blacks, global diversity, and people with disabilities. Most effective programs to man-
age diversity, such as Sodexo’s diversity program, include the key components shown in
Table 7.9.
As should be apparent from this discussion, successful diversity programs involve
more than just an effective training program. They require an ongoing process of culture
change that includes top management support, a position in charge of managing diver-
sity (Chief Diversity Officer), as well as diversity policies and practices in the areas of
recruitment and hiring, training and development, and administrative structures, such as
conducting diversity surveys and evaluating managers’ progress on diversity goals.122
They also focus on enhancing diversity and inclusion with suppliers, vendors, and in
the communities where the company conducts business. ABB North America recently
Table 7.9
Key Components of Effective Managing Diversity Programs
Top Management Support
Recruitment and Hiring
Identifying and Developing Talent
of maximizing team performance.
and leadership programs.

Employee Support
use them to help the company develop business goals and understand the issues they are concerned with
(e.g., Asian Pacific employees, women, gays, lesbians, transgenders, Native Americans, veterans, Hispanics).
Ensuring Fair Treatment
Holding Managers Accountable
inclusion in the workplace.
opportunities for development, work/life balance, and perceptions of the company culture.
Improving Relationships with External Stakeholders
women.
members.
SOURCES: Based on B. Groysberg and K. Connolly, “Great Leaders Who Make the Mix Work,” Harvard Business Review, September 2013, pp. 68–76;
K. Bezrvkova, K. Jehn, and C. Spell, “Reviewing Diversity Training: Where Have We Been and Where Should We Go?” Academy of Management
Learning & Education 11 (2012), pp. 207–227; R. Anand and M. Winters, “A Retrospective View of Corporate Diversity Training from 1964 to the Pres-
ent,” Academy of Management Learning & Education 7 (2008), pp. 356–72; C. Chavez and J. Weisinger, “Beyond Diversity Training: A Social Infusion
for Cultural Inclusion,” Human Resource Management 47 (2008), pp. 331–50; V. Smith, “Texaco Outlines Comprehensive Initiatives,” Human Resource
Executive, February 1997, p. 13; “Diversity & Inclusion,” Verizon’s diversity program available at the company website, www.verizon.com.
created a chief diversity and inclusion officer position reporting directly to the CEO.123
This sends a message that diversity is supported and creates a position responsible for
managing diversity and inclusion and establishing metrics to track progress.
Onboarding and Socialization

Onboarding, or socialization, refers to the process of helping new hires adjust to social Onboarding
and performance aspects of their new jobs.124 This is important to help employees adjust Refers to the process
to their jobs by establishing relationships to increase satisfaction, clarifying goals and of helping new hires
adjust to social and per-
expectations to improve performance, and providing feedback, coaching, and follow-up formance aspects
activities to reduce turnover. There is wide variation in the types of onboarding proof their new jobs.
grams across companies. However, effective onboarding involves the four steps shown in
Figure 7.6. Effective onboarding does include understanding mundane tasks such as
completing tax forms and knowing how to complete time sheets or travel reimbursement
forms. But it goes beyond compliance to include enhancing new hires’ self-confidence,
their feeling socially comfortable and accepted by their peers and manager, understand-
ing their role and job expectations, responsibilities, and performance requirements, and
helping them “fit” into and understand the company culture. Effective onboarding is
related to many important outcomes for the employee and the company including higher
job satisfaction, organizational commitment, lower turnover, higher performance,
reduced stress and career effectiveness.125
Table 7.10 shows the characteristics of effective onboarding programs. Effective
onboarding programs actively involve the new employee. Several companies offer
onboarding programs that include the characteristics shown in Table 7.10. New hires
at Sierra Nevada Corporation, a company in the defense and aerospace industry, are
contacted by the company’s talent acquisition and training teams before orientation.126
The program includes a review of the company’s history, culture, vision, and values.
New hires’ first day on the job includes a meet-and-greet lunch date with their man-
ager. Employees continue onboarding for 90 days, which includes e-learning, mentor-
ing, on-the-job training, and a performance review. Booz Allen’s onboarding programs
involve face-to-face and online activities to enhance the effectiveness of their process.
Booz Allen, a strategy and technology consulting company, revised their onboarding
program to reduce the time it took for new employees to become productive, support
Figure 7.6
Connection
The Four Steps in
v
Onboarding
Culture
y
y, ,
v
Clarification
Compliance
y
SOURCE: Based on T. Bauer, “Onboarding New Employees: Maximizing Success” (Alexandria, VA: SHRM Foundation,
2010); G. Chao, A. O’Leary-Kelly, S. Wolf, H. Klein, and P. Gardner, “Organizational Socialization: Its Content and Con-
sequences,” Journal of Applied Psychology 79 (1994), pp. 730–743.
Table 7.10
Characteristics of Employees are encouraged to ask questions
Effective Onboarding Program includes information on both technical and social aspects of the job
Programs The employee manager has some onboarding responsibility
Debasing or embarrassing new employees is avoided
Employees learn about the company culture, history, language, products, services,
and customers
Follow-up of employee progress occurs at different points up to one year after
joining the company
Program involves participation, active involvement, and formal and informal
interaction between new hires and current employees
Relocation assistance is provided (such as house hunting or information sessions
on the community for employees and their significant others)
their decision to join the company, and develop knowledge regarding the company cul-
ture and core values.127 The new program, which spans 12 months, includes learning
activities and events organized into three phases. The first phase, known as “Engage,” is
designed to motivate and prepare new hires for their first year. Engage spans two to three
weeks. It includes learning activities that actively involve the new hires including work-
ing in cross-functional teams with members from different offices and levels. New hires
can use their laptops to explore online resources for career planning and development.
Teams of three new hires each begin to compete in a simulated year-long client project.
They have access to an experienced employee who can provide insights and examples
of how they have worked with clients during their career. Also, senior company leaders
deliver welcome messages and lead discussions on how to succeed at the company. The
second phase of the onboarding program, “Equip,” begins the new hires’ second week
and continues through their first six months. “Equip” provides employees with the skills,
behaviors, and tools they need for success at the company. It includes 30, 60, and 90 day
meetings with their manager, a series of e-newsletters, and a detailed onboarding tool kit
designed to reinforce and build on what they learned in the first phase of the program.
The third and final phase, “Excel,” emphasizes professional development, relationship
building, and acceptance of the company’s values. “Excel” involves the seven-month
period through the end of the new hires’ first year of employment. The employees’ first
annual performance review occurs at the end of “Excel.” In addition to the three phases,
new hires have access to and are encouraged to use the company’s social media and
knowledge management tool, known as the Onboarding Community, to discover and
share information via blogs and take part in online activities and resources that support
the onboarding program. As a result of the program, turnover for new employees who
have been with the company six months or less has been reduced by 4%. Also, new
employees’ time to productivity has been reduced, saving the company millions of dol-
lars in lost revenue.
Shape Corp. designs, engineers, manufactures, and tests metal and plastic products
that absorb impact energy and protect vehicles, their occupants, and pedestrians.128
Shape’s employees work with cutting torches, welders, grinders, and other machin-
ery. This makes it critical that Shape’s orientation program focuses on safety as well as
onboarding. Based on a needs assessment using employee focus groups, Shape found
that many new employees had little experience working in manufacturing and had begun
working prior to any training or orientation. As result, the orientation was changed
from one day to four days for all new employees, followed by a six-day manufacturing
technician training course for employees working in manufacturing. The new orientation
includes speakers, plant tours, introduction to the company’s mentoring program and the
employee’s mentor, web-based training, and instructor-led safety training. If employees
fail the manufacturing technology training course they are not allowed to work in manu-
facturing and may be terminated. The orientation program has been implemented glob-
ally to 1,800 employees in their native languages. Shape constantly revises the program
content based on focus groups who meet semi-annually. As a result of the new orienta-
tion program injury rates have decreased 75% among employees who have worked one
year or less at Shape. The program provides employees with the knowledge they need
to perform their jobs, improves their safety awareness, and helps them develop relation-
ships at work that enhance their socialization.
A LOOK BACK
Keller Williams
The chapter opener highlights the different training methods that Keller Williams
uses to support its business objectives.
QUESTIONS
1. What are the advantages and disadvantages of the blended learning approach
used at Keller Williams?
2. Is Keller Williams’ training strategic? Explain your answer.
SUMMARY
Technological innovations, new product markets, and a was to choose a method that would best accomplish the
diverse workforce have increased the need for companies to objectives of training. We also emphasized how training can
reexamine how their training practices contribute to learning. contribute to effectiveness through establishing a link with
In this chapter we discussed a systematic approach to train- the company’s strategic direction and demonstrating through
ing, including needs assessment, design of the learning envi- cost–benefit analysis how training contributes to profitabil-
ronment, consideration of employee readiness for training, ity. Managing diversity and cross-cultural preparation are
and transfer-of-training issues. We reviewed numerous train- two training issues that are relevant given company needs to
ing methods and stressed that the key to successful training capitalize on a diverse workforce and global markets.
KEY TERMS
Continuous learning, 265 Organizational analysis, 270 Opportunity to perform, 280
Training, 265 Person analysis, 270 Performance support systems, 280
Formal training, 265 Task analysis, 270 Communities of practice, 281
Informal learning, 266 Readiness for training, 275 Presentation methods, 283
Explicit knowledge, 266 Motivation to learn, 275 Teleconferencing, 284
Tacit knowledge, 266 Transfer of training, 277 Webcasting, 284
Knowledge management, 266 Manager support, 279 Hands-on methods, 285
Training design process, 267 Action plan, 279 On-the-job training (OJT), 285
Needs assessment, 269 Support network, 280 Apprenticeship, 286
Internship, 287 Learning management system Training outcomes, 297

Simulation, 287 (LMS), 292 Return on investment, 299
Avatar, 287 Group- or team-building methods, 293 Expatriate, 300
Virtual reality, 288 Experiential programs, 293 Cross-cultural preparation, 301
E-learning, 289 Adventure learning, 293 Repatriation, 302
Repurposing, 290 Cross-training, 294 Inclusion, 303
Massive open online courses Coordination training, 294 Diversity training, 304
(MOOCs), 290 Team leader training, 295 Managing diversity and inclusion, 304
Social media, 291 Action learning, 295 Onboarding, 307
Blended learning, 291 Kaizen, 296
1. Noetron, a retail electronics store, recently invested a 5. To improve product quality, a company is introducing a
large amount of money to train sales staff to improve computer-assisted manufacturing process into one of its
customer service. The skills emphasized in the program assembly plants. The new technology is likely to sub-
include how to greet customers, determine their needs, stantially modify jobs. Employees will also be required
and demonstrate product convenience. The company to learn statistical process control techniques. The new
wants to know whether the program is effective. What technology and push for quality will require employees
outcomes should it collect? What type of evaluation to attend numerous training sessions. More than 50%
design should it use? of the employees who will be affected by the new tech-
2. “Melinda,” bellowed Toran, “I’ve got a problem and nology completed their formal education more than
you’ve got to solve it. I can’t get people in this plant to 10 years ago. Only about 5% of the company’s employ-
work together as a team. As if I don’t have enough trouble ees have used the tuition reimbursement benefit. How
with the competition and delinquent accounts, now I have should management maximize employees’ readiness for
to put up with running a zoo. It’s your responsibility to see training?
that the staff gets along with each other. I want a human 6. A training course was offered for maintenance employ-
relations training proposal on my desk by Monday.” How ees in which trainees were supposed to learn how to
would you determine the need for human relations train- repair and operate a new, complex electronics system.
ing? How would you determine whether you actually had On the job, maintenance employees were typically
a training problem? What else could be responsible? told about a symptom experienced by the machine
3. Assume you are general manager of a small seafood com- operator and were asked to locate the trouble. During
pany. Most training is unstructured and occurs on the job. training, the trainer would pose various problems for
Currently, senior fish cleaners are responsible for teaching the maintenance employees to solve. He would point
new employees how to perform the job. Your company out a component on an electrical diagram and ask,
has been profitable, but recently wholesale fish dealers “What would happen if this component was faulty?”
that buy your product have been complaining about the Trainees would then trace the circuitry on a blueprint
poor quality of your fresh fish. For example, some fillets to uncover the symptoms that would appear as a result
have not had all the scales removed and abdomen parts of the problem. You are receiving complaints about
remain attached to the fillets. You have decided to change poor troubleshooting from maintenance supervisors
the on-the-job training received by the fish cleaners. How of employees who have completed the program. The
will you modify the training to improve the quality of the trainees are highly motivated and have the necessary
product delivered to the wholesalers? prerequisites. What is the problem with the training
4. A training needs analysis indicates that managers’ pro- course? What recommendations do you have for fixing
ductivity is inhibited because they are reluctant to del- this course?
egate tasks to their subordinates. Suppose you had to 7. What factors contribute to the effectiveness of
decide between using adventure learning and a lecture e-learning training programs?
using a virtual classroom for your training program. 8. Choose a job you are familiar with. Design a
What are the strengths and weaknesses of each tech- new employee onboarding program for that job.
nique? Which would you choose? Why? What factors Explain how your program contributes to effective
would influence your decision? socialization.
9. Why might employees prefer blended learning to train- 11. What can companies do to encourage informal learning?
ing using only iPads? 12. List and discuss the steps in cross-cultural preparation.
10. What learning condition do you think is most necessary
for learning to occur? Which is least critical? Why?
In the chapter we discussed the need for learners to be moti- 5 = Strongly Agree
vated so that training will be effective. What is your motiva- 4 = Somewhat Agree
tion to learn? Find out by answering the following questions. 3 = Neutral
Read each statement and indicate how much you agree with 2 = Somewhat Disagree
it, using the following scale: 1 = Strongly Disagree
1. I try to learn as much as I can from the courses I take. 5 4 3 2 1
2. I believe I tend to learn more from my courses than other
students do. 5 4 3 2 1
3. When I’m involved in courses and can’t understand
something, I get so frustrated I stop trying to learn. 5 4 3 2 1
EXERCISING STRATEGY
IBM Offers Training (and Pay Cuts) to Employees to Learn New Technologies
Some employees in IBM’s Global Technology Services outsourcing business. The purpose of the program is to help
group received e-mails from the company informing them employees develop key skills in areas such as cloud and
that a recent evaluation had identified them as an employee mobile computing and advanced data analytics. Because the
who had not kept pace with acquiring the necessary skills program can help employees in the long term to increase
and expertise needed to meet changing client needs, technol- their billable hours with clients, IBM believes the salary cut
ogy, and markets. As a result, IBM requires them to dedicate is a co-investment cost shared by both the employees and the
one day a week or up to 23 total days between October 2014 company. IBM calculated that it will lose one day of bill-
and March 2015 to focus on training. During this time, the ing clients each week that the employees are in the training
employee will take a pay cut, receiving only 90% of their program, which matches the 20% of the compensation of the
base salary. Once training is completed salaries will be employees involved. So the 10% salary cut actually splits the
restored in full. Employees can either take the training or difference.
look for job opportunities within IBM that better match their
QUESTIONS
current skills set.
1. Do you believe this program is strategic? Why or why
Employees have reacted negatively toward the program.
not? Should employees’ salaries be reduced for the time
Some feel the program with its pay cut is unfair because
they attend training programs? Provide a rationale for
their work has received positive evaluations from their man-
your answer.
agers. Also, employees noted that all workers in their group
2. What other ways might IBM convince the affected
were being assigned to the same training program regard-
employees to update and gain new skills?
less of their individual skill levels. A few employees believe
that the training program is a cost-cutting exercise that is SOURCES: P. Thibodeau, “IBM Cuts Pay by 10% for Workers Picked for
being presented as a training program. A spokesperson for Training,” Computerworld, www.computerworld.com; accessed February 12,
2015, S. Lohr, “IBM Offers Workers Training and Pay Cuts,” The New York
IBM emphasized that the salary cut and retraining program Times, http://bits.blogs.nytimes.com; accessed February 12, 2015, P. Cappelli,
was not standard practice across IBM but affected only a “‘Back to the Future’ at IBM,” Human Resource Executive, www.hreonline
few hundred employees in the U.S. technology services .com, accessed February 12, 2015.
MANAGING PEOPLE
Learning Opportunities for Employees Are No Accident at Farmers Insurance Group of Companies
Farmers Insurance Group of Companies is the third-largest relevant to their jobs rather than forcing them to learn every-
insurer of auto and homeowners insurance in the United States thing at once and having them frustrated with being unable
and also provides other insurance and financial products. to recall the information when they need it later. As a result
Farmers has 60,000 employees and exclusive and independent of the program revision, converting new agents to full-time
agents in every one of the 50 states. It processes millions of status improved by 12%, sales results exceeded sales goals
insurance quotes, new policies, renewals, and bills each year. by 11%, and agency success rates increased 10%.
In the insurance industry, legal requirements and the introduc- Recognizing that new technologies are potentially useful
tion of new products, processes and services make training and for training delivery and instruction, Farmers has started to
development critical for business success. At Farmers Insur- use virtual classrooms, mobile learning, social networks, elec-
ance, learning professionals are rewarded based on the degree tronic tablets such as iPads, and learning simulations. While
to which training programs change the behavior of employees taking courses at the University of Farmers, learners can use
and help the business meet its objectives. Learning is delivered electronic tablets to take notes, access websites and articles,
based on the desired end result. No wonder that Farmers has and view videos. The video capabilities of the tablets allow
been ranked in the Top 10 of Training magazine’s Top 125 for instructors to use them to record the learners’ practicing skills
the last four years and will be inducted into the Hall of Fame! and then provide feedback and coaching. Also, the instructors
Farmers uses a blended learning approach to deliver can create learning materials such as iBooks with embedded
effective learning to its multigenerational employees and videos. To encourage learning outside of a formal classroom
agents who are located across the U.S. Farmers believes that environment, Farmers developed iFarmers apps for custom-
rather than allowing learners to chose the type of training ers, sales agents, and employees. The iFarmers customer app
method that they believe best fits their style, a blended learn- helps customers learn about different insurance products. An
ing approach is more effective. As a result, its training pro- iClaims app gives customers access to input and managing
grams integrate face-to-face instruction, print, online, video, their insurance claims. The iAgent app provides business-
audio, virtual simulations, and coaching. Technology is used focused learning for sales agents. Farmers has also been exper-
for delivering knowledge and instructor-led training is used imenting with social networking for employees to collaborate,
for skill development. In the past five years the amount of create and share knowledge, and to provide performance sup-
learning delivered through instructor-led classroom based port. Some training programs are using the social network for
training has dropped from 90 to 50%. The other 50% is collaborative exercises. Farmers’ “Agency Insider” program
online or informal learning. For example, Farmers is using allows learners to specify whether they want to use Twitter,
various training methods to help its employees cope with the Facebook, e-mail, or an RSS feed.
changes made in claims processing, ratings, billing and prod-
QUESTIONS
uct systems in support of Farmers business strategy, which
1. Is Farmers’ training strategic? Why? What information
emphasizes customer experience, distribution, and product
did you consider in determining your answer?
management excellence. For example, field managers were
2. Does Farmers support informal learning? How? What
required to complete online training and webinars designed
else could the company do to facilitate informal learning?
to provide the new knowledge they needed. Then the man-
3. How would Farmers determine if training, instead of some
agers received instructor-led training, videos, and coaching
other reason, was responsible for the failure of new agents?
guides. Farmers also revised its training program for new
SOURCES: Based on www.farmers.com, website for Farmers Insurance;
agents as a result of an increased failure rate of new agen-
M. Weinstein, “Farmers’ Comprehensive Training Policy,” Training (January/
cies. The revised program includes more coaching, perfor- February 2013), pp. 42–44; L. Freifeld, “Farmers’ Premier Position,” Training
mance support aids, and multimedia methods. It also insures (January/February 2011), pp. 26–31; J. Salopek, “Thriving through Change,
that new agents learn knowledge and skills when they are Cultivating Growth,” T + D (October 2010), pp. 53–54.
How Nick’s Pizza Delivers Training Results
At first glance, Nick’s Pizza & Pub sounds as ordinary as a in one of Chicago’s northwest suburbs. But when you take
company can be: a pizza restaurant with two locations, each a look at the company’s performance measures, something
special seems to be going on. In an industry where 200% training in communication and leadership and study a book
employee turnover and operating profits around 6.5% are called Mastery: The Keys to Success and Long-Term Fulfill-
normal, Nick’s has to replace only 20% of its employees ment by George Leonard. Employees who complete these
each year and enjoys operating profits of 14% or more. requirements receive a Leadership 301 Passport, which
These results are amazing, especially for a business in which includes a checklist of behaviors they are expected to model
4 out of 10 employees are high school students. for the employees they lead. During the weeks that follow,
What makes the difference? It could be the culture at they watch for situations in which they or others are exhibit-
Nick’s. Rather than hiring expert managers and laying down ing each behavior, jotting down descriptions of what they
a lot of rules, Nick’s is choosy about who gets hired for witnessed. When the listed behaviors have all been observed
every position and then provides them with enough train- and noted, the participants take a course in training, and they
ing to operate skillfully and exercise sound judgment. The finally are ready to be named trainers themselves.
whole training program emphasizes ways to develop trust- Along with these formal training programs, Nick’s
worthy, dedicated employees. provides further on-the-job learning through coaching by
Training at Nick’s begins with a two-day orientation managers and trainers. The goal is to provide feedback in
program. Trainees learn the company’s purpose, values, the moment, not waiting for performance appraisal meet-
and culture, and they participate in role-playing activities to ings. For example, at the end of each shift, trainers will ask
practice those lessons. Then it’s on to skills training, begin- trainees to identify one thing they did well that day and one
ning with a course called simply 101. During that four-hour thing they would like to improve. In addition, managers are
hands-on lesson in the kitchen, all the new employees— taught to observe employees’ behavior on the job and ask
regardless of what their future job will be—learn to make a themselves whether what they see would make them want
pizza. From there, the trainees divide into work groups for to hire the employee. If yes, the manager is expected to give
the next level of training. In 201, these groups of trainees immediate positive feedback. If no, the manager is expected
embark on longer-term training to be certified in performing to coach the employee on how to do better.
a particular job. For example, an employee might train in
pizza making for a few weeks until he or she earns a certifi- QUESTIONS
cation as a pizza maker. 1. To the extent that you can provide details from the infor-
Class 201 ends the mandatory training, but Nick’s pro- mation given and a visit to the Nick’s Pizza website
vides incentives for further learning. An employee can par- (www.nickspizzapub.com), prepare a needs assessment
ticipate in additional 201 courses to learn more jobs and earn for training kitchen staff at Nick’s. Remember to include
a pay increase. An employee who earns two more certifica- organization, person, and task analyses.
tions (say, one in salad making and one in sandwich prepara- 2. How does the work environment support training at
tion) enjoys a wage increase of 75 cents an hour—and the Nick’s? In what additional ways, besides those described,
prestige of exchanging the uniform’s tan hat for a red hat. could the work environment support training?
Some employees earn nine certifications, after which their 3. Do you think an outside contractor could provide training
pay rises another $2 an hour, and they get to wear a black hat for Nick’s as effectively as its current methods do? Why
with their uniform. or why not? Are there some types or topics of training for
Yet another level of training prepares employees to be which a contractor might be appropriate? If so, which ones?
trainers themselves. This level—301—prepares employ- SOURCES: Nick’s Pizza & Pub corporate website, www.nickspizzapub.com,
ees to earn a top skill rating in their areas of certification. accessed May 18, 2015; and based on Bo Burlingham, “Lessons from a Blue-
Besides these task-oriented skills, the employees receive Collar Millionaire,” Inc., February 2010, www.inc.com.
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Performance Management
PART THREE
8
C H A P T E R
Assessment and Development of HRM
LEARNING OBJECTIVES
LO 8-1 Identify the major parts of an effective performance

management process. page 322
LO 8-2 Discuss the three general purposes of performance management. page 324
LO 8-3 Identify the five criteria for effective performance

management systems. page 326
LO 8-4 Discuss the five approaches to performance management, the specific

techniques used in each approach, and the way these approaches compare
with the criteria for effective performance management systems. page 331
LO 8-5 Choose the most effective approach to performance

measurement for a given situation. page 350
LO 8-6 Discuss the advantages and disadvantages of the different

sources of performance information. page 350
LO 8-7 Choose the most effective source(s) for performance

information for any situation. page 350
LO 8-8 Discuss the potential advantages of performance management, gamification,

social performance management, and electronic monitoring. page 355
LO 8-9 Distinguish types of rating errors, and explain how to

minimize each in a performance evaluation. page 358
LO 8-10 Conduct an effective performance feedback session. page 360

LO 8-11 Identify the cause of a performance problem. page 363
318
>>>
Reformatting Performance Evaluations
Many companies, such as Intel, Microsoft, and Gap to change to increase the likelihood that performance
Inc., have revamped their performance management will be effective. Employees are evaluated on the basis
systems to eliminate ratings they feel demoralize and of how they have performed against their goals rather
threaten employees, take too long for managers to than how they compare to other employees. More fre-
complete, and constrain performance discussions to quent performance feedback is especially important to
formal reviews conducted one or two times each year. Millennial employees who are used to real-time com-
Adobe Systems Inc. provides multimedia and creativ- munications through texting and postings.
ity software products including Photoshop, Adobe Managers no longer have to complete lengthy
Acrobat, Adobe Reader, and the files we call pdfs, performance evaluation forms and submit them to HR.
which stands for portable document format. Adobe HR’s role is to provide managers with consulting and
was experiencing an increase in turnover which it dis- tools to help with performance discussions rather than
covered was related to employees’ dissatisfaction with policing to see if reviews are completed or discus-
the performance review process, a lack of recognition, sions have occurred. Both managers and employees
and the lack of regular feedback about their perfor- can access a resource center that provides materials
mance. Like other companies, Adobe’s performance about coaching, giving feedback, and personal and
review included managers providing an overall rating professional development. For example, managers
of each employees on a 1 to 4 scale which was based might use the resource center to help them with tough
on how their performance compared to other employ- performance conversations such as those involving
ees. This created a competitive rather than the collab- giving employees difficult feedback. HR relies on what
orative work environment which Adobe values. Each is known as a skip-level process to insure that perfor-
year after employees received their reviews HR saw a mance discussions are occurring throughout the year.
spike in voluntary turnover which was especially con- This means that the manager’s own boss holds them
cerning because Adobe was losing good employees. accountable for having performance discussions. The
To improve performance management Adobe boss asks employees if discussions are occurring and
decided to abandon annual ratings and introduced if they have a development plan.
a new system called The Check-In. The Check-In There are several indications that Check-In is
emphasizes ongoing feedback. Instead of managers effective. HR includes questions about performance
only discussing performance with employees during management on its annual employee survey. Survey
the formal performance review as tended to occur in results show that 80% of employees responded that
the old system, Check-In encourages managers and they had regular performance meetings with their
employees to have informal performance discussions managers and felt supported by them. Since Check-
at least every other month. Managers are asked to In was introduced voluntary turnover has decreased
focus performance discussions around employees’ by 25%. Also, it is estimated that Check-In saves
performance objectives or goals and what resources Adobe managers 80,000 hours each year that were
they need to succeed. Also, employees’ career devel- previously spent completing employee performance
opment needs are part of the conversations. Manag- evaluation forms.
ers are given complete freedom to decide how often SOURCES: Based on R. Feintzeig, “The Trouble with Grading Employ-
and in what ways they want to set goals and provide ees,” The Wall Street Journal, April 22, 2015, pp. B1, B7; D. Meinert,
“Reinventing Reviews,” HR Magazine, April 2015, pp. 36–40; J. Ramirez,
feedback. The discussion is future-focused. That is, “Rethinking the Review,” Human Resource Executive, July/August 2013,
both the employee and the manager consider what pp. 16–19.
319
320 CHAPTER 8 Performance Management
Introduction
Companies that seek competitive advantage through employees must be able to man-
age the behavior and results of all employees. Traditionally, the formal performance
appraisal system was viewed as the primary means for managing employee perfor-
mance. Performance appraisal was an administrative duty performed by managers and
was primarily the responsibility of the human resource function. Managers now view
performance appraisal as an annual ritual—they quickly complete the form and use
it to catalog all the negative information they have collected on an employee over the
previous year. Because they may dislike confrontation and feel that they don’t know
how to give effective evaluations, some managers spend as little time as possible giv-
ing employees feedback. Not surprisingly, most managers and employees dislike per-
formance appraisals. “Time-consuming,” “frustrating,” “dread,” “burden,” and “pain”
are some of the words that come to employees’ minds when giving or receiving per-
formance reviews.1 Some of the reasons include the lack of consistency of use of per-
formance appraisals across the company; inability to differentiate among different
performance levels; and the inability of the appraisal system to provide useful data for
development, to help employees build their skills and competencies, or to build a high-
performance culture.2
Some have argued that all performance appraisal systems are flawed to the point that
they are manipulative, abusive, autocratic, and counterproductive. It is important to real-
ize that the criticisms voiced about annual performance appraisals shown in Table 8.1
are not the result of evaluating employee performance. Rather, they result from how the
performance management system is developed and used. If done correctly, performance
appraisal can provide several valuable benefits to both employees and the company. An
important part of appraising performance is to establish employee goals, which should
be tied to the company’s strategic goals. As the chapter opener illustrates, performance
management should not occur just once or twice each year during a formal evaluation.
Table 8.1
Examples of “Performance Management is an outdated concept. The entire conversation and mind-
Problems with set needs to change.”
Traditional Annual —VP of HR for Mozilla
Performance “Over time the rating system has become a huge obstacle. The employee would see
Reviews their rating first and then the whole review evolved into a discussion of Why this? Why
not that? It was no longer driving performance.”
—Executive VP for Global HR at Expedia
“There is a lot of pain in performance management.”
—Senior Consultant for Towers Watson
“. . . mainstream management is embedded in, and relies on, a culture of domination . . .
the performance review is the biggest hammer management has.”
—Samuel A. Culbert, author of Get Rid of the Performance Review
“In a traditional performance review, the employee listens until he hears the rating and
then tunes out because he’s doing the calculation in his head about how that will affect
his bonus.”
—Senior VP of Human Resources for Motorola Solutions
SOURCES: E. Goldberg, “Performance Management Gets Social,” HR Magazine, August 2014, pp. 35–38; J. Ramirez,
“Rethinking the Review,” Human Resource Executive, July/August 2013, pp. 16–19; V. Liberman, “Performance Man-
agement: To Get Results Stop Measuring People by Them,” The Conference Board Review, Summer 2013, pp. 57–63;
S. Culbert, Get Rid of the Performance Review (New York: Business Plus, 2010).
CHAPTER 8 Performance Management 321
The performance appraisal process tells top performers that they are valued by the com-
pany. It requires managers to at least annually communicate to employees their perfor-
mance strengths and deficiencies. A good appraisal process ensures that all employees
doing similar jobs are evaluated according to the same standards. The use of technology
can reduce the administrative burden of performance appraisal, improve the accuracy
of performance reviews, and ensure that employees get frequent feedback about their
performance. Also, a properly conducted appraisal can help the company identify the
strongest and weakest employees. It can help legally justify many HRM decisions such
as promotions, salary increases, discipline, and layoffs.
We believe that performance appraisal is only one part of the broader process of per-
formance management. We define performance management as the process through Performance
which managers ensure that employees’ activities and outputs are congruent with the Management
The means through
organization’s goals. Performance management is central to gaining competitive
which managers ensure
advantage. that employees’ activi-
Our performance management system has three parts: defining performance, measur- ties and outputs are
ing performance, and feeding back performance information. First, a performance man- congruent with the
agement system specifies which aspects of performance are relevant to the organization, organization’s goals.
primarily through job analysis (discussed in Chapter 4). Second, it measures those
aspects of performance through performance appraisal, which is only one method for Performance
managing employee performance. Third, it provides feedback to employees through Appraisal
The process through
performance feedback sessions so they can adjust their performance to the organiza-
which an organization
tion’s goals. Performance feedback is also fulfilled through tying rewards to performance gets information on
via the compensation system (such as through merit increases or bonuses), a topic to be how well an employee
covered in Chapters 11 and 12. is doing his or her job.
In this chapter, we examine a variety of approaches to performance management.
First we provide a brief summary of current performance management practices. Next, Performance
we present a model of performance that helps us examine the system’s purposes. Then Feedback
we discuss specific approaches to performance management and the strengths and weak- The process of pro-
viding employees
nesses of each. We also look at various sources of performance information. The errors
information regarding
resulting from subjective assessments of performance are presented, as well as the means their performance
for reducing those errors. Then we discuss some effective components to performance effectiveness.
feedback. Finally, we address components of a legally defensible performance manage-
ment system.
The Practice of Performance Management

Several recent surveys of human resource professionals suggest that most companies’
performance management practices require annual paper-driven reviews that include both
behaviors and business goals.3 While many companies use performance management to
manage employee performance and make pay decisions, less than 25% of the companies
use performance management to help manage talent through identifying training needs
and developing leadership talent. Sixty-six percent of companies used the same perfor-
mance management system across all levels of the organization. Unfortunately, although
performance management is a prevalent practice, it is often not valued or effectively
used. Sixty-six percent of employees say that the performance review process interferes
with their productivity and 65% believe it isn’t relevant to their jobs. Many HR profes-
sionals don’t believe that yearly performance evaluations are useful. More than one-half
(53%) gave their organizations a grade of C+ to B, another one-fifth (21%) chose a C,
and only 2% gave an A in performance management to their organizations.
Although almost one-half (46%) of HR professionals agreed with the statement that
managers at their companies “did an effective job of differentiating between poor, aver-
age, and strong performers,” about one-third (32%) had some level of disagreement with
this statement. Similarly, although two-fifths (42%) agreed that managers at their organi-
zation were “willing to ‘make the tough calls,’” another 38% disagreed.
The Process of Performance Management

LO 8-1 As you may have already figured out from the chapter introduction and your own experi-
Identify the major parts ences, many employees and managers dislike the annual performance review. Although
of an effective perfor-
performance management does include the once or twice a year formal appraisal or eval-
mance management
process. uation meeting, effective performance management is a process, not an event. Figure 8.1
shows the performance management process. As shown in the process model, providing
feedback and the formal performance evaluation are important but they are not the only
important parts of an effective performance management process that contributes to the
company’s competitive advantage.4 Also, visible CEO and senior management support
Figure 8.1
Model of the Effective Performance Management Process
Step 1
Define performance
outcomes for company
division and department
Step 2
Develop employee goals,
behavior, and actions to
achieve outcomes
Step 5 Step 6
Identify improvements Provide consequences
needed for performance
results
Step 3
Provide support and
ongoing performance
discussions
Step 4
Evaluate performance
SOURCE: Based on E. Pulakos, R. Mueller-Hanson, R. O’Leary, and M. Meyrowitz, Building a High-Performance Culture: A Fresh Look at
Performance Management (Alexandria, VA: SHRM Foundation, 2012); H. Aguinis, “An Expanded View of Performance Management,” in J.
W. Smith and M. London (eds.), Performance Management (San Francisco: Jossey-Bass, 2009), pp. 1–43; and J. Russell and L. Russell, “Talk
Me through It: The Next Level of Performance Management,” T + D, April 2010, pp. 42–48.
for the system are necessary. This ensures that the system is consistently used across the
company, appraisals are completed on time, and giving and receiving performance feed-
back is an accepted part of the company culture. The first two steps of the performance
management process involve identifying what the company is trying to accomplish
(goals or objectives), a set of key performance dimensions that represent critical factors
or drivers that influence the goals or objectives, and then develop performance measures
for the key performance dimensions.5 The first step in the performance management
process starts with understanding and identifying important performance outcomes or
results. Typically, these outcomes or results benefit customers, the employees’ peers or
team, and the organization itself. The company’s and department or team’s strategy,
mission, and values play an important part in determining these outcomes. Chapter 2
pointed out that most companies pursue some type of strategy to reach revenue, profit,
and market share goals. Divisions, departments, teams, and employees must align their
goals and behaviors, and choose to engage in activities that help achieve the organiza-
tion’s strategy and goals. The second step of the process involves understanding the pro-
cess (or how) to achieve the goals established in the first step. This includes identifying
measurable goals, behaviors, and activities that will help the employee achieve the per-
formance results. The goals, behaviors, and activities should be measurable so that the
manager and employee can determine if they have been achieved. The goals, activities,
and behaviors should be part of the employee’s job description. Step three in the process,
organizational support, involves providing employees with training, necessary resources
and tools, and frequent feedback communication between the employee and manager
focusing on accomplishments as well as issues and challenges influencing performance.
For effective performance management managers and employees have to value feedback
and regularly exchange it. Managers need to make time to provide feedback as well as
train in how to give and receive it. Step four involves performance evaluation, that is,
when the manager and employee discuss and compare the targeted performance goal
and supporting behaviors with the actual results. This typically involves the annual or
biannual formal performance review. As we will see later in the chapter there are many
ways to help make this formal review more of a performance conversation designed
to identify and discuss opportunities to improve and less of a one-way evaluation by
the manager. One way to make the formal evaluation more effective is for managers to
engage in frequent performance conversations with employees rather than wait for the
formal annual review (step 3). The final steps of the performance management cycle
involve the employee and manager identifying what the employee (with help from the
manager) can do to capitalize on performance strengths and address weaknesses (step 5)
and providing consequences for achieving (or failing to achieve) performance outcomes
(step 6). This includes identifying training needs, adjusting the type or frequency of
feedback the manager provides to the employee, clarifying, adjusting, or modifying per-
formance outcomes, and discussions of behaviors or activities that need improvement
or relate to new priorities based on changes or new areas of emphasis in organizational
or department goals. Achieving performance results may relate to compensation (sal-
ary increases, cash bonuses), recognition, promotion, development opportunities, and
continued employment. This depends on the purposes the company decides on for the
performance management system (see our discussion in the section “Purposes of Perfor-
mance Management”). Finally, it is important to realize that what employees accomplish
(or fail to accomplish) and their consequences help shape changes in the organizational
business strategy and performance goals and the ongoing performance management
process. Evaluating the effectiveness of the performance management system is neces-
sary to determine needed changes. This could include gathering comments about the
managers’ and employees’ concerns about the system, analyzing rating data to determine
if they are being affected by rating errors, reviewing objectives for their quality, and
studying the relationship between employees meeting objectives and department and
organizational results.
For example, Hilton Worldwide decided to develop a new performance management
system from scratch to create a consistent process for helping its employees improve.6
The new system is business-focused and easy to administer and use. The goal of the sys-
tem is encouraging performance conversations between managers and employees out-
side of formal review meetings. The system focuses on what gets done and how it gets
done by assessing behaviors and competencies. Managers set objectives at the begin-
ning of the year and check in with employees at the middle of the year to discuss how
they are performing. Managers enter comments on employees’ performance directly
into the online performance management system. Managers and employees can enter
more comments about performance between the mid-year and end-of-year review. This
encourages continuous feedback between managers and employees outside of the formal
midyear and end of year review meetings. A recent survey showed that employee satis-
faction with the new performance management process increased by 37% compared to
the prior system. The “Integrity in Action” box shows how company leaders’ behavior
can help create a culture that encourages continuous improvement through performance
feedback and recognition.
Purposes of Performance Management

LO 8-2 The purposes of performance management systems are of three kinds: strategic, admin-
Discuss the three gen- istrative, and developmental.
eral purposes of perfor-
mance management.
STRATEGIC PURPOSE
First and foremost, a performance management system should link employee activities
with the organization’s goals. One of the primary ways strategies are implemented is
through defining the results, behaviors, and, to some extent, employee characteristics
that are necessary for carrying out those strategies, and then developing measurement
and feedback systems that will maximize the extent to which employees exhibit the char-
acteristics, engage in the behaviors, and produce the results.
Performance management is critical for companies to execute their talent manage-
ment strategy, that is, to identify employees’ strengths and weaknesses, drive employee
engagement, link employees to appropriate training and development activity, and reward
good performance with pay and other incentives. Also, performance management prac-
tices can relate positively to companies’ financial success.7 For example, among busi-
ness executives who believe their companies are excellent or very good at performance
management, 76% of their companies experienced a revenue increase. In contrast, 30%
of companies that were less effective in performance management experienced a decline
in revenues, and 20% performed more poorly than their competitors.
ADMINISTRATIVE PURPOSE
Organizations use performance management information (performance appraisals, in
particular) in many administrative decisions: salary administration (pay raises), pro-
motions, retention–termination, layoffs, and recognition of individual performance.8
Despite the importance of these decisions, however, many managers, who are the source
INTEGRITY IN ACTION
Creating a Culture of Continuous Performance Improvement
Like other hospital groups, that continuous improvement he wrote let-
Kaiser Permanente follows is a powerful, uniting value for ters to all
the universal protocols and an organization of over 180,000 180,000 employees celebrating
processes for patient care and staff members working with a performance improvement,
buys and uses state-of-the-art millions of patients. According great research, or other rewards
medical equipment and technol- to Halvorson, three conditions such as when Kaiser’s hospitals
ogy. But George Halvorson, who must exist to nurture a culture were found to have the lowest
recently retired as chairman and of continuous improvement. number of pressure ulcers or
chief executive officer of Kaiser Employees must understand when Kaiser received the top
Permanente, believed that a how small improvements quality assurance score from a
culture of continuous improve- snowball to make a big differ- national health care accredita-
ment is what distinguishes his ence, they must love improving tion organization.
organizations from its competi- because they are passionate
tors. During his tenure as CEO about their work, and they need DISCUSSION QUESTION
he helped to install a culture of confidence in their peers to What other things can a com-
continuous improvement that believe that the organization pany CEO do to create a culture
allowed employees to know is capable of making progress. of continuous improvement?
it is acceptable to speak out As CEO, Halvorson reinforced SOURCE: Based on G. Halvorson, “The Cul-
about a way to do something these conditions through his ture to Cultivate,” Harvard Business Review,
better. Halvorson emphasized actions. Every Friday afternoon July–August 2013, p. 34.
of the information, see the performance appraisal process only

as a necessary evil they must go through to fulfill their job
requirements. They feel uncomfortable evaluating others and
feeding those evaluations back to the employees. Thus, they
tend to rate everyone high or at least rate them the same, mak-
ing the performance appraisal information relatively useless.
For example, one manager stated, “There is really no getting
around the fact that whenever I evaluate one of my people, I
stop and think about the impact—the ramifications of my deci-
sions on my relationship with the guy and his future here. . . .
Call it being politically minded, or using managerial discre-
tion, or fine-tuning the guy’s ratings, but in the end, I’ve got to © Stockbyte/Getty Images/RF
live with him, and I’m not going to rate a guy without thinking Performance management is critical for
about the fallout.”9 executing a talent management system
and involves one-on-one contact with
managers to ensure that proper training and
DEVELOPMENTAL PURPOSE development are taking place.
A third purpose of performance management is to develop employ-
ees. When employees are not performing as well as they should, performance manage-
ment seeks to improve their performance. The feedback given during a performance
evaluation process often pinpoints the employee’s weaknesses. Ideally, however, the per-
formance management system identifies not only any deficient aspects of the employee’s
performance but also the causes of these deficiencies—for example, a skill deficiency, a
motivational problem, or some obstacle holding the employee back.
325
Managers are often uncomfortable confronting employees with their performance

weaknesses. Such confrontations, although necessary to the effectiveness of the work
group, often strain everyday working relationships. Giving high ratings to all employees
enables a manager to minimize such conflicts, but then the developmental purpose of the
performance management system is not fully achieved.10 Development doesn’t just focus
on poor performers. Development also involves helping good performers get the training
and other opportunities they need to enhance their skill set and advance their careers.
Texas Roadhouse revamped the performance management system for 500 employees
at the company’s corporate headquarters.11 Under the previous system managers were
having a hard time understanding the meaning of an overall rating of three on a five-
point scale. For some managers a “three” meant that an employee was doing a good
job while for others it meant that the employee was merely “average.” The new system
eliminated the rating and replaced it with a process called GPS, which stands for growth,
plan, and support. The objective of GPS is to encourage managers to have frequent per-
formance conversations with employees and for employees to take more responsibility
for their performance and development. A month before the anniversary of their hiring
date, employees are reminded to have GPS meetings with their managers to discuss their
career goals and the resources they need to perform successfully. HR provides a discus-
sion guide to help managers and employees have an effective conversation. Also, in the
old performance management system managers tended to spend more time working with
poor performers who represented less than 10% of employees. GPS emphasizes the need
to spend similar amounts of time in performance conversations with good and high-
performing employees. This means more frequent meetings with employees who need to
improve but also having discussions with high performers, the top talent in the company,
about how training and development opportunities can help them further develop their
skills and reach their career goals.
An important step in performance management is to develop the measures by which
performance will be evaluated. We next discuss the issues involved in developing and
using different measures of performance.
Performance Measures Criteria

LO 8-3 In Chapter 4 we discussed how, through job analysis, one can analyze a job to deter-
Identify the five criteria mine exactly what constitutes effective performance. Once the company has determined,
for effective perfor-
through job analysis and design, what kind of performance it expects from its employees,
mance management
systems. it needs to develop ways to measure that performance. This section presents the criteria
underlying job performance measures. Later sections discuss approaches to performance
measurement, sources of information, and errors.
Although people differ about criteria to use to evaluate performance management
systems, we believe that five stand out: strategic congruence, validity, reliability, accept-
ability, and specificity.
Strategic
Congruence
The extent to which the STRATEGIC CONGRUENCE
performance manage- Strategic congruence is the extent to which a performance management system elicits
ment system elicits job performance that is congruent with the organization’s strategy, goals, and culture. If
job performance that
is consistent with the a company emphasizes customer service, then its performance management system
organization’s strategy, should assess how well its employees are serving the company’s customers. Strategic
goals, and culture. congruence emphasizes the need for the performance management system to guide
employees in contributing to the organization’s success. This requires systems flexible

enough to adapt to changes in the company’s strategic posture. The “Competing through
Globalization” box shows the important role of performance management in developing
a global business.
Many companies such as Brinker International, Federal Express, and Coca-Cola have
introduced measures of critical success factors (CSFs) or key performance indicators
(KPIs) into their performance management systems.12 CSFs are factors in a company’s
business strategy that give it a competitive edge. Companies measure employee behavior
that relates to attainment of CSFs, which increases the importance of these behaviors for
employees. Employees can be held accountable and rewarded for behaviors that directly
relate to the company attaining the CSFs.
Brinker International Inc., known for Chili’s Restaurants, used to have 40 KPIs but
employees were confused about what performance outcomes were expected. Brinker
reduced the number of KPIs from 40 to 4. The focus on a smaller number of KPIs helped
motivate and focus employees, resulting in a return of 20% to shareholders, lowered
turnover, and increased employee engagement survey scores.
One challenge that companies face is how to measure customer loyalty, employee
satisfaction, and other nonfinancial performance areas that affect profitability. To effec-
tively use nonfinancial performance measures managers need to:13
∙ Develop a model of how nonfinancial performance measures link to the company’s

strategic goals. Identify the performance areas that are critical to success.
∙ Using already existing databases, identify data that exists on key performance mea-
sures (e.g., customer satisfaction, employee satisfaction surveys). If data are not
available, identify a performance area that affects the company’s strategy and perfor-
mance. Develop measures for those performance areas.
∙ Use statistical and qualitative methods for testing the relationship between the per-
formance measures and financial outcomes. Regression and correlation analysis as
well as focus groups and interviews can be used. For example, studies show that
employees’ involvement, satisfaction, and enthusiasm for work are significantly
related to business performance including customer satisfaction, productivity, and
profitability.14
∙ Revisit the model to ensure that the nonfinancial performance measures are appro-
priate and determine whether new measures should be added. This is important
to understand the drivers of financial performance and to ensure that the model is
appropriate as the business strategy and economic conditions change.
∙ Act on conclusions that the model demonstrates. For example, Sears found that
employee attitudes about the supervision they received and the work environment
had a significant impact on customer satisfaction and shareholder results. As a
result, Sears invested in managerial training to help managers do a better job of
holding employees accountable for their jobs while giving them autonomy to per-
form their roles.15
∙ Audit whether the actions taken and the investments made produced the desired
result.
Most companies’ appraisal systems remain constant over a long time and through a
variety of strategic emphases. However, when a company’s strategy changes, its employ-
ees’ behavior needs to change too.16 The fact that appraisal systems often do not change
may account for why many managers see performance appraisal systems as having little
impact on a firm’s effectiveness.
Timely and Future-Focused Feedback Helps Ensure
Travel Customers Are Satisfied Around the World
Expedia Inc. is an online travel Expedia’s training consisted employees feel
company with more than of providing managers with an the new performance manage-
140 travel websites in nearly overview of the new perfor- ment system is an improvement.
70 countries. Expedia wanted mance management system, For example, an employee
employees to receive more helping them understand how survey found that over 40%
ongoing real-time feedback to give feedback, and under- reported that it had more focus
which they could use to change standing the link between per- on performance strengths and
their performance rather than formance conversations and areas for improvement, 70%
limiting performance conversa- compensation decisions. Expe- believed it had a good discus-
tions to the past-focused feed- dia also provided training for sion of future-focused topics
back they received during their employees so they understood including business results and
formal performance review. the new performance manage- behaviors, and 61% felt the pro-
The new emphasis in Expe- ment system and how they could gram improved how Expedia
dia’s Passport to Performance use it to benefit their develop- manages performance.
performance management ment and career. For example,
program meant that managers in the training focused on how DISCUSSION QUESTION
were required to have weekly to provide feedback, managers One of the criteria used to evalu-
or at least bi-weekly conversa- were told to stop using adjec- ate a performance management
tions with employees that were tives such as “be proactive” and system is development. How
focused on their performance, instead use verbs to describe would you evaluate Expedia’s
development, and career path the behavior they wanted to see Passport to Performance pro-
along with completing a formal in employees such as “think- gram according to this criterion?
mid-year review. For this shift ing through what could happen Explain your evaluation.
in focus to be effective, manag- and planning before something
ers needed training on how to becomes an emergency.” Effec- SOURCES: Based on K. Kuehner-Hubert,
provide feedback in specific, tive performance was now based “Passport to Performance,” Chief Learning
Officer, July 2013, pp. 42–47; J. Ramirez,
behavior-based language that on business goals and desired “Rethinking the Review,” Human Resource
employees could understand. behaviors. Both managers and Executive, July/August 2013, pp. 16–19.
VALIDITY
Validity Validity is the extent to which a performance measure assesses all the relevant—and only
The extent to which the relevant—aspects of performance. This is often referred to as “content validity.” For
a performance mea-
a performance measure to be valid, it must not be deficient or contaminated. As you can
sure assesses all the
relevant—and only the see in Figure 8.2, one of the circles represents “true” job performance—all the aspects of
relevant—aspects of job performance relevant to success in the job. On the other hand, companies must use some
performance. measure of performance, such as a supervisory rating of performance on a set of dimen-
sions or measures of the objective results on the job. Validity is concerned with maxi-
mizing the overlap between actual job performance and the measure of job performance
(the green portion in the figure).
A performance measure is deficient if it does not measure all aspects of perfor-
mance (the brown portion in the figure). An example is a system at a large university
that assesses faculty members based more on research than teaching, thereby relatively
ignoring a relevant aspect of performance.
328
Figure 8.2
Contamination and
Deficiency of a
Job Actual, or “true,” Job Performance
performance job Measure
measure performance
Contamination Validity Deficiency
A contaminated measure evaluates irrelevant aspects of performance or aspects that

are not job related (the gold portion in the figure). The performance measure should
seek to minimize contamination, but its complete elimination is seldom possible. An
example of a contaminated measure is the use of actual sales figures for evaluating sales-
persons across very different regional territories. Often sales are highly dependent upon
the territory (number of potential customers, number of competitors, economic condi-
tions) rather than the actual performance of the salesperson. A salesperson who works
harder and better than others might not have the highest sales totals because the territory
simply does not have as much sales potential as others. Thus, these figures alone would
be a measure that is strongly affected by things beyond the control of the individual
employee.
RELIABILITY
Reliability refers to the consistency of a performance measure. One important type of Reliability
reliability is interrater reliability: the consistency among the individuals who evaluate The consistency of a
the employee’s performance. A performance measure has interrater reliability if two performance measure;
the degree to which a
individuals give the same (or close to the same) evaluations of a person’s job perfor- performance measure
mance. Evidence seems to indicate that most subjective supervisory measures of job is free from random
performance exhibit low reliability.17 With some measures, the extent to which all the error.
items rated are internally consistent is important (internal consistency reliability).
In addition, the measure should be reliable over time (test–retest reliability). A mea-
sure that results in drastically different ratings depending on when the measures are
taken lacks test–retest reliability. For example, if salespeople are evaluated based on
their actual sales volume during a given month, it would be important to consider their
consistency of monthly sales across time. What if an evaluator in a department store
examined sales only during May? Employees in the lawn and garden department would
have high sales volumes, but those in the men’s clothing department would have some-
what low sales volumes. Clothing sales in May are traditionally lower than other months.
One needs to measure performance consistently across time.
ACCEPTABILITY
Acceptability refers to whether the people who use a performance measure accept it. Acceptability
Many elaborate performance measures are extremely valid and reliable, but they con- The extent to which a
sume so much of managers’ time that they refuse to use it. Alternatively, those being performance measure
is deemed to be satis-
evaluated by a measure may not accept it. factory or adequate by
Acceptability is affected by the extent to which employees believe the performance those who use it.
management system is fair. As Table 8.2 shows, there are three categories of perceived
Table 8.2
Categories of IMPORTANCE FOR
Perceived Fairness PERFORMANCE
and Implications FAIRNESS MANAGEMENT
for Performance CATEGORY SYSTEM IMPLICATIONS
Management
Systems Procedural Development
fairness opportunity to participate in
development of system.
evaluating different employees.
Interpersonal Use
fairness
evaluation.
of respect and courtesy.

Outcome Outcomes
fairness regarding performance
evaluations and standards.
regarding rewards.
SOURCE: Adapted from S. W. Gilliland and J. C. Langdon, “Creating Performance Management Systems That Promote
Perceptions of Fairness,” in Performance Appraisal: State of the Art in Practice, ed. J. W. Smither. Copyright © 1998 by
Jossey-Bass, Inc. This material is used by permission of John Wiley & Sons, Inc.
fairness: procedural, interpersonal, and outcome fairness. The table also shows spe-
cifically how the performance management system’s development, use, and outcomes
affect perceptions of fairness. In developing and using a performance management sys-
tem, managers should take the steps shown in the column labeled “Implications” in
Table 8.2 to ensure that the system is perceived as fair. Research suggests that perfor-
mance management systems that are perceived as unfair are likely to be legally chal-
lenged, be used incorrectly, and decrease employee motivation to improve.18
SPECIFICITY
Specificity Specificity is the extent to which a performance measure tells employees what is expected
The extent to which a of them and how they can meet these expectations. Specificity is relevant to both the
performance measure strategic and developmental purposes of performance management. If a measure does
gives detailed guid-
ance to employees
not specify what an employee must do to help the company achieve its strategic goals, it
about what is expected does not achieve its strategic purpose. Additionally, if the measure fails to point out
of them and how employees’ performance problems, it is almost impossible for the employees to correct
they can meet these their performance.
expectations. Deloitte’s performance management system for its project teams meets most of the
criteria for a good performance management system.19 Deloitte’s goals are to recog-
nize, observe, and motivate performance through the annual compensation decision, the
project performance snapshot, and the weekly performance conversations. Deloitte’s
client needs tend to involve both short- and long-term projects that are too complex
for any one employee to have the expertise needed to carry them out. So to meet its
clients’ needs Deloitte relies on employee teams. These teams include a team leader and
employees who each bring a different skill set. To evaluate each team member’s perfor-
mance Deloitte asks team leaders to answer four questions. These questions ask if the
leader would award the person the highest possible compensation increase and bonus
(measures overall performance and unique value to the organization), always want them
on their team (measures ability to work well with others), and if the person is a risk for
low performance (identifies problems that might harm the customer), and is ready for
promotion today (measures potential). These four questions each represent a specific
performance dimension (pay, teamwork, poor performance, promotion) that is relevant
to Deloitte’s project teams. The team leaders were chosen as the raters because they
were in the best position to see the performance of team members and in their role must
make subjective judgments. The questions were used after they were tested to see if
they differentiated ineffective from effective team members and were correlated with
other performance outcomes measured in other ways such as engagement surveys. For
short-term projects, team member evaluations occur at the end of each project and lon-
ger-term project evaluations occur quarterly. To ensure that the evaluations are driving
team performance and are accepted by team members, every team leader has to check in
with each team member once each week. During these conversations team leaders dis-
cuss expectations, review priorities, and provide feedback on recent work. Team mem-
bers are encouraged to initiate check-ins because team leaders may otherwise forget to
have the discussions because they have many demands on their time. Once each quarter
Deloitte’s business leaders use the evaluations to review a group of employees, such as
those with critical skills or who are eligible for promotion, to discuss the actions that
need to be taken to develop that group. The questions provide input into compensa-
tion decisions made at the end of the year by business leaders who also consider the
difficulty of project assignments and other contributions team members have made to
Deloitte.
Approaches to Measuring Performance

An important part of effective performance management is establishing how we evaluate LO 8-4
performance. This is difficult to do because performance is complex—it includes how Discuss the four
employees perform their individual work tasks as well as contribute to teams and behave approaches to perfor-
mance management,
in ways that support their peers and the company.20 What is considered effective perfor- the specific techniques
mance and when and how it is measured likely varies across positions. For example, in used in each approach,
sales positions results such as number of sales might be more important than behaviors and the way these
while the opposite may be true in management positions. In this section we explore dif- approaches compare
ferent ways to evaluate performance: the comparative approach, the attribute approach, with the criteria for
effective performance
the behavioral approach, the results approach, and the quality approach. We also evalu- management systems.
ate these approaches against the criteria of strategic congruence, validity, reliability,
acceptability, and specificity. As you will see, all of these approaches have strengths and
weaknesses. As a result, many companies’ performance evaluations use a combination
of approaches. There is no one best approach for measuring performance. But to effec-
tively contribute to organizational business strategy and goals, effective performance
evaluation systems should measure both what gets accomplished (objectives) and how it
gets accomplished (behaviors). Figure 8.3 shows an example of a performance manage-
ment system that evaluates behavior and results. The results (project development) are
linked to the goals of the business. The performance standards include behaviors that the
employee must demonstrate to reach the results. The system provides feedback to the
employee and holds both the employee and manager accountable for changing behavior.
332
Figure 8.3
Example of a Performance Management System That Includes Behavior and Results
Accountabilities and Performance Interim Feedback Actual Results Performance Rating Areas for Action
Key Results Standards Development
Key result areas that How the key result Employee and Review actual Evaluate performance Specific knowledge, What employee and
the employee will area will be measured manager discuss performance for each on each key result. skills, and behaviors manager will do to
accomplish during the (quality, cost, performance on an key result. to be developed that address development
review period. Should quantity). Focus on ongoing basis. 1 = Outstanding will help employee needs.
align with company work methods and 2 = Highly effective achieve key results.
values, business goals, accomplishments. 3 = Acceptable
and job description. 4 = Unsatisfactory
Project Development Develop preliminary Preliminary project By end of year, 3 Increase knowledge Read articles,
Manage the project material for materials are approvals were at of project management research, and meet
development of approval within four developed on time. 75%, 5% less than software. with software vendors.
project scope, cost weeks after receiving standard.
estimate studies, and project scope. Eighty
schedules for percent of new
approval. projects receive
approval. Initial cost
estimates are within
5% of final estimates.
THE COMPARATIVE APPROACH

The comparative approach to performance measurement requires the rater to compare
an individual’s performance with that of others. This approach usually uses some overall
assessment of an individual’s performance or worth and seeks to develop some ranking
of the individuals within a work group. At least three techniques fall under the compara-
tive approach: ranking, forced distribution, and paired comparison.
Ranking
Simple ranking requires managers to rank employees within their departments from highest
performer to poorest performer (or best to worst). Alternation ranking, on the other hand,
consists of a manager looking at a list of employees, deciding who is the best employee,
and crossing that person’s name off the list. From the remaining names, the manager
decides who the worst employee is and crosses that name off the list—and so forth.
Ranking has received specific attention in the courts. As discussed in Chapter 3, in
the Albermarle v. Moody case the validation of the selection system was conducted using
employee rankings as the measure of performance. The court actually stated, “There
is no way of knowing precisely what criteria of job performance that supervisors were
considering, whether each supervisor was considering the same criteria—or whether,
indeed, any of the supervisors actually applied a focused and stable body of criteria of
any kind.”21
Forced Distribution
The forced distribution method also uses a ranking format, but employees are ranked
in groups. This technique requires the manager to put certain percentages of employees
into predetermined categories. Most commonly, employees are grouped into three, four,
or five categories usually of unequal size indicating the best workers, the worst workers,
and one or more categories in between. The insurance company American International
Group (AIG), is using a forced distribution system in which AIG employees are ranked
on a scale of 1 to 4.22 Using this system only 10% of employees receive the top ranking
of “1,” 20% of employees receive a ranking of “2,” 50% of employees receive a rank-
ing of “3,” and 20% receive the lowest ranking of “4.” Employees with higher rank-
ings receive much more year-end incentive pay such as bonuses than those with lower
rankings (employees ranked in the top 10% will get much greater bonuses compared to
their peers). The CEO advocated the implementation of the forced distribution system to
ensure that the company is paying the best people for their performance and to better dif-
ferentiate poor from high performers. The company had previously used ranking systems
but found that over half of employees were evaluated as high performers.
Advocates of these systems say that they are the best way to identify high-potential
employees who should be given training, promotions, and financial rewards and to iden-
tify the poorest performers who should be helped or asked to leave. Top-level manag-
ers at many companies have observed that despite corporate performance and return
to shareholders being flat or decreasing, compensation costs have continued to spiral
upward and performance ratings continue to be high. They question how there can be
such a disconnect between corporate performance and employees’ evaluations and com-
pensation. Forced distribution systems provide a mechanism to help align company per-
formance and employee performance and compensation. Employees in the bottom 10%
cause performance standards to be lowered, influence good employees to leave, and
keep good employees from joining the company.
A forced distribution system helps managers tailor development activities to employees

based on their performance. For example, as shown in Table 8.3, poor performers are
given specific feedback about what they need to improve in their job and a timetable is
set for their improvement. If they do not improve their performance, they are dismissed.
Top performers are encouraged to participate in development activities such as job expe-
riences, mentoring, and completion of leadership programs which will help prepare them
for top management positions. The use of a forced distribution system is seen as a way for
companies to increase performance, motivate employees, and open the door for new tal-
ent to join the company to replace poor performers.23 Advocates say these systems force
managers to make hard decisions about employee performance based on job-related cri-
teria, rather than to be lenient in evaluating employees. Critics, on the other hand, say the
systems in practice are arbitrary, erroneously assume that employees’ performance can
be best summarized by a normal distribution, may be illegal, and cause poor morale.24
For example, one workgroup might have 20% poor performers while another might have
only high performers, but the process mandates that 10% of employees be eliminated
from both groups. Also, in many forced distribution systems an unintended consequence
is the bottom category tends to consist of minorities, women, and people over 40 years
of age, causing discrimination lawsuits (we discuss legal issues affecting performance
management later in the chapter). Finally, it is difficult to rank employees into distinctive
categories when criteria are subjective or when it is difficult to differentiate employees
on the criteria (such as teamwork or communications skills). For example, Microsoft
Table 8.3
RANKING OR DISTRIBUTION PERFORMANCE AND
Performance and
CATEGORY DEVELOPMENT PLAN
Development
Based on Forced
Distribution and A Above average
Ranking exceptional challenging job assignments
A1 performer
programs
B Average meets
expectations high performer
steady performer
improvement of weaknesses
contributions
C Below expectations
poor performance specific skills, behavior, and/or results
need to be improved with timetable for
accomplishment
SOURCES: Based on B. Axelrod, H. Handfield-Jones, and E. Michaels, “A New Game Plan for C Players,” HBR,
January 2002, pp. 80–88; A. Walker, “Is Performance Management as Simple as ABC?” T + D, February 2007,
pp. 54–57; T. De Long and V. Vijayaraghavan, “Let’s Hear It for B Players,” HBR, June 2003, pp. 96–102.
is no longer requiring its managers to evaluate its employees against one another and
rank them on a one-to-five scale.25 This system meant that a percentage of Microsoft’s
employees always had to be designated as poor performers. The system was abandoned
because many employees complained that it resulted in unfair rankings, power struggles
between managers over which of their employees could receive the more favorable rank-
ings, and aggressive competition between employees. Also, the system was not consis-
tent with Microsoft’s new strategic emphasis on teamwork.
Research simulating different features of a forced system and other factors that influ-
ence company performance (e.g., voluntary turnover rate, validity of selection methods)
suggests that forced distribution rating systems can improve the potential performance
of a company’s workforce.26 Companies that have clear goals and management criteria,
train evaluators, use the rankings along with other HR metrics, and reward good perfor-
mance may find them useful. The majority of improvement appears to occur during the
first several years the system is used, mainly because of the large number of poorly per-
forming employees who are identified and fired. Keep in mind that despite the potential
advantages of forced choice systems for improving a company’s workforce performance,
the potential negative side effects on morale, teamwork, recruiting, and shareholder per-
ceptions should be considered before adopting such a system. Many companies have
emphasized the linkage between employees’ performance and their development plan
without using a forced distribution or ranking system. Forced ranking is ethical as long
as the system is clearly communicated, the system is part of a positive dimension of the
organization culture (innovation, continuous improvement), and the employees have the
chance to appeal decisions.
Paired Comparison
The paired comparison method requires managers to compare every employee with
every other employee in the work group, giving an employee a score of 1 every time he
or she is considered the higher performer. Once all the pairs have been compared, the
manager computes the number of times each employee received the favorable decision
(i.e., counts up the points), and this becomes the employee’s performance score.
The paired comparison method tends to be time-consuming for managers and will
become more so as organizations become flatter with an increased span of control. For
example, a manager with 10 employees must make 45 (10 × 9/2) comparisons. However,
if the group increases to 15 employees, 105 comparisons must be made.
Evaluating the Comparative Approach

The comparative approach to performance measurement is an effective tool in differen-
tiating employee performance; it virtually eliminates problems of leniency, central ten-
dency, and strictness. This is especially valuable if the results of the measures are to be
used in making administrative decisions such as pay raises and promotions. In addition,
such systems are relatively easy to develop and in most cases easy to use; thus, they are
often accepted by users.
One problem with these techniques, however, is their common failure to be linked to
the strategic goals of the organization. Although raters can evaluate the extent to which
individuals’ performances support the strategy, this link is seldom made explicit. In
addition, because of the subjective nature of the ratings, their actual validity and reliabil-
ity depend on the raters themselves. Some firms use multiple evaluators to reduce the
biases of any individual, but most do not. At best, we could conclude that their reliability
and validity are modest.
These techniques lack specificity for feedback purposes. Based only on their rela-
tive rankings, individuals are completely unaware of what they must do differently to
improve their ranking. This puts a heavy burden on the manager to provide specific
feedback beyond that of the rating instrument itself. Finally, many employees and man-
agers are less likely to accept evaluations based on comparative approaches. Evaluations
depend on how employees’ performance relates to other employees in a group, team, or
department (normative standard) rather than on absolute standards of excellent, good,
fair, and poor performance.
THE ATTRIBUTE APPROACH

The attribute approach to performance management focuses on the extent to which indi-
viduals have certain attributes (characteristics or traits) believed desirable for the com-
pany’s success. The techniques that use this approach define a set of traits—such as
initiative, leadership, and competitiveness—and evaluate individuals on them.
Graphic Rating Scales

The most common form that the attribute approach to performance management takes
is the graphic rating scale. Table 8.4 shows a graphic rating scale used in a manufactur-
ing company. As you can see, a list of traits is evaluated by a five-point (or some other
number of points) rating scale. The manager considers one employee at a time, circling
the number that signifies how much of that trait the individual has. Graphic rating scales
can provide a number of different points (a discrete scale) or a continuum along which
the rater simply places a check mark (a continuous scale).
Table 8.4
Example of a Graphic Rating Scale
The following areas of performance are significant to most positions. Indicate your assessment of
performance on each dimension by circling the appropriate rating.
RATING
PERFORMANCE
DIMENSION
DISTINGUISHED EXCELLENT COMMENDABLE ADEQUATE POOR
Knowledge 5 4 3 2 1
Communication 5 4 3 2 1
Judgment 5 4 3 2 1
Managerial skill 5 4 3 2 1
Quality performance 5 4 3 2 1
Teamwork 5 4 3 2 1
Interpersonal skills 5 4 3 2 1
Initiative 5 4 3 2 1
Creativity 5 4 3 2 1
Problem solving 5 4 3 2 1
The legal defensibility of graphic rating scales was questioned in the Brito v. Zia
case. In this case, Spanish-speaking employees had been terminated as a result of their
performance appraisals. These appraisals consisted of supervisors’ rating subordinates
on a number of undefined dimensions such as volume of work, quantity of work, job
knowledge, dependability, and cooperation. The court criticized the subjective apprais-
als and stated that the company should have presented empirical data demonstrating that
the appraisal was significantly related to actual work behavior.
Mixed-Standard Scales
Mixed-standard scales were developed to get around some of the problems with graphic
rating scales. To create a mixed-standard scale, we define the relevant performance
dimensions and then develop statements representing good, average, and poor perfor-
mance along each dimension. These statements are then mixed with the statements from
other dimensions on the actual rating instrument. An example of a mixed-standard scale
is presented in Table 8.5.
As we see in the table, the rater is asked to complete the rating instrument by indicat-
ing whether the employee’s performance is above (+), at (0), or below (–) the statement.
A special scoring key is then used to score the employee’s performance for each dimen-
sion. Thus, for example, an employee performing above all three statements receives
a 7. If the employee is below the good statement, at the average statement, and above
the poor statement, a score of 4 is assessed. An employee below all three statements is
given a rating of 1. This scoring is applied to all the dimensions to determine an overall
performance score.
Note that mixed-standard scales were originally developed as trait-oriented scales.
However, this same technique has been applied to instruments using behavioral rather than
trait-oriented statements as a means of reducing rating errors in performance appraisal.27
Evaluating the Attribute Approach

Attribute-based performance methods are the most popular methods in organizations.
They are quite easy to develop and are generalizable across a variety of jobs, strategies,
and organizations. In addition, if much attention is devoted to identifying those attributes
relevant to job performance and carefully defining them on the rating instrument, they
can be as reliable and valid as more elaborate measurement techniques.
However, these techniques fall short on several of the criteria for effective perfor-
mance management. There is usually little congruence between the techniques and the
company’s strategy. These methods are used because of the ease in developing them and
because the same method (list of traits, comparisons) is generalizable across any organi-
zation and any strategy. In addition, these methods usually have very vague performance
standards that are open to different interpretations by different raters. Because of this,
different raters often provide extremely different ratings and rankings. The result is that
both the validity and reliability of these methods are usually low.
Virtually none of these techniques provides any specific guidance on how an employee
can support the company’s goals or correct performance deficiencies. In addition, when
raters give feedback, these techniques tend to elicit defensiveness from employees.
For example, how would you feel if you were told that on a five-point scale, you were
rated a “2” in maturity? Certainly you might feel somewhat defensive and unwilling to
accept that judgment, as well as any additional feedback. Also, being told you were rated
a “2” in maturity doesn’t tell you how to improve your rating.
Table 8.5
An Example of a Three traits being assessed: Levels of performance in statements:
Mixed-Standard Initiative (INTV) High (H)
Scale Intelligence (INTG) Medium (M)
Relations with others (RWO) Low (L)
Instructions: Please indicate next to each statement whether the employee’s perfor-
mance is above (+), equal to (0), or below (–) the statement.
INTV H 1. This employee is a real self-starter. The employee always +
takes the initiative and his/her superior never has to prod
this individual.
INTG M 2. While perhaps this employee is not a genius, s/he is +
a lot more intelligent than many people I know.
RWO L 3. This employee has a tendency to get into unnecessary 0
conflicts with other people.
INTV M 4. While generally this employee shows initiative, occasionally +
his/her superior must prod him/her to complete work.
INTG L 5. Although this employee is slower than some in +
understanding things, and may take a bit longer in
learning new things, s/he is of average intelligence.
RWO H 6. This employee is on good terms with everyone. S/he −
can get along with people even when s/he does not
agree with them.
INTV L 7. This employee has a bit of a tendency to sit around +
and wait for directions.
INTG H 8. This employee is extremely intelligent, and s/he learns −
very rapidly.
RWO M 9. This employee gets along with most people. Only very −
occasionally does s/he have conflicts with others
on the job, and these are likely to be minor.
Scoring Key:
STATEMENTS SCORE
HIGH MEDIUM LOW
+ + + 7
0 + + 6
− + + 5
− 0 + 4
− − + 3
− − 0 2
− − − 1
Example score from preceding ratings:
STATEMENTS SCORE
HIGH MEDIUM LOW
Initiative + + + 7
Intelligence 0 + + 6
Relations with others − − 0 2
THE BEHAVIORAL APPROACH

The behavioral approach to performance management attempts to define the behaviors
an employee must exhibit to be effective in the job. The various techniques define those
behaviors and then require managers to assess the extent to which employees exhibit
them. We discuss five techniques that rely on the behavioral approach.
Behaviorally Anchored Rating Scales

A behaviorally anchored rating scale (BARS) is designed to specifically define perfor-
mance dimensions by developing behavioral anchors associated with different levels of
performance.28 An example of a BARS is presented in Figure 8.4. As you can see, the
performance dimension has a number of examples of behaviors that indicate specific
levels of performance along the dimension.
To develop a BARS, we first gather a large number of critical incidents that repre-
sent effective and ineffective performance on the job. These incidents are classified into
performance dimensions, and the ones that experts agree clearly represent a particular
level of performance are used as behavioral examples (or anchors) to guide the rater.
The manager’s task is to consider an employee’s performance along each dimension and
determine where on the dimension the employee’s performance fits using the behavioral
anchors as guides. This rating becomes the employee’s score for that dimension.
Behavioral anchors have advantages and disadvantages. They can increase interrater
reliability by providing a precise and complete definition of the performance dimension.
A disadvantage is that they can bias information recall—that is, behavior that closely
approximates the anchor is more easily recalled than other behavior.29 Research has also
demonstrated that managers and their subordinates do not make much of a distinction
between BARS and trait scales.30
Behavioral Observation Scales

A behavioral observation scale (BOS) is a variation of a BARS. Like a BARS, a BOS is
developed from critical incidents.31 However, a BOS differs from a BARS in two basic
ways. First, rather than discarding a large number of the behaviors that exemplify effec-
tive or ineffective performance, a BOS uses many of them to more specifically define all
the behaviors that are necessary for effective performance (or that would be considered
ineffective performance). Instead of using, say, 4 behaviors to define 4 levels of perfor-
mance on a particular dimension, a BOS may use 15 behaviors. An example of a BOS is
presented in Table 8.6.
A second difference is that rather than assessing which behavior best reflects an indi-
vidual’s performance, a BOS requires managers to rate the frequency with which the
employee has exhibited each behavior during the rating period. These ratings are then
averaged to compute an overall performance rating.
The major drawback of a BOS is that it may require more information than most man-
agers can process or remember. A BOS can have 80 or more behaviors, and the manager
must remember how frequently an employee exhibited each of these behaviors over a
6- or 12-month rating period. This is taxing enough for one employee, but managers
often must rate 10 or more employees.
A direct comparison of BOS, BARS, and graphic rating scales found that both man-
agers and employees prefer BOS for differentiating good from poor performers, main-
taining objectivity, providing feedback, suggesting training needs, and being easy to use
among managers and subordinates.32
Figure 8.4
Task-BARS Rating Preparing for Duty
Dimension: Patrol
Always early for work, gathers all
Officer 7
necessary equipment to go to
work, fully dressed, uses time
before roll call to review previous
shift’s activities and any new
bulletins, takes notes of previous
shift’s activity mentioned during
roll call.
Always early for work, gathers all
6
necessary equipment to go to
work, fully dressed, checks activity
from previous shifts before going
to roll call.
Early for work, has all necessary

5
equipment to go to work, fully
dressed.
On time, has all necessary 4

equipment to go to work, fully
dressed.
3 Not fully dressed for roll call, does

not have all necessary equipment.
Late for roll call, does not check

2
equipment or vehicle for damage
or needed repairs, unable to go to
work from roll call, has to go to
locker, vehicle, or home to get
necessary equipment.
Late for roll call majority of period,

1
does not check equipment or
vehicle, does not have necessary
equipment to go to work.
SOURCE: Adapted from R. Harvey, “Job Analysis,” in Handbook of Industrial & Organizational Psychology, 2nd ed.,
ed. M. Dunnette and L. Hough (Palo Alto, CA: Consulting Psychologists Press, 1991), p. 138.
Table 8.6
Overcoming Resistance to Change An Example of
(1) Describes the details of the change to subordinates. a Behavioral
Almost Never 1 2 3 4 5 Almost Always Observation Scale
(2) Explains why the change is necessary. (BOS) for Evaluating
Job Performance
Almost Never 1 2 3 4 5 Almost Always
(3) Discusses how the change will affect the employee.
(4) Listens to the employee’s concerns.
(5) Asks the employee for help in making the change work.
(6) If necessary, specifies the date for a follow-up meeting to
respond to the employee’s concerns.
Total = _____
Below Adequate Adequate Full Excellent Superior
6–10 11–15 16–20 21–25 26–30
Scores are set by management.

SOURCE: From Gary Latham and Ken Wexley, Increasing Productivity Through Performance Appraisal (Prentice Hall
Series in Human Resources), 2nd Edition © 1994. Reproduced by permission of Pearson Education, Inc., Upper Saddle
River, New Jersey.
Competency Models
Competencies are sets of skills, knowledge, abilities, and personal characteristics that Competencies
enable employees to successfully perform their jobs.33 A competency model identifies Sets of skills, knowl-
and provides descriptions of competencies that are common for an entire occupation, edge, abilities, and
personal characteristics
organization, job family, or a specific job. Competency models can be used for perfor- that enable employees
mance management. However, one of the strengths of competency models is that they to successfully perform
are useful for a variety of HR practices including recruiting, selection, training, and their jobs.
development. Competency models can be used to help identify the best employees to fill
open positions, and as the foundation for development plans that allow the employee and Competency model
manager to target specific strengths and development areas. Identify and provide
Table 8.7 shows the competency model that Luxottica Retail, known for premium, descriptions of compe-
tencies that are com-
luxury, and sports eyewear sold through LensCrafters, Sunglass Hut, and Pearle Vision, mon for an occupation,
developed for its associates in field and store positions.34 The competency model includes organization, job family,
leadership and managerial, functional, and foundational competencies. The goal was to or specific job.
define and identify competencies that managers could use for hiring, performance man-
agement, and training. Also, competencies would help associates identify and develop
the skills they need to apply for different jobs. To effectively use competency models for
performance evaluation they must be up-to-date, drive business performance, be job-
related (valid), be relevant (or customized) for all of the company’s business units, and
provide sufficient detail to make an accurate assessment of employees’ performance. At
Luxottica Retail developing competencies started with meeting with business leaders
to understand their current and future business strategies. Business drivers were identi-
fied and questionnaires, focus groups, and meetings with managers and associates were
used to identify important competencies and examples of behaviors related to each.
Competencies across business units and brands are reviewed every four or five years or
whenever a major change in jobs or business strategy occurs to ensure they are relevant.
Also, the weighting given to each set of competencies in the performance evaluation is
Table 8.7
Luxottica Retail’s Leadership and Managerial
Competency Model Leadership
Coach and develop others
Motivate others
Foster teamwork
Think strategically
Functional
Global perspective
Financial acumen
Business key performance indicators
Foundational
Critical thinking
Foster open communications
Build relationships and interpersonal skills
Develop and manage oneself
Adaptability and flexibility
Customer focus
Act with integrity
Diversity and multiculturalism
Drive and commitment
SOURCE: From C. Spicer, “Building a Competency Model,” HR Magazine, April 2009, pp. 34–36. Reprinted with
permission of Society for Human Resource Management.
reviewed to ensure that they are appropriate (e.g., what weights should be given to the
functional skills). Depending on their relevance for a specific job, various combinations
of these competencies are used for evaluating associates’ performances. Associates are
rated on a 1–5 scale for each competency with 5 meaning far exceeds expectations. HR,
training and development, and operations teams worked together to define the levels of
each competency, that is, what does it mean and what does the competency look like
when an employee is rated “meets expectations” versus “below expectations”? This was
necessary to ensure that managers are using a similar frame of reference when they
evaluate associates using the competencies.
Evaluation of the Behavioral Approach

The behavioral approach can be very effective. It can link the company’s strategy to the
specific behavior necessary for implementing that strategy. It provides specific guidance
and feedback for employees about the performance expected of them. Most of the tech-
niques rely on in-depth job analysis, so the behaviors that are identified and measured
are valid. Because those who will use the system develop the measures, the acceptability
is also often high. Finally, with a substantial investment in training raters, the techniques
are reasonably reliable.
The major weaknesses have to do with the organizational context of the system.
Although the behavioral approach can be closely tied to a company’s strategy, the behav-
iors and measures must be constantly monitored and revised to ensure that they are still
linked to the strategic focus. This approach also assumes that there is “one best way”
to do the job and that the behaviors that constitute this best way can be identified. One
study found that managers seek to control behaviors when they perceive a clear rela-
tionship between behaviors and results. When this link is not clear, they tend to rely on
managing results.35 The behavioral approach might be best suited to less complex jobs
(where the best way to achieve results is somewhat clear) and least suited to complex
jobs (where there are multiple ways, or behaviors, to achieve success).
THE RESULTS APPROACH

The results approach focuses on managing the objective, measurable results of a job or
work group. This approach assumes that subjectivity can be eliminated from the mea-
surement process and that results are the closest indicator of one’s contribution to orga-
nizational effectiveness.36 We examine two performance management systems that use
results: the balanced scorecard and the productivity measurement and evaluation system.
The Use of Objectives

The use of objectives is popular in both private and public organizations.37 In a results-
based system, the top management team first defines the company’s strategic goals for
the coming year. These goals are passed on to the next layer of management, and these
managers define the goals they must achieve for the company to reach its goals. This
goal-setting process cascades down the organization so that all managers set goals that
help the company achieve its goals.38 These goals are used as the standards by which an
individual’s performance is evaluated.39
Results-based systems have three common components.40 They require setting effec-
tive goals. The most effective goals are SMART goals. That is, the goals are specific
(clearly stated, define the result to be achieved), measurable (compared to a standard),
attainable (difficult but achievable), relevant (link to organizational success factors or
goals), and timely (measured in deadline, due dates, cycles, or schedules). Different
types of measurements can be used for goals or objectives including timeliness (e.g.,
responds to requests within 12 hours), quality (report provided clear information with no
revisions necessary), quantity (increased sales 25%), or financial metrics (e.g., reduced
purchasing costs 10%). (An example of objectives used in a financial service firm is
presented in Table 8.8.) The goals are not usually set unilaterally by management but
with the managers’ and subordinates’ participation. And the manager gives objective
feedback throughout the rating period to monitor progress toward the goals.
Research on objectives has revealed two important findings regarding their effec-
tiveness.41 Of 70 studies examined, 68 showed productivity gains, while only 2 showed
productivity losses, suggesting that objectives usually increase productivity. Also, pro-
ductivity gains tend to be highest when there is substantial commitment to the objec-
tives program from top management: an average increase of 56% when commitment was
high, 33% when commitment was moderate, and 6% when commitment was low.
Table 8.8
ACTUAL
An Example of an
KEY RESULT AREA OBJECTIVE % COMPLETE PERFORMANCE
Objectives Measure
of Job Performance
Loan portfolio Increase portfolio 90 Increased portfolio
management value by 10% over value by 9% over the
the next 12 months past 12 months
Sales Generate fee income 150 Generated fee
of $30,000 over the income of $45,000
next 12 months over the past
12 months
Clearly, use of an objectives system can have a very positive effect on an organiza-
tion’s performance. Considering the process through which goals are set (involvement
of staff in setting objectives), it is also likely that use of an objectives system effectively
links individual employee performance with the firm’s strategic goals. Evaluation of
objectives, based on results or business-based metrics, removes the subjectivity from the
evaluation process—employees either meet the objectives or they do not. For example,
Long Island Jewish Medical Center implemented a computer-based performance man-
agement system that breaks the nurses’ job description into measurable goals in order to
keep infection rates for the unit low and patient-satisfaction scores high.42
Table 8.9 shows how to best use objectives or goals in performance management.
Waiting for goals to cascade down from company leaders, to division, function, and
their team, takes too much time and employees have a difficult time understanding how
their goals are related to company goals (line of sight). As a result, employees should set
goals that as much as possible are linked to organizational goals. It is important to make
sure that goals are SMART but they also are meaningful.43 Rewards and incentives are
best for motivating employees to achieve performance goals in jobs in which the results
are easily measured and under employees’ control. It is also important to remember that
goals typically focus just on results not on behaviors, values, or how things get done. If
you want employees to behave in certain ways (or avoid behaving in certain ways) in
achieving goals you need to also insure your performance management system includes
evaluating behaviors. Otherwise, for example, a goal emphasis on sales might cause
employees to mislead customers and poorly treat their peers.
Balanced Scorecard
Some companies use the balanced scorecard to measure performance (we discussed
the use of the balanced scorecard in Chapter 1). The balanced scorecard includes four
perspectives of performance including financial, customer, internal or operations, and
learning and growth (see Table 1.8 in Chapter 1). The financial perspective focuses
on creating sustainable growth in shareholder value, the customer perspective defines
value for customers (e.g., service, quality), the internal or operations perspective
focuses on processes that influence customer satisfaction, and the learning and growth
perspective focuses on the company’s capacity to innovate and continuously improve.
Each of these perspectives are used to translate the business strategy into organizational,
Table 8.9 1. Employees and managers should discuss and set no more than 3 to 5 goals.
Best Practices in
2. Goals should be brief, meaningful, challenging, and include the results the employee
Goal Setting
is expected to achieve.
3. The time frame for goal achievement should be related to when they are expected to
be accomplished.
4. The relationship between goals and rewards should be appropriate.
5. Goals should be “linked up” rather than “cascaded down”. This means that functions,
teams, and employees should set their own goals that are related to company goals.
SOURCES: Based on R. Hanson and E. Pulakos, Putting the “Performance” Back in Performance Management
(Alexandria, VA: Society for Human Resource Management, 2015); R. Noe, and L. Inks, It’s About People: How Perfor-
mance Management Helps Middle Market Companies Grow Faster (Columbus, Ohio: National Center for the Middle
Market, Ohio State University Fisher College of Business, GE Capital, 2014): D. Grote, How to be Good at Performance
Appraisals (Boston, MA: Harvard University Press, 2011); A. Fox, “Put Plans into Action,” HR Magazine, April 2013,
pp. 27–31.
managerial, and employee objectives. Employee performance is linked with the busi-
ness strategy through communicating and educating employees on the elements of the
balanced scorecard, translating strategic objectives into measures for departments and
employees, and linking rewards to performance measures.44 Employees need to know
the corporate objectives, how they translate into objectives for each business unit, and
develop their own and team objectives that are consistent with the business unit and
company objectives. Effective balanced scorecards allow employees to understand the
business strategy by looking only at the scorecard and the strategy map (the cause-
and-effect relationships among the measures). For example, for the customer perspec-
tive of the balanced scorecard an airline might have on-time performance as a critical
success factor.45 Gate agents, ground, maintenance, and scheduling represent groups
of employees who impact on-time performance. Gate agents have four roles that can
influence boarding speed including check-in timeliness, effectively dealing with con-
nections, flight documentation, and the boarding process. Gate agents’ performance in
these four roles should be evaluated because they impact key performance indicators
related to on-time performance including cost savings, customer satisfaction, customer
losses, and operational costs.
Productivity Measurement and Evaluation System (ProMES)

The main goal of ProMES is to motivate employees to improve team or company-level
productivity.46 It is a means of measuring and feeding back productivity information to
employees.
Team members try to map the relationship between specific outcomes and productiv-
ity and the relationships between effect and performance, performance and outcomes,
and outcomes relationship to satisfaction of employee needs. ProMES consists of four
steps. First, people in an organization identify the products, or the set of activities or
objectives, the organization expects to accomplish. The organization’s productivity
depends on how well it produces these products. At a repair shop, for example, a product
might be something like “quality of repair.” Second, the staff defines indicators of the
products. Indicators are measures of how well the products are being generated by the
organization. Quality of repair could be indicated by (1) return rate (percentage of items
returned that did not function immediately after repair) and (2) percentage of quality-
control inspections passed. Third, the staff establishes the contingencies between the
amount of the indicators and the level of evaluation associated with that amount. Fourth,
a feedback system is developed that provides employees and work groups with informa-
tion about their specific level of performance on each of the indicators. An overall pro-
ductivity score can be computed by summing the effectiveness scores across the various
indicators.
Research thus far strongly suggests this technique is effective in increasing productiv-
ity. (Figure 8.5 illustrates the productivity gains in the repair shop described previously.)
The research also suggests the system is an effective feedback mechanism. However,
users found it time-consuming to develop the initial system.
Evaluation of the Results Approach

The results approach minimizes subjectivity, relying on objective, quantifiable indica-
tors of performance. Thus, it is usually highly acceptable to both managers and employ-
ees. Another advantage is that it links an individual’s results with the organization’s
strategies and goals.
Figure 8.5 600

Increases in
G G I
Productivity for a I I I
Repair Shop Using F
ProMES Measures 500 G
G I
G
400 F F
Effectiveness
F
300
F
B
200
B
B
B
100
B B
B
B
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Month
SOURCE: P. Pritchard, S. Jones, P. Roth, K. Stuebing, and S. Ekeberg, “The Evaluation of an Integrated Approach to
Measuring Organizational Productivity,” Personnel Psychology, 42, (1989), pp. 69–115. Used by permission.
However, there are a number of challenges in using objective performance mea-

sures. Objective measurements can be both contaminated and deficient—contaminated
because they are affected by things that are not under the employee’s control and defi-
cient because not all the important aspects of job performance are amenable to objective
measurement. For example, consider how an economic recession can influence sales
goals or, for a teacher, parental support for studying can influence student’s achievement
test scores. Another disadvantage is that individuals may focus only on aspects of their
performance that are measured, neglecting those that are not. For example, if the large
majority of employees’ goals relate to productivity, it is unlikely they will be concerned
with customer service. One study found that objective performance goals led to higher
performance but that they also led to helping co-workers less.47 It is important to iden-
tify if goals should be set at the individual, team, or department level. Setting employ-
ees’ objectives may not be appropriate if work is team-based. Individual objectives may
undermine behaviors related to team success such as sharing information and collabora-
tion. A final disadvantage is that, although results measures provide objective feedback,
the feedback may not help employees learn how they need to change their behavior to
increase their performance. If baseball players are in a hitting slump, simply telling them
that their batting average is .190 may not motivate them to raise it. Feedback focusing on
the exact behavior that needs to be changed (like taking one’s eye off the ball or dropping
one’s shoulder) would be more helpful.48
John Deere takes specific actions to avoid these problems.49 At the start of each fiscal
year, managers and employees meet to discuss objectives for the year. A midyear review
is then conducted to check on the employees’ progress in meeting the goals. The year-
end review meeting focuses on evaluating goal accomplishment. Goal achievement at
the end of the year is linked to pay increases and other rewards. All company objectives
are supported by division objectives that are available for employees to view online.
Employees also have available a learning and activities courseware catalog they can use
to help develop skills needed to achieve their performance objectives.
THE QUALITY APPROACH

Thus far we have examined the traditional approaches to measuring and evaluating
employee performance. Fundamental characteristics of the quality approach include
a customer orientation, a prevention approach to errors, and continous improvement.
Improving customer satisfaction is the primary goal of the quality approach. Custom-
ers can be internal or external to the organization. A performance management system
designed with a strong quality orientation can be expected to
∙ Emphasize an assessment of both person and system factors in the measurement
system.
∙ Emphasize that managers and employees work together to solve performance problems.
∙ Involve both internal and external customers in setting standards and measuring
performance.
∙ Use multiple sources to evaluate person and system factors.50
Based on this chapter’s earlier discussion of the characteristics of an effective perfor-
mance management system, it should be apparent to you that these characteristics are
not just unique to the quality approach but are characteristics of an effective appraisal
system!
Advocates of the quality approach believe that most U.S. companies’ performance
management systems are incompatible with the quality philosophy for a number of
reasons:
1. Most existing systems measure performance in terms of quantity, not quality.
2. Employees are held accountable for good or bad results to which they contribute
but do not completely control.
3. Companies do not share the financial rewards of successes with employees accord-
ing to how much they have contributed to them.
4. Rewards are not connected to business results.51
Sales, profit margins, and behavioral ratings are often collected by managers to
evaluate employees’ performance. These are person-based outcomes. An assumption of
using these types of outcomes is that the employee completely controls them. However,
according to the quality approach, these types of outcomes should not be used to evalu-
ate employees’ performance because they do not have complete control over them (i.e.,
they are contaminated). For example, for salespersons, performance evaluations (and sal-
ary increases) are often based on attainment of a sales quota. Salespersons’ abilities and
motivation are assumed to be directly responsible for their performance. However, quality
approach advocates argue that better determinants of whether a salesperson reaches the
quota are “systems factors” (such as competitors’ product price changes) and economic
conditions (which are not under the salesperson’s control).52 Holding employees account-
able for outcomes affected by systems factors is believed to result in dysfunctional behav-
ior, such as falsifying sales reports, budgets, expense accounts, and other performance
measures, as well as lowering employees’ motivation for continuous improvement.
Quality advocates suggest that the major focus of performance evaluations should be
to provide employees with feedback about areas in which they can improve. Two types
of feedback are necessary: (1) subjective feedback from managers, peers, and custom-
ers about the personal qualities of the employee and (2) objective feedback based on the
work process itself using statistical quality control methods.
At Just Born, the company that makes Peeps and Mike and Ike candy, the performance
management process is designed with a strong quality orientation.53 The performance man-
agement system is designed to facilitate employee improvement (a forward-looking approach)
rather than focus entirely on what the employee has accomplished during the past year. Also,
managers and employees are encouraged to work together to solve performance problems.
The performance management system is part of the company’s broader people devel-
opment system (PDS) which is designed to ensure that learning and development align
with business strategy and drive business results while ensuring employees have the
skills to succeed in their current and future jobs. The PDS includes the performance
management process, learning and career development processes, and succession plan-
ning process. Information from each of these systems is shared to ensure that employees
are developing the skills through training and on-the-job experiences needed for their
current jobs as well as preparing for their future career interests. Just Born’s perfor-
mance management system starts with a planning meeting between the employee and
their manager. At this meeting the employee’s role and strategic goals of the depart-
ment are discussed. The manager and employee agree on up to four personal objectives
that will help the department meet its objectives and the employee achieve the specific
deliverables described in the job description. Two competencies that the employee needs
to deliver or improve on are identified. The manager and employee work together to
develop a learning plan to help the employee gain the competencies. During the year,
the employee and manager meet to discuss the progress in meeting the deliverables and
improving the competencies. Pay decisions made at the end of each fiscal year are based
on the achievement of performance objectives and learning goals.
Just Born also uses the Wow . . . Now improvement process, a customized Kaizen pro-
cess to improve business processes and results. The Wow . . . Now improvement process
includes teaching employees how to identify improvement opportunities, collect data,
make improvements, measure results, and, based on the results, refine practices. Kaizen,
the Japanese word for improvement, is one of the underlying principles of lean manufactur-
Kaizen ing and total quality management (we discussed lean thinking in Chapter 1). Kaizen refers
Employee practices that to practices participated in by employees from all levels of the company that focus on con-
emphasize continuous tinuous improvement of business processes.54 As the Wow . . . Now improvement process
improvement of busi-
ness processes.
illustrates, Kaizen involves considering a continuous cycle of activities including planning,
doing, checking, and acting (PDCA). Statistical process control techniques are used by
employees to identify causes of problems and potential solutions. They include process-
flow analysis, cause-and-effect diagrams, control charts, histograms, and scattergrams.
Statistical process control techniques are very important in the quality approach. These
techniques provide employees with an objective tool to identify causes of problems and
potential solutions. These techniques include process-flow analysis, cause-and-effect
diagrams, Pareto charts, control charts, histograms, and scattergrams. Process-flow anal-
ysis identifies each action and decision necessary to complete work, such as waiting on
a customer or assembling a television set. Process-flow analysis is useful for identifying
redundancy in processes that increase manufacturing or service time. In cause-and-effect
diagrams, events or causes that result in undesirable outcomes are identified. Employees
try to identify all possible causes of a problem. The feasibility of the causes is not evalu-
ated, and as a result, cause-and-effect diagrams produce a large list of possible causes.
70 Figure 8.6
Pareto Chart
60
Number of times cited
50
40
30
20
10
0
Transfer Lack Management Prefer Lack
time timing discretion outside development
too long candidates plan
Reasons given for not selecting current employees

SOURCE: From Clara Carter, HR Magazine. Copyright 1992. Reprinted with permission of Society for Human Resource
Management.
A Pareto chart highlights the most important cause of a problem. In a Pareto chart,
causes are listed in decreasing order of importance, where importance is usually defined
as the frequency with which that cause resulted in a problem. The assumption of Pareto
analysis is that the majority of problems are the result of a small number of causes.
Figure 8.6 shows a Pareto chart listing the reasons managers give for not selecting cur-
rent employees for a job vacancy. Control charts involve collecting data at multiple
points in time. By collecting data at different times, employees can identify what factors
contribute to an outcome and when they tend to occur. Figure 8.7 shows the percentage
of employees hired internally for a company for each quarter between 2013 and 2015.
100% Figure 8.7

90 Control Chart
Percentage hired internally
80
70
60
50
40
30
20
10
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2
2013 2014 2015
SOURCE: Based on Clara Carter, HR Magazine. Copyright 1992.

Internal hiring increased dramatically during the third quarter of 2014. The use of con-
trol charts helps employees understand the number of internal candidates who can be
expected to be hired each year. Also, the control chart shows that the amount of internal
hiring conducted during the third quarter of 2014 was much larger than normal. Histo-
grams display distributions of large sets of data. Data are grouped into a smaller number
of categories or classes. Histograms are useful for understanding the amount of variance
between an outcome and the expected value or average outcome.
Scattergrams show the relationship between two variables, events, or different pieces
of data. Scattergrams help employees determine whether the relationship between two
variables or events is positive, negative, or zero.
LO 8-5 Evaluation of the Quality Approach

Choose the most The quality approach relies primarily on a combination of the attribute and results
effective approach approaches to performance measurement. However, traditional performance appraisal
to performance
systems focus more on individual employee performance, while the quality approach
measurement for a
given situation. adopts a systems-oriented focus.55 Many companies may be unwilling to completely
abandon their traditional performance management system because it serves as the basis
for personnel selection validation, identification of training needs, or compensation
decisions. Also, the quality approach advocates evaluation of personal traits (such as
cooperation), which are difficult to relate to job performance unless the company has
been structured into work teams.
In summary, organizations can take five approaches to measuring performance:
comparative, attribute, behavioral, results, and quality. Table 8.10 summarizes the vari-
ous approaches to measuring performance based on the criteria we set forth earlier and
illustrates that each approach has strengths and weaknesses. As a result, effective per-
formance evaluations involve a combination of approaches including assessment of
objectives and behaviors.
Choosing a Source for

Performance Information
LO 8-6 Whatever approach to performance management is used, it is necessary to decide whom
Discuss the advantages to use as the source of the performance measures. Each source has specific strengths and
and disadvantages of weaknesses. We discuss five primary sources: managers, peers, subordinates, self, and
the different sources
of performance
customers. Many companies include manager and self-assessment of performance. This
information. helps facilitate a conversation about performance during the appraisal meeting and on a
more frequent basis. The “Competing through Sustainability” box illustrates the impor-
tance of using multiple sources of performance information to ensure that the needs of
all stakeholders are being met.
MANAGERS
LO 8-7 Managers are the most frequently used source of performance information. It is usu-
Choose the most ally safe to assume that supervisors have extensive knowledge of the job requirements
effective source(s) for and that they have had adequate opportunity to observe their employees—in other words,
performance informa-
that they have the ability to rate their employees. In addition, because supervisors have
tion for any situation.
something to gain from the employees’ high performance and something to lose from
Table 8.10
Evaluation of Approaches to Performance Measurement
CRITERIA
STRATEGIC
APPROACH CONGRUENCE VALIDITY RELIABILITY ACCEPTABILITY SPECIFICITY
Comparative Poor, unless Can be high Depends on rater, Moderate; easy Very low
manager takes if ratings are but usually no to develop and
time to make link done carefully measure of agree- use but resistant
ment used to normative
standard
Attribute Usually low; Usually low; Usually low; can High; easy to Very low
requires man- can be fine be improved by develop and use
ager to make if developed specific definitions
link carefully of attributes
Behavioral Can be quite Usually high; Usually high Moderate; difficult Very high
high minimizes con- to develop, but
tamination and accepted well for
deficiency use
Results Very high Usually high; High; main prob- High; usually High regarding
can be both lem can be test– developed with results, but low
contaminated retest—depends input from those regarding behav-
and deficient on timing to be evaluated iors necessary to
of measure achieve them
Quality Very high High, but can High High; usually High regarding
be both developed with results, but low
contaminated input from those regarding behav-
and deficient to be evaluated iors necessary to
achieve them
low performance, they are motivated to make accurate ratings.56 Finally, feedback from
supervisors is strongly related to performance and to employee perceptions of the accu-
racy of the appraisal if managers attempt to observe employee behavior or discuss per-
formance issues in the feedback session.57
Burlington Northern Santa Fe Corporation of Fort Worth, Texas, improved its per-
formance management process by holding leaders accountable in setting annual goals,
creating individual development plans, providing feedback and coaching to employees,
and self-evaluation.58 An online performance management system supports the process.
The company’s executive team creates the overall company objectives, which cascade
down to each department and individual employees who can now see how they contrib-
ute to the company’s success. The online system allows managers and employees to see
how they and the department are progressing on the objectives. Required to be engaged
in the performance management process, managers are more focused on the necessary
communications, coaching, and giving feedback, and they are more inclined to seek out
training to be sure that they have the necessary communications, feedback, and coaching
skills. Managers’ effectiveness is monitored by periodic employee surveys that ask ques-
tions about whether the manager discusses performance, whether the dialogue with the
manager is two-way, and whether the employee receives ongoing feedback.
Connecticut Health Foundation Uses Goals to
Ensure It Meets Mission and Objectives
The Connecticut Health Foun- already established and pub- term it’s not enough to pay ven-
dation (CHF) is a nonprofit lished yearly organization-level dors accurately and on time if
organization whose mission is objectives, the supervisor has employees don’t have a positive,
to improve the health status of a sense of what his or her customer-focused attitude.
people in Connecticut, specifi- group needs to accomplish to
cally helping more people support those objectives. This DISCUSSION QUESTION
of color and underserved com- information enables the man- What source(s) for performance
munities gain access to afford- ager to support the employee information do you think is best
able and high-quality care. It in identifying SMART goals that to use to determine whether
provides funding for programs to will contribute to achieving the employees are working toward
improve health systems group’s effort. In practice, setting the organization’s long-term
in Connecticut and helps and meeting these goals can be goals and mission, and ulti-
Connecticut residents make challenging. Some accomplish- mately its future? What perfor-
informed decisions about health ments are difficult to measure, mance outcomes (attributes,
care and advocate for their and some appear unrelated to behaviors, competencies,
health. Its strategic goals focus CHF’s overall goals and mission objective results) would you
on health equity and oral health. related to promoting health. For assess?
For each need, the organiza- example, it can be easier for SOURCES: Connecticut Health Foundation,
tion’s leaders establish yearly employees to think about pay- “About Us” and “Our Strategic Plan,” http://
objectives the agency should ing vendor bills on time than www.cthealth.org, accessed April 28, 2015;
Carol Pollack, “Measuring Employee Perfor-
attain to fulfill its mission. Each to focus on a broader purpose mance: Easier Said Than Done!” Connecticut
employee collaborates with their such as “maintaining the integ- Health Foundation blog, January 3, 2012, http://
supervisor to define the employ- rity of the foundation’s financial www.cthealth.org; Carol Pollack, “Employee
Performance: From Both an Inside and Outside
ee’s performance objectives. information.” Also, for the organi- View,” Connecticut Health Foundation blog,
Because the organization has zation to succeed over the long January 5,2012, http://www.cthealth.org.
Problems with using supervisors as the source of performance information can occur
in particular situations. In some jobs, for example, the supervisor does not have an ade-
quate opportunity to observe the employee performing his job duties. For example, in
outside sales jobs, the supervisor does not have the opportunity to see the salesperson at
work most of the time. This usually requires that the manager occasionally spend a day
accompanying the salesperson on sales calls. However, on those occasions the employee
will be on best behavior, so there is no assurance that performance that day accurately
reflects performance when the manager is not around.
Also, some supervisors may be so biased against a particular employee that to use the
supervisor as the sole source of information would result in less-than-accurate measures
for that individual. Favoritism is a fact of organizational life, but it is one that must be
minimized as much as possible in performance management.59 Thus, the performance
evaluation system should seek to minimize the opportunities for favoritism to affect rat-
ings. One way to do this is not to rely on only a supervisor’s evaluation of an employee’s
performance.
352
PEERS
Another source of performance information is the employee’s co-workers. Peers are an
excellent source of information in a job such as law enforcement, where the supervi-
sor does not always observe the employee. Peers have expert knowledge of job require-
ments, and they often have the most opportunity to observe the employee in day-to-day
activities. Also, peers are often in the best position to praise and recognize each other’s
performance on a daily basis. Peer evaluations can be even more motivating than manag-
ers’ evaluations because, unlike managers, peers are not expected to provide feedback.
Google provides employees with Kudos, a peer-to-peer recognition program that lets
employees send online thank-you notes and Peer Bonus, through which they can nomi-
nate their peers for $175 rewards.60 At Colorado’s Douglas County Libraries employ-
ees nominate colleagues for their accomplishment.61 Each year a committee chooses
employees or teams who will be recognized. For example, honored employees include
librarians who created a storytime for special needs children and improved an inventory
management process. The employees are honored during a recognition dinner, given
one day off with pay, and are asked to choose a favorite book in which a label is placed
acknowledging the award.
Peers also bring a different perspective to the evaluation process, which can be valuable
in gaining an overall picture of the individual’s performance. In fact, peers have been found
to provide extremely valid assessments of performance in several different settings.62
One disadvantage of using peer ratings is the potential for friendship to bias ratings.63
Little empirical evidence suggests that this is often a problem, however. Another disad-
vantage is that when the evaluations are made for administrative decisions, peers often
find the situation of being both rater and ratee uncomfortable. When these ratings are
used only for developmental purposes, however, peers react favorably.64
SUBORDINATES
Subordinates are an especially valuable source of performance information when man-
agers are evaluated. Subordinates often have the best opportunity to evaluate how well a
manager treats employees. Upward feedback refers to appraisals that involve collecting Upward Feedback
subordinates’ evaluations of manager’s behavior or skills. Dell Inc., the Texas-based Managerial perfor-
computer company, recently took steps to focus not only on financial goals but also on mance appraisal that
involves subordinates’
making the company a great place to work to attract and keep talented employees.65 To evaluations of the man-
help develop what Dell calls a “winning culture,” Dell added a people management com- ager’s behavior or skills.
ponent to its results-oriented performance management system. Managers are now rated
by their employees on semiannual “Tell Dell” surveys. Managers who receive less than
50% favorable scores on five questions receive less favorable compensation, bonus, and
promotion opportunities and are required to take additional training. Table 8.11 shows
Table 8.11
Example of Upward
company, I would stay at Dell. Feedback Survey
Questions from “Tell
Dell” Surveys
SOURCE: Based on A. Pomeroy, “Agent of Change,” HR Magazine, May 2005, pp. 52–56.
the five questions. Managers are expected to work continuously to improve their scores.
Their goal is to receive at least 75% favorable ratings from employees on the five ques-
tions. One study found that managers viewed receiving upward feedback more positively
when receiving feedback from subordinates who were identified, but subordinates pre-
ferred to provide anonymous feedback. When subordinates were identified, they inflated
their ratings of the manager.66
One problem with subordinate evaluations is that they give subordinates power over
their managers, thus putting the manager in a difficult situation.67 This can lead to
managers’ emphasizing employee satisfaction over productivity. However, this hap-
pens only when administrative decisions are made from these evaluations. As with peer
evaluations, it is a good idea to use subordinate evaluations only for developmental
purposes. To assure subordinates that they need not fear retribution from their manag-
ers, it is necessary to use anonymous evaluations and at least three subordinates for
each manager.
SELF
Although self-ratings are not often used as the sole source of performance information,
they can still be valuable.68 Obviously, individuals have extensive opportunities to observe
their own behavior, and they usually have access to information regarding their results on
the job. The YMCA of Greater Rochester, New York, added employee self-evaluation
as part of its performance review process to address concerns that employees had little
input into the appraisal process. Its original performance management process didn’t help
facilitate conversation between employees and managers, and both parties dreaded for-
mal appraisal meetings.69 In the revamped process, self-evaluation allows employees to
give examples of good performance and to request training to improve their weaknesses.
Before they are finalized, performance ratings are based on a discussion between the
manager and employee. Self-evaluations have lessened the fear and anxiety associated
with the old appraisal process. Employees feel they have a voice and the opportunity to
influence the appraisal process. Managers are relieved because the burden for evaluation
is no longer completely their responsibility. Now, employees provide them with feedback
and insight into their performance which help determine performance ratings.
One problem with self-ratings, however, is a tendency toward inflated assessments.
Research has found that self-ratings for personal traits as well as overall performance
ratings tend to be lenient compared to ratings from other sources.70 This stems from two
sources. If the ratings are going to be used for administrative decisions (like pay raises),
it is in the employees’ interests to inflate their ratings. And there is ample evidence
in the social psychology literature that individuals attribute their poor performance
to external causes, such as a co-worker who they think has not provided them with
timely information. Although self-ratings are less inflated when supervisors provide
frequent performance feedback, it is not advisable to use them for administrative pur-
poses.71 The best use of self-ratings is as a prelude to the performance feedback session
to get employees thinking about their performance and to focus discussion on areas of
disagreement.
CUSTOMERS
Many companies are involving customers in their evaluation systems. One writer has
defined services this way: “Services is something which can be bought and sold but
which you cannot drop on your foot.”72 Because of the unique nature of services—
the product is often produced and consumed on the spot—supervisors, peers, and
subordinates often do not have the opportunity to observe employee behavior. Instead,
the customer is often the only person present to observe the employee’s performance and
thus is the best source of performance information.
Many companies in service industries have moved toward customer evaluations of
employee performance. Marriott Corporation provides a customer satisfaction card in
every room and mails surveys to a random sample of customers after their stay in a
Marriott hotel. Whirlpool’s Consumer Services Division conducts on-site (using the
service technicians’ handheld computers), mail, and telephone surveys of customers
after factory service technicians have serviced their appliances. These surveys allow the
company to evaluate an individual technician’s customer-service behaviors while in the
customer’s home.
Using customer evaluations of employee performance is appropriate in two
situations.73 The first is when an employee’s job requires direct service to the cus-
tomer or linking the customer to other services within the company. Second, customer
evaluations are appropriate when the company is interested in gathering information
to determine what products and services the customer wants. That is, customer evalu-
ations serve a strategic goal by integrating marketing strategies with human resource
activities and policies. Customer evaluations collected for this purpose are useful for
both evaluating the employee and helping to determine whether changes in other HRM
activities (such as training or the compensation system) are needed to improve cus-
tomer service.
The weakness of customer surveys is their expense, particularly if printing, postage,
telephone, and labor are involved. On-site surveys completed using handheld computers
help eliminate these expenses.
In conclusion, the best source of performance information often depends on the par-
ticular job. One should choose the source or sources that provide the best opportunity to
observe employee behavior and results. Often, eliciting performance information from a
variety of sources results in a performance management process that is accurate and
effective. In fact, one recent popular trend in organizations is called 360-degree 360-Degree
appraisal.74 This technique consists of having multiple raters (boss, peers, subordinates, Appraisal
customers) provide input into a manager’s evaluation. The major advantage of the tech- A performance
appraisal process
nique is that it provides a means for minimizing bias in an otherwise subjective evalua- for managers that
tion technique. It has been used primarily for strategic and developmental purposes and includes evaluations
is discussed in greater detail in Chapter 9.75 Netflix doesn’t use annual performance from a wide range of
reviews but instead uses informal 360-degree reviews.76 Employees are asked to identify persons who interact
things that their peers should start, stop, and continue doing. The reviews are not anony- with the manager. The
process includes self-
mous and many teams hold the reviews face-to-face. Netflix’s use of 360-degree apprais- evaluations as well as
als fits into the company’s performance culture that emphasizes that performance should evaluations from the
be discussed simply and honestly. manager’s boss, sub-
ordinates, peers, and
customers.
Use of Technology in Performance

Management LO 8-8
Technology is influencing performance management systems in four ways. First, many Discuss the potential
companies are moving to web-based online paperless performance management sys- advantages of perfor-
mance management,
tems. These systems help companies ensure that performance goals across all levels of
gamification, social
the organization are aligned, provide managers and employees with greater access to performance manage-
performance information, and tools for understanding and use of the performance man- ment, and electronic
agement process.77 monitoring.
Second, social media tools similar to Facebook and Twitter are increasingly being
Social Performance used to deliver timely feedback. Social performance management refers to systems simi-
Management lar to Facebook, LinkedIn, and Yammer that allow employees to quickly exchange infor-
Social media and mation, talk to each other, provide coaching, and receive recognition. Social performance
microblogs similar to
Facebook, LinkedIn,
management is especially valued by Milliennial generation employees who want more
and Yammer that allow frequent feedback about their performance because they have grown up electronically
employees to quickly connected to each other through social networking tools that enable personal and profes-
exchange informa- sional connections.78 Although Baby Boomers may be more likely to believe that feed-
tion, talk to each other, back involves judgment compared to younger generations who see feedback as an
provide coaching, and
receive feedback and
opportunity to learn, high performers of all ages across generations are likely to seek and
recognition in the form value feedback. As emphasized in the effective performance management model (see
of electronic badges. Figure 8.1) performance feedback is a critical part of the performance management pro-
cess that should not be limited to quarterly, midyear, or annual formal performance eval-
uations. Also sometimes peers and co-workers can give more timely and accurate
feedback and recognition than busy managers. For example, Mozilla’s social perfor-
mance management system can be accessed by employees on their computers and smart-
phones.79 Employees and managers can send each other colorful “badges” to recognize
good performance. The badges include slogans such as “you rock” or “kicking butt.”
Also, employees can receive feedback and coaching from peers. Employees can post
short questions about their performance such as “What did you think about my speech?”
or “How can I handle angry customers better?” The questions are e-mailed to managers,
peers, and anyone else from whom the employee wants to receive feedback. The
responses are gathered together so they are anonymous and sent back to the employee,
providing a quick and timely performance review.
Third, companies are starting to use gamification in performance management.
Gamification Gamification means that game-based strategies are applied to performance management
Game-based strategies to make it a fun, effective, transparent, and inclusive process for employees and manag-
applied to performance ers. The “Competing through Technology” box shows how gamification is being used by
management to make
it a fun, effective, trans-
Persistent Systems.
parent, and inclusive Fourth, companies are relying on electronic tracking and monitoring systems to
process for employees ensure that employees are working when and how they should be and to block access
and managers. to visiting certain websites (such as those containing pornographic images). These
systems include hand and fingerprint recognition systems, global positioning sys-
tems (GPS), and software that can track employees using smartphones and notebook
computers.
For example, at the New York law firm Akin & Smith LLC, paralegals, receptionists,
and clerks clock in by placing their finger on a sensor kept at a secretary’s desk. The
managing partners believe the system improves productivity and keeps everyone honest,
holding them to their lunch times.80
In the trucking industry, drivers are constantly monitored.81 An onboard computer
records whether the driver is on or off duty, documents his gas mileage, and tells him
where to get gas. If the truck stops while on duty the driver is asked to provide an expla-
nation. The electronic monitoring system built in the computer tells him which route
to follow and records even slight deviations from the route due to traffic or accidents.
Plants, Inc., a company that provides interior landscaping services to homes and busi-
nesses, uses monitoring software installed on company-provided phones.82 Managers
can see employee location and any photo, text message, e-mail, and website visits made
over the phones. However, managers only use the location-tracking feature in response
to customer questions about when and if Plants’ employees had provided service on the
scheduled date and time.
Gamification Improves Performance Management
Persistent Systems, a global KPIs, performance goals, train- drop in turnover
technology innovation and soft- ing needs, and certifications. and increase in
ware solutions company, asked The new system has allowed customer ratings and satisfaction
eMee to help develop a game- performance management to scores.
based approach to performance provide just-in-time feedback
management. The game-based from customers, peers, and man- DISCUSSION QUESTIONS
approach allows any employee agers, across teams and busi- 1. Consider the performance
to participate in performance ness functions. This is important management process shown
management. In the system because Persistent’s work is in Figure 8.1. On which
every employee has a virtual project-driven, which means that step(s) in the process do you
avatar. Managers and peers can employees often switch manag- think that gamification of
present virtual gifts to employers and projects many times performance management
ees for their achievements. The each year. Last year, approxi- can have the most positive
virtual gifts carry points which mately 500,000 comments influence?
provide a measure of perfor- and citations were provided by 2. Why did this performance
mance against key performance managers and peers in the sys- management system result in
indicators (KPIs). The system is tem. The company estimates it lowering turnover? Increas-
integrated with other business saved more than 28,000 hours ing customer ratings and
applications and information sys- by using the new system. Persis- satisfaction?
tems. Employees and managers tent believes that the new per- SOURCE: Based on D. Zinger and S. Bhobe,
can access all aspects of perfor- formance management system “Game-changing Performance Management,”
mance management including is directly responsible for a 5% T + D, January 2014, p. 80.
Memorial Care, a nonprofit hospital group, keeps detailed data on the extent to which
doctors perform immunizations and mammograms and reduce the blood sugar levels of
diabetes patients.83 In its hospitals the company tracks the extent to which patients experi-
ence complications and hospital readmissions, as well as the cost of services. Doctors are
graded as green, yellow, or red based on how well they are performing compared to their
peers. The data collected is discussed with individual doctors as well as clinics. For exam-
ple, at one clinic all of the numbers exceeded the standards except cervical cancer screen-
ings. Some patients were getting pap smears more often than the recommended guideline
of every three years. The clinic doctors discussed the results and identified that the high
rate of pap smears was because some of the tests were ordered by gynecologists outside the
groups who also saw Memorial care patients and some low cancer-risk patients’ resistance
to not getting annual pap smears. To persuade these patients and reduce the number of pap
smears one doctor hung cervical cancer guidelines on the wall of the exam room.
Companies are using software that analyzes employees’ computers and creates a pro-
file.84 Over time the software is able to create a baseline of normal behavior including
where they log in, what programs are used, databases accessed, and external websites
browsed. It also provides a score for users (a risk score) based on what dangers they may
pose to the company such as stealing data or new product designs or viewing pornog-
raphy. Software called Scout can be used to evaluate the content of employees e-mail
and other communications. The software scans for variations in language usage in the
e-mails such as an increase in the use of phrases such as “medical bills” or “missed pay-
ments” that may mean the employee is an increased risk for stealing.
357
Despite the potential increased productivity and efficiency benefits that can result
from these systems, they still present privacy concerns.85 Critics argue that these systems
threaten to reduce the workplace to an electronic sweatshop in which employees are
treated as robots that are monitored to maximize productivity for every second they are
at work. Also, electronic monitoring systems threaten employees’ rights and dignity to
work without being monitored.
Some argue that electronic tracking systems are needlessly surveilling and tracking
employees when there is no reason to believe that anything is wrong. Good managers
know what their employees are doing, and electronic systems should not be a substitute
for good management. Critics also argue that such systems result in less productivity and
motivation, demoralize employees, and create unnecessary stress. A mentality is created
that employees have to always be at their desks to be productive. However, these systems
can ensure that time is not abused, they improve scheduling, and they help motivate
workers and improve performance.86 To avoid the potential negative effects of electronic
monitoring, managers must communicate why employees are being monitored. Moni-
toring can also be used as a way for more experienced employees to coach less experi-
enced employees.
REDUCING RATER ERRORS, POLITICS, AND INCREASING

RELIABILITY AND VALIDITY OF RATINGS
LO 8-9 Research consistently reveals that humans have tremendous limitations in process-
Distinguish types of rating information. Because we are so limited, we often use “heuristics,” or simplifying
ing errors, and explain
mechanisms, to make judgments, whether about investments or about people.87 These
how to minimize each
in a performance heuristics, which appear often in subjective measures of performance, can lead to rater
evaluation. errors. Performance evaluations may also be purposefully distorted to achieve personal or
company goals (appraisal politics). Table 8.12 shows the different types of rating errors.
Similar to me error is based on stereotypes the rater has about how individuals with cer-
tain characteristics are expected to perform.88 Leniency, strictness, and central tendency
are known as distributional errors because the rater tends to use only one part of the rat-
ing scale.
Appraisal Politics Appraisal politics refer to evaluators purposefully distorting a rating to achieve per-
A situation in which sonal or company goals. Research suggests that several factors promote appraisal
evaluators purpose- politics. These factors are inherent in the appraisal system and the company culture.
fully distort ratings to
achieve personal or
Appraisal politics are most likely to occur when raters are accountable to the employee
company goals. being rated, there are competing rating goals, and a direct link exists between perfor-
mance appraisal and highly desirable rewards. Also, appraisal politics are likely to
occur if top executives tolerate distortion or are complacent toward it, and if distor-
tion strategies are part of “company folklore” and are passed down from senior
employees to new employees. For example, employees at King Pharmaceutical
resisted development of a centralized performance system.89 King Pharmaceutical is
built from smaller acquired companies, each with a unique culture. Each department
within the company had developed its own way of figuring out how to evaluate per-
formance and link it to pay.
There are three approaches to reducing rating errors.90 They include rater error
training, frame-of-reference training, and calibration meetings. Rater error training
attempts to make managers aware of rating errors and helps them develop strategies
for minimizing those errors.91 These programs consist of having the participants view
videotaped vignettes designed to elicit rating errors such as “contrast.” They then
make their ratings and discuss how the error influenced the rating. Finally, they get
Table 8.12
RATER ERROR DESCRIPTION
Typical Rater Errors
Similar to me Individuals who are similar to us in race, gender, back-

ground, interest, beliefs, etc., receive higher ratings than
those who are not.
Contrast Ratings influenced by comparison between individuals
instead of an objective standard (e.g., employee receives
lower than deserved rating because he/she is compared to
outstanding peers).
Leniency Rater gives high ratings to all employees regardless of their
performance.
Strictness Rater gives low ratings to all employees regardless of their
performance.
Central tendency Rater gives middle or average ratings to all employees
despite their performance.
Halo Rater gives employee high ratings on all aspects of perfor-
mance because of their overall positive impression of the
employee.
Horns Rater gives employee low ratings on all aspects of perfor-
mance because of an overall negative impression of the
employee.
tips to avoid committing those errors. This approach has been shown to be effective
for reducing errors, but there is evidence that reducing rating errors can also reduce
accuracy.92
Rater accuracy training, also called frame-of-reference training, attempts to empha-
size the multidimensional nature of performance and to get raters to understand and use
the same idea of high, medium, and low performance when making evaluations. This
involves providing examples of performance for each dimension and then discussing the
actual or “correct” level of performance that the example represents.93 Accuracy training
seems to increase accuracy, provided that in addition the raters are held accountable for
ratings, job-related rating scales are used, and raters keep records of the behavior they
observe.94
An important way to help ensure that performance is evaluated consistently across
managers and to reduce the influence of rating errors and politics on appraisals is to
hold calibration meetings.95 Calibration meetings provide a way to discuss employees’ Calibration
performance with the goal of ensuring that similar standards are applied to their evalu- Meetings
ations. These meeting include managers responsible for conducting performance Meetings attended
by managers in which
appraisals and their managers and are facilitated by an internal HR representative or an employee performance
external consultant. In the meetings, each employee’s performance rating and the man- ratings are discussed
ager’s reasons for the ratings are discussed. Managers have the opportunity to discuss and evidence sup-
the definition of each performance rating and ask questions. The calibration meetings porting the ratings is
help managers identify if their ratings are too positive or negative or tend to be based on provided. The purpose
of the meetings is to
employees’ most recent performance. Managers are more likely to provide accurate reduce the influence
evaluations that are well-documented when they know they may have to justify them in of rating errors and
a calibration meeting. Calibration meetings can also help eliminate politics by discuss- politics on performance
ing how performance ratings relate to business results. Also, in addition to rater training appraisals.
and calibration meetings, to minimize appraisal politics, managers should keep in mind
the characteristics of a fair appraisal system, shown earlier in Table 8.2. Thus, managers
should also:
∙ Build top management support for the appraisal system and actively discourage distortion.
∙ Give raters some latitude to customize performance objectives and criteria for their ratees.
∙ Recognize employee accomplishments that are not self-promoted.
∙ Provide employees with access to information regarding which behaviors are desired
and acceptable at work.
∙ Encourage employees to actively seek and use feedback to improve performance.
∙ Make sure constraints such as budget do not drive the process.
∙ Make sure appraisal processes are consistent across the company.
∙ Foster a climate of openness to encourage employees to be honest about weaknesses.96
Performance Feedback
LO 8-10 Once the expected performance has been defined and employees’ performances have
Conduct an effective been measured, it is necessary to feed that performance information back to the employ-
performance feedback ees so they can correct any deficiencies. The performance feedback process is complex
session.
and provokes anxiety for both the manager and the employee.
Few of us feel comfortable sitting in judgment of others. The thought of confronting
others with what we perceive to be their deficiencies causes most of us to shake in our
shoes. If giving negative feedback is painful, receiving it can be excruciating—thus the
importance of the performance feedback process.
THE MANAGER’S ROLE IN AN EFFECTIVE

PERFORMANCE FEEDBACK PROCESS
If employees are not made aware of how their performance is not meeting expectations,
their performance will almost certainly not improve. In fact, it may get worse. Effective
managers provide specific performance feedback to employees in a way that elicits posi-
tive behavioral responses. Because of the importance of performance feedback for an
effective performance management system, many companies are training managers on
how to provide feedback. For example, Lubrizol Corporation, a chemical manufacturer
based in Wickliffe, Ohio, requires that managers enroll in a two-day training course
designed to help them provide meaningful feedback.97 The company’s goal is to become
recognized as the best developer of people. The training course focuses on how managers
give feedback, who they need help from, and how they can hold themselves accountable.
To contribute to the effectiveness of a performance management system through provid-
ing effective feedback, managers should consider the following recommendations.98
Feedback Should Be Given Frequently, Not Once a Year. There are two reasons for
this. First, managers have a responsibility to correct performance deficiencies imme-
diately on becoming aware of them. If performance is subpar in January, waiting until
December to appraise the performance could mean an 11-month productivity loss. Sec-
ond, a major determinant of the effectiveness of a feedback session is the degree to
which the subordinate is not surprised by the evaluation. An easy rule to follow is that
employees should receive such frequent performance feedback that they already know
almost exactly what their formal evaluation will be.
Survey results from several companies suggest that many employees, especially
those in Generation Y (employees born after 1980), want more frequent and candid
performance feedback from managers beyond what is provided once or twice a year
during their formal performance review.99 As a result, Ernst & Young LLC created an
online “Feedback Zone” that prompts employees twice a year to request feedback but
also allows them to request or submit feedback at any time.
Create the Right Context for the Discussion. Managers should choose a neutral
location for the feedback session. The manager’s office may not be the best place for
a constructive feedback session because the employee may associate the office with
unpleasant conversations. Managers should describe the meeting as an opportunity to
discuss the role of the employee, the role of the manager, and the relationship between
them. Managers should also acknowledge that they would like the meeting to be an open
dialogue.
Ask the Employee to Rate His or Her Performance before the Session. Having
employees complete a self-assessment before the feedback session can be very produc-
tive. It requires employees to think about their performance over the past rating period,
and it encourages them to think about their weaknesses. Although self-ratings used for
administrative decisions are often inflated, there is evidence that they may actually be
lower than supervisors’ ratings when done for developmental purposes. Another reason
a self-assessment can be productive is that it can make the session go more smoothly
by focusing discussion on areas where disagreement exists, resulting in a more efficient
session. Finally, employees who have thought about past performance are more able to
participate fully in the feedback session.
Encourage the Employee to Participate in the Session. Managers can take one of
three approaches in performance feedback sessions. In the “tell-and-sell” approach,
managers tell the employees how they have rated them and then justify these ratings. In
the “tell-and-listen” approach, managers tell employees how they have rated them and
then let the employees explain their side of the story. In the “problem-solving” approach,
managers and employees work together to solve performance problems in an atmosphere
of respect and encouragement. In spite of the research demonstrating the superiority of
the problem-solving approach, most managers still rely on the tell-and-sell approach.
When employees participate in the feedback session, they are consistently satisfied
with the process. (Recall our discussion of fairness earlier in this chapter.) Participation
includes allowing employees to voice their opinions of the evaluation, as well as discuss
performance goals. One study found that, other than satisfaction with one’s supervisor,
participation was the single most important predictor of satisfaction with the feedback
session.100
Recognize Effective Performance through Praise. One usually thinks of performance
feedback sessions as focusing on the employee’s performance problems. This should
never be the case. The purpose of the session is to give accurate performance feedback,
which entails recognizing effective performance as well as poor performance. Praising
effective performance provides reinforcement for that behavior. It also adds credibility
to the feedback by making it clear that the manager is not just identifying performance
problems.
Focus on Solving Problems. A common mistake that managers make in providing per-
formance feedback is to try to use the session as a chance to punish poorly performing
employees by telling them how utterly lousy their performance is. This only reduces
the employees’ self-esteem and increases defensiveness, neither of which will improve
performance.
To improve poor performance, a manager must attempt to solve the problems caus-
ing it. This entails working with the employee to determine the actual cause and then
agreeing on how to solve it. For example, a salesperson’s failure to meet a sales goal
may be the result of lack of a proper sales pitch, lack of product knowledge, or sto-
len sales by another salesperson. Each of these causes requires a different solution.
Without a problem-solving approach, however, the correct solution might never be
identified.
Focus Feedback on Behavior or Results, Not on the Person. One of the most impor-
tant things to do when giving negative feedback is to avoid questioning the employee’s
worth as a person. This is best accomplished by focusing the discussion on the employ-
ee’s behaviors or results, not on the employee. Saying “You’re screwing up! You’re just
not motivated!” will bring about more defensiveness and ill feelings than stating “You
did not meet the deadline that you agreed to because you spent too much time on another
project.”
Minimize Criticism. Obviously, if an individual’s performance is below standard, some
criticism must take place. However, an effective manager should resist the temptation
to reel off a litany of offenses. Having been confronted with the performance problem,
an employee often agrees that a change is in order. However, if the manager continues
to come up with more and more examples of low performance, the employee may get
defensive.
Agree to Specific Goals and Set a Date to Review Progress. The importance of goal
setting cannot be overemphasized. It is one of the most effective motivators of perfor-
mance.101 Research has demonstrated that it results in increased satisfaction, motivation
to improve, and performance improvement.102 Besides setting goals, the manager must
also set a specific follow-up date to review the employee’s performance toward the goal.
This provides an added incentive for the employee to take the goal seriously and work
toward achieving it.
EVIDENCE-BASED HR
Like most businesses, Google had files of data about managers—results of perfor-
mance reviews, surveys measuring employee attitudes, and nominations for manage-
ment awards. Google used its expertise in analyzing large amounts of data to identify
a profile of the kind of manager whose team is most successful. The company’s peo-
ple analytics group (which brings together psychologists, MBAs, and data mining
experts) analyzed 10,000 observations about managers in terms of more than 100
variables, looking for patterns. The initial finding was a surprise to some at a com-
pany that had once operated without managers: teams with good managers outperform
teams with bad managers. But what makes a good manager? Under the leadership of
Google’s HR vice president, the company distilled its findings into a list of the behav-
iors that get results:
1. Be a good coach.
2. Empower your team, and don’t micromanage.
3. Express interest in team members’ success and personal well-being.
4. Don’t be a sissy: Be productive and results-oriented.
5. Be a good communicator, and listen to your team.
6. Help your employees with career development.
7. Have a clear vision and strategy for the team.
8. Have key technical skills so you can help advise the team.
By building performance measures including the eight behaviors, Google was able
to evaluate its managers’ performance and identify those who needed to improve in
particular areas. It developed training programs in the eight types of desired behav-
ior. Before and after providing performance appraisals, training, and coaching,
Google conducted surveys to gauge managers’ performance. It measured a significant
improvement in manager quality for 75% of its lowest-performing managers.
SOURCES: L. Bock, Work Rules! Insights from Inside Google That Will Transform How You Live and Lead (New
York: Grand Central Publishing, 2015); A. Bryant, “Google’s Quest to Build a Better Boss,” The New York Times,
March 12, 2011, www.nytimes.com; Clara Byrne, “People Analytics: How Google Does HR by the Numbers,”
VentureBeat, September 20, 2011, http://venturebeat.com; P. Galagan, “Measure for Measure,” T + D, May 2011,
pp. 28–30.
What Managers Can Do to Diagnose

Performance Problems and Manage
Employees’ Performance
As we emphasized in the previous discussion, employees need performance feedback to LO 8-11
improve their current job performance. As we discuss in Chapter 9, “Employee Develop- Identify the cause of a
performance problem.
ment,” performance feedback is also needed for employees to develop their knowledge
and skills for the future. In addition to understanding how to effectively give employ-
ees performance feedback, managers need to be able to diagnose the causes of perfor-
mance problems and take actions to improve and maintain employee performance. For
example, giving performance feedback to marginal employees may not be sufficient for
improving their performance.
DIAGNOSING THE CAUSES OF POOR PERFORMANCE

Many different reasons can cause an employee’s poor performance. For example, poor
performance can be due to lack of employee ability, misunderstanding of performance
expectations, lack of feedback, or the need for training an employee who does not have
the knowledge and skills needed to meet the performance standards. When diagnosing
the causes of poor performance it is important to consider whether the poor performance
is detrimental to the business. That is, is poor performance critical to completing the job
and does it affect business results? If it is detrimental, then the next step is to conduct
a performance analysis to determine the cause of poor performance. The different fac-
tors that should be considered in analyzing poor performance are shown in Figure 8.8.
For example, if an employee understands the expected level of performance, has been
given sufficient feedback, understands the consequences, but lacks the knowledge and
skills needed to meet the performance standard, this suggests that the manager may want
to consider training the employee to improve performance, moving the employee to a
different job that better fits that person’s skills, or discharging the employee and making
sure that selection methods to find a new employee measure the level of knowledge and
skills needed to perform the job.
After conducting the performance analysis, managers should meet with the employee
to discuss the results, agree to the next steps that the manager and employee will take to
Figure 8.8 Input

Factors to Consider
in Analyzing Poor Does the employee recognize what he or she is supposed to do?
Performance Are the job flow and procedures logical?
Do employees have the resources (tools, equipment, technology, time) needed for
successful performance?
Are other job demands interfering with good performance in this area?
Employee Characteristics
Does the employee have the necessary skills and knowledge needed?
Does the employee know why the desired performance level is important?
Is the employee mentally, physically, and emotionally able to perform at the
expected level?
Feedback
Has the employee been given information about his or her performance?
Is performance feedback relevant, timely, accurate, specific, and understandable?
Performance Standard/Goals
Do performance standards exist?

Does the employee know the desired level of expected performance?
Does the employee believe she or he can reach the performance standard?
Consequences
Are consequences (rewards, incentives) aligned with good performance?

Are the consequences of performance valuable to the employee?
Are performance consequences given in a timely manner?
Do work group or team norms encourage employees not to meet
performance standards?
SOURCES: Based on G. Rummler, “In Search of the Holy Performance Grail,” Training and Development, April 1996,
pp. 26–31; C. Reinhart, “How to Leap over Barriers to Performance,” Training and Development, January 2000,
pp. 20–24; F. Wilmouth, C. Prigmore, and M. Bray, “HPT Models: An Overview of the Major Models in the Field,”
Performance Improvement 41 (2002), pp. 14–21.
improve performance (e.g., training, providing resources, giving more feedback), discuss
the consequences of failing to improve performance, and set a time line for improve-
ment. This type of discussion is most beneficial if it occurs more frequently than the
quarterly or yearly performance review, so performance issues can be quickly dealt with
before they have adverse consequences for the company (and the employee). Following,
we discuss the actions that should be considered for different types of employees.
ACTIONS FOR MANAGING EMPLOYEES’ PERFORMANCE

Table 8.13 shows actions for the manager to take with four different types of employees.
As the table highlights, managers need to take into account employees’ ability, motiva-
tion, or both in considering ways to improve performance. To determine an employee’s
level of ability, a manager should consider if he or she has the knowledge, skills, and
abilities needed to perform effectively. Lack of ability may be an issue if an employee is
new or the job has recently changed. To determine employees’ level of motivation, man-
agers need to consider if employees are doing a job they want to do and if they feel they
are being appropriately paid or rewarded. A sudden negative change in an employee’s
performance may indicate personal problems.
Employees with high ability and motivation include likely good and outstanding
performers (solid performers). Table 8.13 emphasizes that managers should not ignore
employees with high ability and high motivation. Managers should provide development
opportunities to keep them satisfied and effective. Some individuals who are outstand-
ing or good performers may be candidates for leadership positions within the company.
As a result they will need challenging development experiences and exposure to dif-
ferent aspects of the business. These employees would be considered “A players” (see
Table 8.3). We discuss development experiences in Chapter 9. Other employees may
Table 8.13
ABILITY
Ways to Manage
HIGH LOW Employees’
Performance
Solid performers Misdirected effort
opportunities feedback
High
feedback
assignment for skill
development
assignment
MOTIVATION Underutilizers Deadwood
feedback
Low conflict resolution

on performance problems
performance outcomes
knowledge or skills
SOURCES: Based on M. London, Job Feedback (Mahwah, NJ: Lawrence Erlbaum Associates, 1997), pp. 96–97;
H. Aguinis and E. O’Boyle, Jr., “Star Performers in the Twenty-First Century,” Personnel Psychology 67 (2014),
pp. 313–50; D. Grote, How to Be Good at Performance Appraisals (Boston: Harvard University Press, 2011).
not desire positions with managerial responsibility. These employees need development
opportunities to help keep them engaged in their work and to avoid obsolescence. These
employees would be considered B players in Table 8.3. Finally, there are different rea-
sons why employees are considered poor performers (C players shown in Table 8.3).
Poor performance resulting from lack of ability but not motivation (misdirected effort)
may be improved by skill development activities such as training or temporary assign-
ments. Managers with employees who have the ability but lack motivation (underutiliz-
ers) need to consider actions that focus on interpersonal problems or incentives. These
actions include making sure that incentives or rewards that the employee values are
linked to performance and making counseling available to help employees deal with per-
sonal problems or career or job dissatisfaction. Chronic poor performance by employees
with low ability and motivation (deadwood) indicates that outplacement or firing may
be the best solution.
Developing and Implementing

a System That Follows
Legal Guidelines
We now discuss the legal issues and constraints affecting performance management.
Because performance measures play a central role in such administrative decisions as
promotions, pay raises, and discipline, employees who sue an organization over these
decisions ultimately attack the measurement systems on which the decisions were made.
Two types of cases have dominated: discrimination and unjust dismissal.
In discrimination suits, the plaintiff often alleges that the performance measure-
ment system unjustly discriminated against the plaintiff because of age, race, gender,
or national origin. Many performance measures are subjective, and we have seen that
individual biases can affect them, especially when those doing the measuring harbor
racial or gender stereotypes.
In Brito v. Zia, the Supreme Court essentially equated performance measures with
selection tests.103 It ruled that the Uniform Guidelines on Employee Selection Proce-
dures apply to evaluating the adequacy of a performance appraisal instrument. This rul-
ing presents a challenge to those involved in developing performance measures, because
a substantial body of research on race discrimination in performance rating has dem-
onstrated that both white and black raters give higher ratings to members of their own
racial group, even after rater training.104 There is also evidence that the discriminatory
biases in performance rating are worse when one group makes up a small percentage of
the workgroup. When the vast majority of the group is male, females receive lower rat-
ings; when the minority is male, males receive lower ratings.105
In the second type of suit, an unjust dismissal suit, the plaintiff claims that the dis-
missal was for reasons other than those the employer claims. For example, an employee
who works for a defense contractor might blow the whistle on the company for defraud-
ing the government. If the company fires the employee, claiming poor performance,
the employee may argue that the firing was, in fact, because of blowing the whistle on
the employer—in other words, that the dismissal was unjust. The court case will likely
focus on the performance measurement system used as the basis for claiming the
employee’s performance was poor. Unjust dismissal also can result from terminating for
poor performance an employee who has a history of favorable reviews and raises. This
may occur especally when a new evaluation system is introduced that results in more
experienced older employees receiving unsatisfactory reviews. Rewarding poor perform-
ers or giving poor performers positive evaluations because of an unwillingness to con-
front a performance issue undermines the credibility of any performance management
system. This makes it difficult to defend termination decisions based on a performance
appraisal system.
For example, Baltimore-based MRA Systems, Inc., a subsidiary of General Electric,
paid $130,000 to settle an age discrimination lawsuit.106 An employee received a lower
performance rating, despite his successful job performance, because of his age, which
was 61. In addition, MRA Systems had to provide at least two hours of mandatory train-
ing on federal laws prohibiting employment discrimination to all managers, supervisors
and other employees who participate in the performance evaluation process or assign-
ment decisions. The Equal Employment Opportunity Commission sued Wisconsin
Plastics, Inc. (WPI), a metal and plastic products manufacturer, for violating federal law
by firing several Hmong and Hispanic employees because of their national origin.107
WPI fired the Hmong and Hispanic employees based on 10-minute observations that
marked them down for their English skills even though those skills were not needed to
perform their jobs. The fired employees had received satisfactory ratings on their annual
performance evaluations.
Because of the potential costs of discrimination and unjust dismissal suits, an orga-
nization needs to determine exactly what the courts consider a legally defensible per-
formance management system. Based on reviews of such court decisions, we offer the
following characteristics of a system that will withstand legal scrutiny.108
1. The system should be developed by conducting a valid job analysis that ascertains
the important aspects of job performance. The requirements for job success should
be clearly communicated to employees.
2. The system should be based on either behaviors or results; evaluations of ambigu-
ous traits should be avoided. Also, performance discussions should focus on work
behavior and results other than questioning potential underlying reasons for behav-
ior and results such as a physical or mental disability.
3. Raters should be trained in how to use the system rather than simply given the
materials and left to interpret how to conduct the appraisal.
4. There should be some form of review by upper-level managers of all the perfor-
mance ratings, and there should be a system for employees to appeal what they
consider to be an unfair evaluation.
5. The organization should provide some form of performance counseling or cor-
rective guidance to help poor performers improve their performance before
being dismissed. Both short- and long-term performance goals should be
included.
6. Multiple raters should be used, particularly if an employee’s performance is
unlikely to be seen by only one rating source such as manager or customer. At
a minimum, employees should be asked to comment on their appraisals. There
should be a dialogue between the manager and the employee.
7. Performance evaluations need to be documented.
A LOOK BACK
Adobe’s Revised Performance Management System
The chapter opener discussed how Adobe revised their performance evalua-
tion system to abandon ranking employees and instead focus on managers and
employees having frequent performance discussions.
QUESTIONS
1. What steps should managers take to ensure that performance discussions are
effective?
2. What are the benefits and potential disadvantages of more frequent perfor-
mance discussions between managers and employees?
3. Which purpose of performance management will be more difficult to achieve
for companies like Adobe that decide to abandon ranking or rating employee
performance?
SUMMARY
Measuring and managing performance is a challeng- particular situations. In addition, once performance has
ing enterprise and one of the keys to gaining competitive been measured, a major component of a manager’s job is
advantage. Performance management systems serve stra- to provide frequent informal as well as formal feedback that
tegic, administrative, and developmental purposes—their is provided during performance evaluations in a way that
importance cannot be overestimated. A performance mea- results in improved performance rather than defensiveness
surement system should be evaluated against the criteria of and decreased motivation. Technologies can be potentially
strategic congruence, validity, reliability, acceptability, and useful in streamlining the performance management process
specificity. Measured against these criteria, the compara- and providing employees with feedback and other infor-
tive, attribute, behavioral, results, and quality approaches mation, which can motivate them to perform effectively.
have different strengths and weaknesses. Thus, deciding Managers should take action based on the causes for poor
which approach and which source of performance infor- performance: ability, motivation, or both. Managers must be
mation are best depends on the job in question. Effective sure that their performance management system can meet
managers need to be aware of the issues involved in deter- legal scrutiny, especially if it is used to discipline or fire
mining the best method or combination of methods for their poor performers.
KEY TERMS
Performance management, 321 Acceptability, 329 360-degree appraisal, 355
Performance appraisal, 321 Specificity, 330 Social performance
Performance feedback, 321 Competencies, 341 management, 356
Strategic congruence, 326 Competency model, 341 Gamification, 356
Validity, 328 Kaizen, 348 Appraisal politics, 358
Reliability, 329 Upward feedback, 353 Calibration meetings, 359
1. What are examples of administrative decisions that might 2. What would you consider the strategy of your univer-
be made in managing the performance of professors? sity (e.g., research, undergraduate teaching, graduate
Developmental decisions? teaching, a combination)? How might the performance
management system for faculty members fulfill its strate- 7. Explain what fairness has to do with performance
gic purpose of eliciting the types of behaviors and results management.
required by this strategy? 8. Why might a manager intentionally distort appraisal
3. What do you think is the most important step shown in results? What would you recommend to minimize this
the model of the effective performance management pro- problem?
cess? Justify your answer. 9. Can electronic monitoring of performance ever be
4. What sources of performance information would you use acceptable to employees? Explain.
to evaluate faculty members’ performance? 10. Customer satisfaction surveys completed after a service
5. What are the advantages and disadvantages of a perfor- call show that a call center representative is having dif-
mance management system? Would such a grading sys- ficulty answering customers questions about their cell
tem motivate your classroom performance? Explain. phone bills. How would you diagnose the cause of this
6. Think of the last time you had a conflict with another performance problem? Explain.
person, either at work or at school. Using the guidelines 11. How can the use of social media such as Facebook and
for performance feedback, how would you provide effec- Twitter-like applications benefit the performance man-
tive performance feedback to that person? agement process?
How do you like getting feedback? To test your attitudes _____ 9. It would bother me to ask the instructor for feedback.
toward feedback, take the following quiz. Read each state- _____ 10. It is not a good idea to ask the instructor for
ment, and write A next to each statement you agree with. If feedback because he or she might think I am
you disagree with the statement, write D. incompetent.
_____ 1. I like being told how well I am doing on a project. _____ 11. It is embarrassing to ask the instructor for
_____ 2. Even though I may think I have done a good job, I feedback.
feel a lot more confident when someone else tells _____ 12. It is better to try to figure out how I am doing on my
me so. own, rather than to ask other students for feedback.
_____ 3. Even when I think I could have done something For statements 1–4, add the total number of As: _____
better, I feel good when other people think well of For statements 5–12, add the total number of As: _____
me for what I have done. For statements 1–4, the greater the number of As, the greater
_____ 4. It is important for me to know what people think your preference for and trust in feedback from others. For
of my work. statements 5–12, the greater the number of As, the greater
_____ 5. I think my instructor would think worse of me if I the risk you believe there is in asking for feedback.
asked him or her for feedback. How might this information be useful in understanding
_____ 6. I would be nervous about asking my instructor how you react to feedback in school or on the job?
how she or he evaluates my behavior in class. SOURCES: Based on D. B. Fedor, R. B. Rensvold, and S. M. Adams, “An
_____ 7. It is not a good idea to ask my fellow students for Investigation of Factors Expected to Affect Feedback Seeking: A Longitudinal
feedback; they might think I am incompetent. Field Study,” Personnel Psychology 45 (1992), pp. 779–805; S. J. Asford,
_____ 8. It is embarrassing to ask other students for their “Feedback Seeking in Individual Adaptation: A Resource Perspective,”
Academy of Management Journal 29 (1986), pp. 465–87.
impression of how I am doing in class.
EXERCISING STRATEGY
Making Unnecessary Repairs
Progress Rail Services inspects railcars at Terminal Island by Progress Rail Services. When Progress Rail Services
in the port of Los Angeles where cargo is unloaded from employees find problems they repair the railcars and charge
ships and moved across the country. Over 10,000 railcars the owners. The workers, known as car men, are paid
each month are found in the port and most are inspected between $15 and $29 per hour. The job includes late night
shifts and often working in wind and rain. Car men need to of parts to replace don’t receive extra pay but their supervi-
work quickly, spending about two minutes looking at each sors tend to treat them more favorably and they often receive
rail car. Some car men have smashed brake parts with ham- employee-of-the-month recognition.
mers, gouged wheels, and used chains to tear off handles to
make repairs necessary. Also, car men make “green repairs,” QUESTIONS
which means replacing parts that are not broken and hiding 1. How could performance management have stopped the
the old parts or throwing them in the ocean so that company car men from making bogus repairs?
auditors cannot find them. 2. Consider the different performance management
Progress Rail Services, a subsidiary of Caterpillar Inc., approaches discussed in the chapter. Which approach
is being investigated by a federal prosecutor for criminal do you recommend for ensuring only correct repairs are
charges stemming from allegation of unnecessary repair made in the future? Explain the reasons for the approach
work. Caterpillar is cooperating with the investigation, you recommend.
which it considers serious because it suggests employees 3. Using the factors to consider in analyzing poor perfor-
have not behaved in a way consistent with company values. mance shown in Figure 8.8 determine the cause for the
Workers blame their managers who say that they would faulty repairs.
lose their jobs and be replaced if they didn’t produce suffi- SOURCE: Based on J. Haggerty and B. Tita, “Workers at Caterpillar Say Train
cient repair revenue. Employees who identify large numbers Repairs Were Often Bogus,” The Wall Street Journal, July 21, 2014, pp. B1, B6.
MANAGING PEOPLE
Performance Management Is About Work and How Work Gets Done
Most companies have a unique set of core values that they get accomplished but how they get it accomplished. Grange
believe contribute to business success through distinguish- Insurance performance management system for its associ-
ing them from competitors and helping create a brand image ates includes both job-relevant performance objectives and
in the eyes of customers, clients, employees, and the general core values. Managers rate the extent to which employees
public. For example, VivaKi Nerve Center in Chicago, the engage in behaviors underlying the company’s core values,
research, development, and production unit of the advertis- which include candor, do the right thing, integrity, owner-
ing and communications firm Publicis Groupe’s VivaKi, ship, and teamwork. For example, the evaluation for can-
has a set of core values called The Way We Work. These dor includes considering whether the associate engages
values include “work hard playfully,” “develop disruptive in behaviors such as openly sharing information, seeks
innovate solutions,” “count on infectious talent and radi- honest and constructive feedback, delivers honest and
cal thinking,” and “believe change ignites new energy and constructive feedback, and addresses problems and issues
conversations.” Studies have shown that companies’ fixa- even when they are unpleasant or sensitive. Eastern Idaho
tion on hitting financial targets often works against produc- Regional Medical Center (EIRMC) in Idaho Falls evaluates
ing sustainable growth. One study found that the highest employees on seven values and their underlying behavior.
financial returns were achieved at companies whose CEOs The values and example behavior in parentheses include
had challenging financial goals and communicated a vision accountability (works to achieve individual, department,
of the company beyond making profits such as creating an and hospital goals), I am EIRMC and I CARE (demon-
innovative product, providing greater customer service, or strates the use of the center’s caring model with every
improving the quality of life. Despite the importance of patient and visitor), integrity (manages conflict appro-
values, it is challenging to define them in behavioral terms priately), respect (respects co-workers by being on time),
so they can be measured and included as part of a perfor- quality (identifies a potential problem and also poten-
mance management system. Also, the results of a Society tial solutions), loyalty (builds teamwork by being a good
for Human Resource Management survey on performance team member and not backbiting), and enjoyment (greets
management highlight the complexity of values for perfor- and welcomes each person with a smiling face and a kind
mance management. Survey results showed that over 85% word). EIRMC uses a five-point scale to rate employees
of HR professionals agree it is more difficult to manage on the values. The scale values range from 1 meaning the
employee behaviors underlying values than it is to manage employee exceeds expectations to 5 meaning their perfor-
job performance. mance is unacceptable.
A number of companies are taking on the challenge Because values impact morale, patient satisfaction, turn-
of redesigning their performance management systems to over, and finances, confronting employees about behav-
ensure that they are evaluating not only what employees iors that breach company values is crucial. Assessing and
changing behaviors that are incongruent with company val- QUESTIONS

ues means that at the end of the day the company stands for 1. Why might peer or co-worker evaluations be necessary
something and reinforces the culture and the way the com- to evaluate values?
pany conducts its business. All employees, including top 2. Do you think evaluations of values should receive
leaders, need to be held accountable for living the values. equal, more, or less weight than evaluation of objec-
For example, at EIRMC a nurse was disciplined for yell- tives (or what the employee accomplishes) in employ-
ing and swearing at another nurse during a procedure with ees’ performance evaluation? Why?
a patient. The nurse believed he was showing his passion 3. Are values only important for organizations that have a
for patient care and demonstrating his willingness to protect sales force or provide some type of customer service?
them. HR had to help the nurse understand that he had vio- Explain your answer.
lated EIRMC’s respect and integrity values, despite his good
SOURCE: Based on K. Tyler, “Evaluating Values,” HR Magazine, April 2011,
intentions. After several meetings the nurse understood and pp. 57–62; R. Pyrillis, “The Reviews Are In,” Workforce Management, May 2011,
accepted the violation and has since repaired the relation- pp. 20–25; and C. Hymowitz, “When Meeting the Targets Becomes the Strategy,
ships he damaged. CEO Is on the Wrong Path,” The Wall Street Journal, March 8, 2005, p. B1.
Performance Management at Xactly
Xactly is a compensation consulting firm with 360 employ- by assigning employees quarterly objectives which help
ees in England, India, and the United States. It has received build employee engagement and positively influence prof-
numerous awards recognizing it as a desirable place to itability. Xactly managers keep close track of employee
work including ranked #25 on the Best Small Workplaces performance, which allows them to get employees train-
by the Great Places to Work organization. Its intrinsic core ing if needed or fire poor performers before they can cause
values are customer success, accountability, respect, and headaches for good performers. The company encourages
excellence (CARE). Xactly Corporation is about motivat- employees to expand their career opportunities through
ing people, both in the software products it provides clients interdepartmental movement. They have rapid-progression
as well as its employees. Xactly gives all employees stock programs for employees who are hired into first-level posi-
options, and most staffers have a bonus plan. But connect- tions. Xactly provides training programs in hard skills such
edness is key to the company success. Connectedness is as project management to soft skills such as cross-cultural
built through XactlyOne, an employee-led philanthropic communication. Xactly also provides tuition reimbursement
group which helps Xactly give back to the community and for employees who want to pursue formal education and cer-
holds monthly all-hands meetings. At the all-hands meet- tificate programs.
ings, the CEO communicates what is going on with the
company as well as introduces new employees and hands QUESTIONS
out awards to employees who have performed above and 1. Based on the information given, discuss how well perfor-
beyond what their job requires. In its San Jose location a mance management at Xactly meets strategic, adminis-
giant rubber ball made up of different colored and shaped trative, and developmental purposes.
rubber bands is displayed in its trophy case which helps 2. What methods for measuring employee performance do
employees see that everyone has differences but that they you think would be most beneficial for Xactly? Explain
are all part of one team with one goal. HR checks to see if why.
employees are connected to the company by asking them to 3. How could Xactly include an emphasis on its core values
explain the company’s mission or vision. Different answers in the performance management system?
suggest that the company mission and vision needs to be
SOURCES: Company website, www.xactlycorp.com, accessed April 28,
better communicated. 2015; “#25: Xactly Corporation,” www.greatplacestowork.com; C. Patton,
Performance management also helps employees feel con- “The Low-Performer Drag,” Human Resource Executive, October 2013,
nected. Xactly links management objectives to performance pp. 26–29.
NOTES
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82. S. Ante and L. Weber, “Memo to Workers: The Boss Is Watch- 3 (1998), pp. 615–63; H. Aguinis, Performance Management
ing,” The Wall Street Journal, October 23, 2013, pp. B1, B6. (Upper Saddle River, NJ: Pearson Prentice Hall, 2007); C. Lee,
83. A. Mathews, “Big Data’s New Prescription: Tracking Doctors at “Feedback, Not Appraisal,” HR Magazine, November 2006, pp.
Work,” The Wall Street Journal, July 12, 2013, pp. 11, A10. 111–14; R. Hanson and E. Pulakos, Putting the ‘Performance’
84. D. Lawrence, “Tracking the Enemy Within,” Bloomberg Busi- Back in Performance Management (Alexandria, VA: Society
nessWeek, March 16–March 22, 2015, pp. 39–41. for Human Resource Management, 2015); M. Budworth, G.
85. “Should Companies Monitor Their Employees Social Media,” Latham, and L. Manroop, “Looking Forward to Performance
The Wall Street Journal, May 12, 2014, pp. R1, R2. Improvement: A Field Test of the Feedforward Interview for
86. D. Bhave, “The Invisible Eye? Electronic Performance Monitor- Performance Management,” Human Resource Management 54
ing and Employee Job Performance,” Personnel Psychology 67 (2014), pp. 45–54; A. Kinicki, K. Jacobson, S. Peterson, and
(2014), pp. 605–635. G. Prussia, “Development and Validation of the Performance
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of Applicant, and Biographical Similarity on Interviewer Evalu- 100. W. Giles and K. Mossholder, “Employee Reactions to Contex-
ations of Job Applicants,” Journal of Social and Behavioral Sci- tual and Session Components of Performance Appraisal,” Jour-
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89. G. Ruiz, “Lessons from the Front Lines,” Workforce Manage- 101. E. Locke and G. Latham, A Theory of Goal Setting and Task
ment, December 2006, pp. 50–52. Performance (Englewood Cliffs, NJ: Prentice Hall, 1990).
102. H. Klein, S. Snell, and K. Wexley, “A Systems Model of the Per- 106. “GE Subsidiary MRA Systems to Pay $130,000 to Settle EEOC
formance Appraisal Interview Process,” Industrial Relations 26 Age Discrimination Suit,” June 3, 2010, news release from
(1987), pp. 267–80; C. Crossley, C. Cooper, and T. Wernsing, www.eeoc.gov, accessed April 29, 2015.
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pp. 263–67. November 2010, pp. 75–77.
Employee Development
9
C H A P T E R
LEARNING OBJECTIVES
LO 9-1 Explain how employee development contributes to

strategies related to employee retention, developing
intellectual capital, and business growth. page 379
LO 9-2 Discuss the steps in the development planning process. page 381
LO 9-3 Explain the employees’ and company’s responsibilities

in planning development. page 381
LO 9-4 Discuss current trends in using formal education for development. page 386
LO 9-5 Relate how assessment of personality type, work behaviors, and job
performance can be used for employee development. page 389
LO 9-6 Explain how job experiences can be used for skill development. page 394
LO 9-7 Develop successful mentoring programs. page 400
LO 9-8 Describe how to train managers to coach employees. page 404
LO 9-9 Discuss what companies are doing for melting the glass ceiling. page 405
LO 9-10 Use the 9-box grid for identifying where employees fit in a succession
plan and construct appropriate development plans for them. page 406
376
>>>
Development Helps ESPN Remain a Sports Dynasty
Entertainment and Sports Programming Network, make it difficult for employees to take the time away
known as ESPN, is one of the leading companies from activities such as producing and delivering
in the global multimedia sports and entertainment programming to focus on development activities.
business. Over 30 years ago ESPN became the first Another challenge is that ESPN is growing its busi-
sports network to televise complete sports cover- ness in global markets such as Latin America. This
age. Today, ESPN, headquartered in Bristol, Con- adds a layer of complexity to building a development
necticut, has over 7,000 employees and includes culture and career management tools because they
eight U.S. cable networks, over 300 radio affiliates, must align with local culture and norms in order to be
and other multimedia and business companies. effective.
Its businesses include television networks (ESPN), ESPN has taken several steps to ensure that its
audio (ESPN Radio, ESPN Deportes Radio), digital development efforts overcome these challenges
(WatchESPN), publishing (ESPN The Magazine), and support employees’ career interests and goals,
event management (X games, ESPYs, college bowls enhance their skills, and grow top leadership tal-
and basketball games), locations (ESPN ZONE at ent. ESPN requires every employee to complete an
Disney) and corporate outreach (The V Foundation individual development plan (IDP). The IDP helps
for Cancer). It televises 65 sports in 16 languages in employees consider where they currently are in
more than 200 countries. In 2014, ESPN produced their careers, their career goals, and how they plan
more than 47,000 hours of live event/studio pro- to reach their career goals. The learning function at
gramming. In the past several years ESPN has ESPN reviews and supports the IDP, which has been
reached significant industry milestones including completed by over 95% of employees. Similar to
ESPN OnDemand Audio being recognized as the other companies, ESPN uses the 70-20-10 approach
most downloaded radio app (215.6 million down- to development. This means that most of employee
loads) and the opening of Digital Center2, the new development occurs on the job, while 20% comes
home of SportsCenter and one of the most sophisti- from relationships and informal learning, and 10%
cated production centers in the world. from formal courses targeted at specific skills. For
To remain in its leadership role in the sports and example, ESPN has a Leadership GPS, which is a
entertainment business, ESPN needs to continue tool used by employees to track their development
to provide the best live sports programming as well progress. The Leadership GPS helps employees set
as expand and develop its digital presence through development goals. It also provides advice on which
social media. To do so, ESPN recognizes the impor- types of development activities (such as courses,
tance of creating exceptional employee experiences job shadowing, or experiences) are available and
through its commitment to people, partnerships, cul- will help them meet their goals. ESPN The University
ture, and excellence. Employee development plays offers courses related to different business areas,
a key role in helping to create exceptional employee which are taught by executives and business leaders.
experiences at ESPN. But employee development This is important because its gets company leaders
at ESPN faces several challenges. One challenge from different business areas involved in developing
is the speed at which the global news, broadcast- employees. It also helps to provide employees with
ing, and entertainment business operates. This can a greater understanding of the different aspects of
CONTINUED
377
ESPN’s business such as production, programming, To ensure development activities support busi-
and HR and how they fit together. ESPN Center Court ness needs, ESPN has a learning and advisory board
is a development program targeted exclusively to which includes senior leaders and vice presidents
high-potential employees who are on the fast-track to from its different businesses. Every major initiative is
future leadership roles in the company. Center Court reviewed and has to receive support from the board
uses job rotations to give high-potential employees before it is implemented. Also, the Employee Learn-
the opportunity to experience different aspects of the ing Council, which includes employees from each of
business. They also interact with the company’s pres- ESPNs business units, provides feedback and helps
ident and top executives. To facilitate development to plan development programs.
through relationships ESPN has a mentoring pro-
SOURCES: Based on F. Kalman, “ESPN’s Top Play: Learning,” Chief
gram known as Open Access that is available to all Learning Officer, March 2013, pp. 22–25, 47; “Learning and Develop-
employees. The only requirements are that employment” at http://espncareers.com/working_here/learning_development,
accessed April 2, 2015; “ESPN Inc. Fact Sheet,” from http://espnmedi-
ees desire to learn from others and want to build
azone.com/, accessed April 2, 2015.
relationships to achieve their development goals.
Introduction
As the ESPN example illustrates, employee development is a key contributor to a company’s
competitive advantage by helping employees understand their strengths, weaknesses, and
interests and by showing them how new jobs and expanded job responsibilities are available
to them to meet their personal growth needs. This helps retain valuable managers who might
otherwise leave to join clients or competitors. It is also important to emphasize that devel-
opment is important for all employees, not just managers. Employee
development is a necessary component of a company’s efforts to com-
pete in the new economy, to meet the challenges of global competi-
tion and social change, and to incorporate technological advances and
changes in work design. Employee development is key to ensuring that
employees have the competencies necessary to serve customers and
create new products and customer solutions. Regardless of the busi-
ness strategy, development is important for retaining talented employ-
ees. Also because companies (and their employees) must constantly
learn and change to meet customer needs and compete in new markets,
© 2013 ESPN, Inc. All Rights Reserved.
the emphasis placed on both training and development has increased.
Career development for employees is
As we noted in Chapter 1, employee commitment and retention are
a key contributor to ESPN’s continued
success across many digital platforms.
directly related to how employees are treated by their managers.
This chapter begins by discussing the relationship between
development, training, and careers. Choosing an approach is one part of development
planning. Second, before employees choose development activities, the employee and
the company must have an idea of the employee’s development needs and the purpose of
development. Identifying the needs and purpose of development is part of its planning.
The second section of the chapter describes the steps of the development planning pro-
cess. Employee and company responsibilities at each step of the process are emphasized.
Third, we look at development approaches, including formal education, assessment, job
experiences, and interpersonal relationships. The chapter emphasizes the types of skills,
knowledge, and behaviors that are strengthened by each development method. The chap-
ter concludes with a discussion of special issues in employee development, including
succession planning and using development to help women and minorities move into
upper-level management positions (referred to as “melting the glass ceiling”).
378
CHAPTER 9 Employee Development 379
The Relationship among Development, LO 9-1

Explain how employee
Training, and Careers development con-
tributes to strategies
DEVELOPMENT AND TRAINING related to employee
retention, developing
Development refers to formal education, job experiences, relationships, and assessment
intellectual capital, and
of personality and abilities that help employees prepare for the future. The ESPN exam- business growth.
ple illustrates that although development can occur through participation in planned
programs, it often results from performing different types of work. Because it is future- Development
oriented, it involves learning that is not necessarily related to the employee’s current The acquisition of
job.1 Table 9.1 shows the differences between training and development. Traditionally, knowledge, skills, and
training focuses on helping employees’ performance in their current jobs. Development behaviors that improve
an employee’s ability
prepares them for other positions in the company and increases their ability to move into
to meet changes in
jobs that may not yet exist.2 Development also helps employees prepare for changes in job requirements and
their current jobs that may result from new technology, work designs, new customers, or in client and customer
new product markets. Development is especially critical for talent management, particu- demands.
larly for senior managers and employees with leadership potential (recall our discussion
of attracting and retaining talent in Chapter 1). Companies report that the most impor-
tant talent management challenges they face include developing existing talent and
attracting and retaining existing leadership talent.3 Chapter 7 emphasized the strategic
role of training. As training continues to become more strategic (that is, related to busi-
ness goals), the distinction between training and development will blur. Both training
and development will be required and will focus on current and future personal and
company needs.
DEVELOPMENT AND CAREERS

Today’s careers are known as protean careers.4 A protean career is based on self- Protean Career
direction with the goal of psychological success in one’s work. Employees take major A career that is based
responsibility for managing their careers. For example, an engineer may decide to take on self-direction with
the goal of psycho-
a sabbatical from her position to work in management at the United Way Agency for a logical success in one’s
year. The purpose of this assignment could be to develop her managerial skills as well as work.
help her personally evaluate if she likes managerial work more than engineering.
The protean career has several implications for employee development. The goal of
the new career is psychological success: the feeling of pride and accomplishment that Psychological
comes from achieving life goals that are not limited to achievements at work (such Success
as raising a family and having good physical health). Psychological success is self- The feeling of pride and
accomplishment that
determined rather than solely determined through signals the employee receives from comes from achieving
the company (like salary increase and promotion). For example, a 52-year-old woman life goals.
co-managed a real estate business in California with her husband.5 She always wanted
to work in medicine or health care and took health science classes in college but decided to
work in real estate because it provided a good income and flexibility when raising her
Table 9.1
TRAINING DEVELOPMENT
Comparison
between Training
Focus Current Future and Development
Use of work experiences Low High
Goal Preparation for current job Preparation for changes
Participation Required Voluntary
380 CHAPTER 9 Employee Development
children. After working in real estate for 25 years she pursued her passion by taking pre-
requisite classes and applying to nursing school. Unfortunately, her husband suffered a
debilitating stroke making her the sole provider for the family. She sold the real estate
business, applied and was accepted to nursing school, and managed her husband’s care.
At age 57 she graduated from nursing school but was unable to find a job in California.
She eventually found a job in a hospital in Oklahoma and moved there with her husband.
After gaining valuable experience she moved back to California and now works in a
facility for developmentally disabled adults. She is passionate about her new job despite
its long and inflexible working hours, and the physical and emotional demands of stay-
ing on her feet all day and helping people with many needs.
Employees need to develop new skills rather than rely on a static knowledge base.
This has resulted from companies’ need to be more responsive to customers’ service and
product demands. As we emphasized in Chapter 7, “Training,” learning is continuous,
often informal, and involves creating and sharing knowledge.
The emphasis on continuous learning has altered the direction and frequency of
movement within careers (career pattern).6 Traditional career patterns consisted of
a series of steps arranged in a linear hierarchy, with higher steps related to increased
authority, responsibility, and compensation. Expert career patterns involve a lifelong
commitment to a field or specialization (such as law, medicine, or management). These
types of career patterns will not disappear. Rather, career patterns involving movement
across specializations or disciplines (a spiral career pattern) will become more preva-
lent. These new career patterns mean that developing employees (as well as employees
taking control of their own careers) will require providing them with the opportunity to
(a) determine their interests, skill strengths, and weaknesses and (b) based on this infor-
mation, seek appropriate development experiences that will likely involve job experi-
ences and relationships as well as formal courses.
The most appropriate view of today’s careers are that they are “boundaryless and often
change.”7 It may include movement across several employers (job hopping) or even dif-
ferent occupations. Studies have found that by age 35, 25% of employees have held five
jobs or more and for employees 55 and older, 20% have held 10 jobs or more.8 One-third
of employers expect job hopping to occur, especially among new college graduates, but
40% believe it becomes less acceptable when employees are in their mid-30s. The reality
is that employees will be unlikely to stay at one company for their entire or even a sig-
nificant part of their career. This means that companies and employees should add value
to each other.9 That is, regardless of how long employees stay, developing them can help
the company adapt to changing business conditions and strategies by providing new skill
sets and managerial talent. In turn, development can facilitate employee engagement by
enhancing their employability. It reduces employees’ job hopping because they feel less
need to change employers to build their skill sets or gain valuable job experiences.
“Boundaryless” means that careers may involve identifying more with a job or pro-
fession than with the present employer. A career can also be considered boundaryless
in the sense that career plans or goals are influenced by personal or family demands
and values. One way that employees cope with changes in their personal lives as well
as in employment relationships is to rearrange and shift their roles and responsibili-
ties. Employees can change their careers throughout their life based on awareness of
strengths and weaknesses, perceived need to balance work and life, and the need to find
stimulating and exciting work.10 Career success may not be tied to promotions but to
achieving goals that are personally meaningful to the employee rather than those set by
parents, peers, or the company. As we discuss later in the chapter, careers are best man-
aged through partnerships between employees and their company that create a positive
relationship through which employees are committed to the organization but can take Development
personal control for managing their own careers to benefit themselves and the company. Planning System
A system to retain and
As this discussion shows, to retain and motivate employees companies need to pro-
motivate employees by
vide a system to identify and meet employees’ development needs. This is especially identifying and meet-
important to retain good performers and employees who have potential for managerial ing their development
positions. This system is often known as a development planning or career management needs (also called
system. We discuss these systems in the following section. career management
systems).
Development Planning Systems LO 9-2

Discuss the steps in the
Companies’ development planning systems vary in the level of sophistication and the development planning
process.
emphasis they place on different components of the process. Steps and responsibilities in
the development planning system are shown in Figure 9.1.
Self-Assessment
Self-assessment refers to the use of information by employees to determine their career
interests, values, aptitudes, and behavioral tendencies. It often involves psychologi-
cal tests such as the Myers-Briggs Type Indicator (described later in the chapter), the
Strong-Campbell Interest Inventory, and the Self-Directed Search. The Strong-Campbell
helps employees identify their occupational and job interests; the Self-Directed Search
identifies employees’ preferences for working in different types of environments (like
sales, counseling, landscaping, and so on). Tests may also help employees identify the
relative values they place on work and leisure activities.
Through the assessment, a development need can be identified. This need can result LO 9-3
Explain the employees’
from gaps between current skills and/or interests and the type of work or position the and company’s respon-
employee wants. For example, employees at PEMCO Mutual Insurance Company use sibilities in planning
online self-assessments to assess their current skills and identify the skills and development.
Figure 9.1
Steps and Responsibilities in the Career Management Process
Self-assessment Reality check Goal setting Action planning
Employee Identify opportunities Identify what needs Identify goal Identify steps and
responsibility and needs to improve. are realistic to and method to timetable to reach
develop. determine goal goal.
progress.
Company Provide assessment Communicate Ensure that goal is Identify resources

responsibility information to identify performance SMART (specific, employee needs
strengths, weaknesses, evaluation, where measurable, to reach goal,
interests, and values. employee fits in attainable, relevant, including additional
long-range plans and timely); assesment, courses,
of the company, commit to help work experiences, and
changes in industry, employee reach relationships.
profession, and the goal.
workplace.
competencies they want to acquire.11 Employees use information obtained from this
assessment to meet with managers of the departments that need the skill sets the employ-
ees intend to acquire to discuss how they will get the skills.
Reality Check
Reality check refers to the information employees receive about how the company evalu-
ates their skills and knowledge and where they fit into the company’s plans (potential
promotion opportunities, lateral moves). Usually this information is provided by the
employee’s manager as part of performance appraisal. Some companies also use the
360-degree feedback assessment which involves employees completing a self-evaluation
of their behaviors or competencies as well as managers, peers, direct reports, and even
customers provide smaller evaluations. (360-degree feedback is discussed later in the
chapter.) It is not uncommon in well-developed systems for the manager to hold separate
performance appraisals and development discussions.
For example, at BKD, an accounting and consulting firm, employees frequently move
between tax, auditing, and consulting projects.12 They need a way to track their skills so
that they can determine how to achieve their career goals such as moving from a general-
ist to becoming a tax expert for the health care industry. To provide feedback on their
skills, project leaders use behavioral checklists, which provide ratings such as “excep-
tional,” “needs improvement,” or “developing.” The checklists are given to employees
who can then schedule a meeting with the project leader to get more specific feedback
about the ratings as well as development recommendations. The development recom-
mendations might include taking a course, seeking a coach or mentor, or networking
with managers in areas in which the employee is interested in working.
Goal Setting
Goal setting refers to the process of employees developing short- and long-term devel-
opment objectives. These goals usually relate to desired positions (such as becoming
sales manager within three years), level of skill application (use one’s budgeting skills
to improve the unit’s cash flow problems), work setting (move to corporate marketing
within two years), or skill acquisition (learn how to use the company’s human resource
information system). These goals are usually discussed with the manager and written into
a development plan. A development plan for a product manager is shown in Figure 9.2.
Development plans usually include descriptions of strengths and weaknesses, career
goals, and development activities for reaching the career goal. An effective development
plan focuses on development needs that are most relevant to the organization’s strategic
objectives.
Consider Just Born’s Career Development Process (CDP) used by high-performing
employees to identify their career path within the company and ready themselves for
their next position.13 The development plan involves identifying both short- and long-
term career goals. Employees commit to two goals to help them progress in their career.
Just Born provides a competency dictionary on the company’s intranet that can be used
for identifying development needs. The CDP gives both employees and their managers
the opportunity to discuss future career plans and becomes a reality check by raising
expectations and increasing performance standards. Employees initiate the career devel-
opment program by first defining future job interests, identifying work experiences that
help prepare for the future job, and establishing the long-term career goal. The CDP is
discussed with the employee’s manager. The manager can support the CDP or suggest
Figure 9.2
Development Plan
Name: Title: Project Manager Immediate Manager:
Competencies
Please identify your three greatest strengths and areas for improvement.
Strengths
)
Areas for Improvement
Development Goals
Please describe your overall career goals.
Long-term: .
Next Assignments
Identify potential next assignments (including timing) that would help you develop toward your
goals.
Training and Development Needs

List both training and development activities that will either help you develop in your current assignment
or provide overall development.
Employee ____________________________ Date __________

Immediate Manager __________________ Date __________
Mentor ______________________________ Date __________
changes. If employees’ future job interests are outside their current department, the
interests are communicated to the manager of that department.
Action Plan
Written strategy that
Action Planning employees use to
During this phase, employees complete an action plan. An action plan is a written strat- determine how they will
egy that employees use to determine how they will achieve their short- and long-term achieve their short- and
career goals. Action plans may involve any one or combination of development approaches long-term career goals.
discussed later the chapter (such as enrolling in courses and seminars, getting additional
assessment, obtaining new job experiences, or finding a mentor or coach).14 The develop-
ment approach used depends on the needs and developmental goal.
Examples of Career Management and Development Systems

Effective career development systems include several important features (see Table 9.2).
Several companies’ development systems include one or more of these features. Con-
sider career management and development systems at Xerox and General Mills.15 Xerox
Services University (XSU) provides an opportunity for employees to develop their skills.
Those who enter the online website are presented with different schools, each of which
provides a unique development path. Each development path provides recommendations
about courses, experiences, and social learning (mentoring, peer coaching) which is
facilitated through social media. The five XSU schools focus on creativity and innova-
tion, operational excellence, leadership, people management, and business foundations.
As employees use the system, provide their skill strengths and weaknesses and identify
areas of interest, the social learning software generates personalized and specific recom-
mendations for development opportunities. General Mills’s development plan follows
the process shown in Figure 9.2. Each employee completes a development plan that asks
employees to consider four areas:
∙ Professional goals and motivation: What professional goals do I have? What excites
me to grow professionally?
∙ Talents or strengths: What are my talents and strengths?
∙ Development opportunities: What development needs are important to improve?
∙ Development objectives and action steps: What will be my objective for this plan?
What steps can I take to meet the objectives?
Every year managers and employees are expected to have a development discussion
and create an individual development plan. Speakers, online tools, and workshops to help
employees complete the development plan and prepare for a development discussion
Table 9.2
Design Factors 1. System is positioned as a response to a business need or supports the business
of Effective strategy.
Development 2. Employees and managers participate in development of the system.
Systems 3. Employees are encouraged to take an active role in career management and
development.
4. Evaluation is ongoing and used to improve the system.
5. Business units can customize the system for their own purposes (with some
constraints).
6. Employees have access to development and career information sources (includ-
ing advisors and positions available).
7. Senior management and the company culture support the development system.
8. The development system is linked to other human resource practices such as
performance management, training, and recruiting systems.
9. A large, diverse talent pool is created.
10. Development plans and talent evaluation information are available and
accessible to all managers.
SOURCE: Based on B. Baumann, J. Duncan, S. E. Former, and Z. Leibowitz, “Amoco Primes the Talent Pump,” Personnel
Journal, February 1996, pp. 79–84; D. Hall, Careers In and Out of Organizations (Thousand Oaks, CA: Sage, 2002).
with their manager increase the visibility and emphasize the importance of the develop-
ment planning process. Evaluation data showed that more than 80% of employees report
having an effective and motivating development plan. Also, annual survey results show
that General Mills ranks 20% to 30% higher on continued improvement and impact of
learning and growth compared to companies it is benchmarked against.
The “Competing through Technology” box shows how Genentech Inc. is using the
web for development and career management.
Approaches to Employee Development

Four approaches are used to develop employees: formal education, assessment, job expe-
riences, and interpersonal relationships.16 Many companies use a combination of these
approaches. In its Frontline Investment in Growing High-Potential Talent (FLIGHT)
program, Asurion, a device insurance company, uses six-month rotational assign-
ments to provide employees with an overall understanding of supply chain operations,
mentoring and coaching opportunities with key leaders, and on-the-job and classroom
training.17 Figure 9.3 shows the frequency of use of different employee development
practices. Larger companies are more likely to use leadership training and development
planning more frequently than smaller companies.
Keep in mind that although much development activity is targeted at managers, all
levels of employees may be involved in development. For example, most employees typ-
ically receive performance appraisal feedback (a development activity related to assess-
ment) at least once per year. As we discussed in Chapter 8, as part of the appraisal
process they are asked to complete individual development plans outlining (1) how
they plan to change their weaknesses and (2) their future plans (including positions or
100 Figure 9.3

Frequency of
Percentage of Specific Practices Used
84 Use of Employee
80 Development
70 Practices
60 55
47
40
30
25
20
0
D inin an
ni nt
ts
ra ing
tio
in
en
an e
a h
el g
ng
s
ch
og or
Pl pm
Tr r t
m
ta
nm
Pr nt
a
ip he
Ro
o
Co
e
sig
sh t
M
er , O
b
ev
As
Jo
al
ad ing
rn
b
Jo
te
Le ain
In
Tr
SOURCE: Based on E. Esen and J. Collison, Employee Development (Alexandria, VA: SHRM Research, 2005).
CareerLab Is the Nucleus of Employee Development at Genentech
Genentech Inc., a biotechnology career growth. Mentoring Ser- rate (6.2%) and
company, developed CareerLab vices help employees form men- increased levels of
to help employees perform well torships. Employees can access employee engagement (17%)
in their current job and provide online assessments that cover since CareerLab was introduced.
opportunities for job enrich- personal style, values, skills, Employees who have used
ment and lateral career moves. strengths, and interests. Through CareerLab report they are more
CareerLab is a physical and vir- CareerLab employees can likely to remain with the com-
tual place where employees can access short videos designed pany and are satisfied with the
consider their skill strengths and to get employees to think about future of their careers.
weaknesses, interests, and take different career options, blogs
ownership of their development. written by career development
1. What design features of effec-
CareerLab provides several experts, and animated pod-
tive development systems are
services. Career consultants are casts. Genentech also offers
included in CareerLab?
available to meet employees employees three career devel-
2. What other design features
in-person, over the phone, or opment workshops (Growing
might they consider including
using Skype. LearningLabs are Your Career, Growing Careers
in CareerLab? Explain your
webinars and class sessions that for Managers, and Personal
recommendation.
cover different topics including Mastery: Developing Your Full
networking for career growth, Potential). CareerLab has helped SOURCES: Based on R. Emlo, “The Power
of Discovery,” Chief Learning Officer, January
managing your personal brand, Genentech maintain a lower 2015, pp. 38–48; “Genentech, Inc.: Career Lab,”
and leveraging strengths for than industry average turnover Training, January/February 2015, pp. 102–3.
locations desired and education or experience needed). Next we explore each type of
development approach.
FORMAL EDUCATION
LO 9-4 Formal education programs include off-site and on-site programs designed specifically for
Discuss current trends the company’s employees, short courses offered by consultants or universities, executive
in using formal educa- MBA programs, and university programs in which participants actually live at the univer-
tion for development.
sity while taking classes. These programs may involve lectures by business experts, busi-
ness games and simulations, adventure learning, and meetings with customers.
Formal Education Many companies such as McDonald’s and General Electric rely primarily on in-
Programs
Employee development
house development programs offered by training and development centers or corporate
programs, including universities, rather than sending employees to programs offered by universities.18 Com-
short courses offered panies rely on in-house programs because they can be tied directly to business needs,
by consultants or uni- can be easily evaluated using company metrics, and can get senior-level management
versities, executive involved.
MBA programs, and
university programs.
The thousands of restaurant managers and owner-operators who attend McDonald’s
Hamburger University each year in Oak Brook, Illinois, get classroom training and par-
ticipate in simulations on how to run a business that delivers consistent service, quality,
and cleanliness. They also receive coaching and peer support face-to-face and online.
386
The company’s highest-performing executives participate in a nine-month leadership

institute at Hamburger U, where they tackle major issues facing the company.
General Electric (GE) has one of the oldest and most widely known management
development centers in the world. GE invests approximately $1 billion each year for
training and education programs for its employees.19 Over the past 17 years, the 189
most senior executives in the company spent at least 12 months in training and pro-
fessional development. GE develops managers at the John F. Welch Leadership Cen-
ter at Crotonville, New York.20 The facility has residence buildings where participants
stay while attending programs as well as classrooms for courses, programs, and semi-
nars. Each year GE employees chosen by their managers based on their performance
and potential attend management development programs. The programs include pro-
fessional skills development and specialized courses in areas such as risk analysis and
loan structuring. All of the programs emphasize theory and practical application. Course
time is spent discussing business issues facing GE. The programs are taught by in-house
instructors, university faculty members, and even CEO Jeff Immelt. Examples of man-
agement development programs available at GE are shown in Table 9.3. As you can see,
GE uses a combination of coursework and job experiences to develop entry-level and top
levels of management. Other programs such as the Business Manager Course and the
Executive Development Course involve action learning. Besides programs and courses
for management development GE also holds seminars to better understand customer
expectations and leadership conferences designed specifically for African Americans,
women, or Hispanic managers to discuss leading and learning.
A number of institutions offering executive education in the United States and abroad
include Harvard, the Wharton School of Business, the University of Michigan, INSEAD,
Table 9.3
Examples of Leadership Development Programs at General Electric
PROGRAM SUMMARY QUALIFICATIONS TO ATTEND
Early Career Pro- Formal courses to develop leadership, commu- Bachelor’s degree with
gram: Communica- nications, and business skills and techniques. communications-related course-
tions Leadership Three eight-month rotations in one of GE’s work; minimum 3.0 GPA; prior
Development businesses. Challenging assignments in public internship or co-op experience,
Program relations and communications roles (marketing willingness to relocate.
communications, employee communications,
executive communications).
Experienced Receive at least six weeks of training to develop MBA; 5–8 years marketing or
Commercial marketing and sales capabilities, strengthen sales experience; demonstrated
Leadership Program leadership skills, foster ECLP culture. Three achievement and leadership
(ECLP): Sales and eight-month business rotations within a GE in sales or marketing
Marketing business; the rotations are marketing focused communications, and analytical
and sales focused. Every four months, review skills; willingness to relocate;
self-assessments and manager evaluations to expertise aligned with a GE
identify accomplishments, development needs business.
and career interests. Training includes classroom
and online training and in-residence symposiums
at the John F. Welch Learning Center.
SOURCES: Based on http://www.ge.com/careers/culture/university-students/communications-leadership-development-program/united-states and http://

www.ge.com/careers/culture/university-students/experienced-commercial-leadership-program/program-details#structure, both accessed April 3, 2015.
IMD, and the Center for Creative Leadership. At the University of Virginia, the Darden
School of Business offers an executive MBA program in which students attend classes
on campus once a month on Thursday through Saturday. The on-campus time provides
opportunities for students to collaborate on presentations, simulations, and case studies.
The school also brings executive MBA students to campus four times for leadership
residencies. During each weeklong residency, the students use workshops, coaching, and
reflection to get better at handling their everyday management challenges. Between the
times on campus, the students continue their education with independent study, online
classes, and tools for virtual meetings and online exams.21
Another trend in executive education is for employers and the education provider to
create programs with content and experiences designed specifically for the audience. For
example, Duke Corporate Education developed a custom program for Thomson Reuters
to increase their managers’ skills related to thinking innovatively to help the company
grow.22 The Thomson Reuters program sponsor encouraged each participant to identify
an opportunity or problem with their business that would require innovative thinking.
To help the managers develop innovative thinking Duke used an experiential exercise
designed to help managers to consider how different global markets can impact their
strategies and understand how consumers’ tastes can shift according to where they are
located. In the experiential exercise participants are immersed in a local market to learn
how to think about and do business differently. Programs were offered in New York,
London, and Shanghai and involved trips to neighborhoods, businesses, and museums
and meetings with local leaders to understand the distinctive features of each business
market. As a result, of the program participants increased their awareness of how they
could be more innovative in their jobs and lead diverse teams. They also gained insights
they could directly apply to their business such as how to use brainstorming techniques
to quickly integrate knowledge and ideas.
Managers who attend the Center for Creative Leadership development program take
psychological tests; receive feedback from managers, peers, and direct reports; par-
ticipate in group-building activities (like adventure learning, discussed in Chapter 7);
receive counseling; and set improvement goals and write development plans.23
Enrollment in executive education programs or MBA programs may be limited to
managers or employees identified to have management potential. As a result, many com-
panies also provide tuition reimbursement as a benefit for all employees to encourage
Tuition them to develop. Tuition reimbursement refers to the practice of reimbursing employees’
Reimbursement costs for college and university courses and degree programs. Companies that have eval-
The practice of reim- uated tuition reimbursement programs have found that the programs increase employee
bursing employees’
costs for college and
retention rates, readiness for promotion, and improve job performance.24 Verizon Wire-
university courses and less invests $26 million annually in tuition assistance program participated in by 23,000
degree programs. of its employees.25 Employees can receive tuition assistance for attending a university or
college or for the costs of the company’s on-site program conducted at call centers and
corporate offices. The on-site program classes, taught by university faculty, help employ-
ees earn degrees by attending classes where they work and when they have free time in
their work schedules. They are eligible for tuition reimbursement from the day they are
hired and have to make no commitment to stay employed with the company. Their
expenses are limited to $8,000 per year for full-time employees and $4,000 for part-time
employees. This exceeds the $5,250 annual reimbursement limit that most companies
use based on the tax-free maximum established by the IRS. To be eligible for reimburse-
ment coursework has to relate to the employees’ current job or career path within Verizon
Wireless. Evaluation of the program has shown that it has resulted in increased morale
and helped to attract new and retain current employees.
ASSESSMENT LO 9-5
Relate how assessment
Assessment involves collecting information and providing feedback to employees about of personality type,
their behavior, communication style, or skills.26The employees, their peers, managers, work behaviors, and
and customers may provide information. Assessments are used for several reasons. First, job performance can
assessment is most frequently used to identify employees with managerial potential and be used for employee
to measure current managers’ strengths and weaknesses. Assessment is also used to development.
identify managers with the potential to move into higher-level executive positions, and it
can be used with work teams to identify the strengths and weaknesses of individual team Assessment
Collecting information
members and the decision processes or communication styles that inhibit the team’s
and providing feedback
productivity. Assessments can help employees understand their tendencies, needs, the to employees about
type of work environment they prefer, and the type of work they might prefer to do.27 their behavior, commu-
This information, along with the performance evaluations they receive from the com- nication style, or skills.
pany, can help employees decide what type of development goals might be most appro-
priate for them (e.g., leadership position, increase scope of their current position).
Companies vary in the methods and the sources of information they use in develop-
mental assessment. Many companies use employee performance evaluations. Companies
with sophisticated development systems use psychological tests to measure employees’
skills, interests, personality types, and communication styles. Self, peer, and managers’
ratings of employees’ interpersonal styles and behaviors may also be collected. Popular
assessment tools include personality tests, assessment center performance appraisal, and
360-degree feedback.
Personality Tests and Inventories

Tests are used to determine if employees have the personality characteristics necessary to
be successful in specific managerial jobs or jobs involving international assignments. Per-
sonality tests typically measure five major dimensions: extraversion, adjustment, agree-
ableness, conscientiousness, and openness to experience (see Table 6.3 in Chapter 6).
The Myers-Briggs Type Inventory (MBTI)® refers to an assessment that is based on Myers-Briggs Type
Carl Jung’s personality type theory. This theory emphasizes that we have a fundamental Inventory (MBTI)®
personality type that shapes and influences how we understand the world, process infor- A personality assess-
ment tool used for team
mation, and socialize. The assessment determines which one of 16 personality types fits building and leader-
best. The 16 unique personality types are based on preferences for introversion (I) or ship development that
extraversion (E), sensing (S) or intuition (N), thinking (T) or feeling (F), and judging (J) identifies employees’
or perceiving (P). The assessment tool identifies individuals’ preferences for energy preferences for energy,
(introversion versus extraversion), information gathering (sensing versus intuition), information gathering,
decision making, and
decision making (thinking versus feeling), and lifestyle (judging versus perceiving).28 lifestyle.
Each personality type has implications for work habits and interpersonal relationships.
For example, individuals who are introverted, sensing, thinking, and judging (known as
ISTJs) tend to be serious, quiet, practical, orderly, and logical. These persons can orga-
nize tasks, be decisive, and follow through on plans and goals. ISTJs have several weak-
nesses because they do not tend to use the opposite preferences: extraversion, intuition,
feeling, and perceiving. These weaknesses include problems dealing with unexpected
opportunities, appearing too task-oriented or impersonal to colleagues, and making
overly quick decisions. Visit the website www.cpp.com for more information on the per-
sonality types.
The DiSC measures personality and behavioral style including dominance (direct,
strong-willed, forceful), influence (sociable, talkative), steadiness (gentle accommodat-
ing) and conscientiousness (private, analytical).29 See www.discprofile.com for more
information on DiSC.
For example, CareSource, a Medicaid-managed care provider in Dayton, Ohio, has

a defined process for identifying and developing employees who have the potential to
be strong leaders and effective managers.30 Assessment of fit with the organizational
values and culture which emphasize serving the underserved, begins with the recruiting
process. The company uses multiple assessment tools to evaluate managers’ competen-
cies (recall our discussion of competencies in Chapter 8, “Performance Management”).
These assessments include the Myers-Briggs Type Indicator; the Gallup’s Strength
Finder to identify managers’ strengths and develop plans for using their strengths with
their employee team; and the Leadership Practices Inventory, which provides manag-
ers with an idea of their leadership skills as evaluated by peers, their boss, and their
own self-assessment, and is used to build a personal leadership development plan.
Also twice a year, using the performance management system, they are evaluated on
competencies and behavior that CareSource believes are characteristics of an effective
leader and manager: a service orientation, organizational awareness, teamwork, com-
munications, and organizational leadership. Based on the assessment results, managers
with high leadership potential are encouraged to participate in a variety of development
activities.
Assessment Center
Assessment Center At an assessment center multiple raters or evaluators (assessors) evaluate employees’
A process in which performance on a number of exercises.31 An assessment center is usually an off-site
multiple raters evaluate location such as a conference center. From 6 to 12 employees usually participate at one
employees’ perfor-
mance on a number of
time. Assessment centers are primarily used to identify if employees have the personal-
exercises. ity characteristics, administrative skills, and interpersonal skills needed for managerial
jobs. They are also increasingly being used to determine if employees have the necessary
Leaderless Group skills to work in teams.
Discussion The types of exercises used in assessment centers include leaderless group discus-
Process in which a sions, interviews, in-baskets, and role-plays.32 In a leaderless group discussion, a team of
team of five to seven five to seven employees is assigned a problem and must work together to solve it within
employees solves
an assigned problem
a certain time period. The problem may involve buying and selling supplies, nominating
together within a cer- a subordinate for an award, or assembling a product. In the interview, employees answer
tain time period. questions about their work and personal experiences, skill strengths and weaknesses, and
career plans. An in-basket is a simulation of the administrative tasks of the manager’s
Interview job. The exercise includes a variety of documents that may appear in the in-basket on a
Employees are ques- manager’s desk. The participants read the materials and decide how to respond to them.
tioned about their work Responses might include delegating tasks, scheduling meetings, writing replies, or com-
and personal experi-
ences, skills, and career
pletely ignoring the memo! Role-plays refer to the participant taking the part or role of a
plans. manager or other employee. For example, an assessment center participant may be asked
to take the role of a manager who has to give a negative performance review to a subor-
In-Basket dinate. The participant is told about the subordinate’s performance and is asked to pre-
A simulation of the pare for and actually hold a 45-minute meeting with the subordinate to discuss the
administrative tasks of performance problems. The role of the subordinate is played by a manager or other
a manager’s job. member of the assessment center design team or company. The assessment center might
also include interest and aptitude tests to evaluate an employee’s vocabulary, general
Role-Plays mental ability, and reasoning skills. Personality tests may be used to determine if employ-
A participant taking
the part or role of
ees can get along with others, their tolerance for ambiguity, and other traits related to
a manager or other success as a manager.
employee. Assessment center exercises are designed to measure employees’ administrative
and interpersonal skills. Skills typically measured include leadership, oral and written
communication, judgment, organizational ability, and stress tolerance. Table 9.4 shows

an example of the skills measured by the assessment center. As we see, each exercise
gives participating employees the opportunity to demonstrate several different skills.
For example, the exercise requiring scheduling to meet production demands evaluates
employees’ administrative and problem-solving ability. The leaderless group discussion
measures interpersonal skills such as sensitivity toward others, stress tolerance, and oral
communication skills.
Managers are usually used as assessors. The managers are trained to look for employee
behaviors that are related to the skills that will be assessed. Typically, each assessor
observes and records one or two employees’ behaviors in each exercise. The assessors
review their notes and rate each employee’s level of skills (for example, 5 = high level of
leadership skills, 1 = low level of leadership skills). After all employees have completed
the exercises, the assessors discuss their observations of each employee. They compare
their ratings and try to agree on each employee’s rating for each of the skills.
As we mentioned in Chapter 6, research suggests that assessment center ratings are
related to performance, salary level, and career advancement.33 Assessment centers
may also be useful for development because employees who participate in the process
receive feedback regarding their attitudes, skill strengths, and weaknesses.34 For exam-
ple, Steelcase, the office furniture manufacturer based in Grand Rapids, Michigan, uses
assessment centers for first-level managers.35 The assessment center exercises include
in-basket, interview simulation, and a timed scheduling exercise requiring participants to
fill positions created by absences. Managers are also required to confront an employee on
a performance issue, getting the employee to commit to improve. Because the exercises
relate closely to what managers are required to do at work, feedback given to managers
Table 9.4
Examples of Skills Measured by Assessment Center Exercises
EXERCISES
LEADERLESS
SCHEDULING GROUP PERSONALITY ROLE-
IN-BASKET EXERCISE DISCUSSION TEST PLAY
SKILLS
Leadership X X X X
(Dominance, coaching, influence,
resourcefulness)
Problem solving X X X X
(Judgment)
Interpersonal X X X
(Sensitivity, conflict resolution,
cooperation, oral communication)
Administrative X X X
(Organizing, planning, written
communications)
Personal X X X
(Stress tolerance, confidence)
X indicates skill measured by exercise.

based on their performance in the assessment center can target specific skills or compe-
tencies that they need to be successful managers.
Performance Appraisals and 360-Degree Feedback Systems

Performance As we mentioned in Chapter 8, performance appraisal is the process of measuring
Appraisal employees’ performance. Performance appraisal information can be useful for employee
The process through development under certain conditions.36 The appraisal system must tell employees spe-
which an organization
gets information on
cifically about their performance problems and how they can improve their performance.
how well an employee This includes providing a clear understanding of the differences between current perfor-
is doing his or her job. mance and expected performance, identifying causes of the performance discrepancy,
and developing action plans to improve performance. Managers must be trained in fre-
quent performance feedback. Managers also need to monitor employees’ progress in
carrying out action plans.
Recall our discussion in Chapter 8 of how Just Born uses performance appraisals for
evaluation and development.37 The appraisal starts with a planning meeting between
employee and manager. The strategic initiatives of the department are discussed along
with the employee’s role. The employee and manager agree on four personal objectives
that will help the department reach its goals as well as key performance outcomes related
to the employee’s job description. Competencies the employee needs to reach the per-
sonal objectives are identified. The manager and employee jointly develop a plan for
improving or learning the competencies. During the year, the manager and employee
monitor the progress toward reaching the performance and personal objectives and
achievement of the learning plan. Pay decisions made at the end of each year are based
on the achievement of both performance and learning objectives.
A recent trend in performance appraisals for management development is the use of
Upward Feedback upward feedback and 360-degree feedback. Upward feedback refers to appraisal that
A performance involves collecting subordinates’ evaluations of managers’ behaviors or skills. The
appraisal process 360-degree feedback process is a special case of upward feedback. In 360-degree feed-
for managers that
includes subordinates’
back systems, employees’ behaviors or skills are evaluated not only by subordinates but
evaluations. by peers, customers, their bosses, and themselves. The raters complete a questionnaire
asking them to rate the person on a number of different dimensions. Table 9.5 provides
360-Degree an example of the types of skills related to management success that are rated in a
Feedback Systems 360-degree feedback questionnaire. Typically, raters are asked to assess the manager’s
A performance strength in a particular item or whether development is needed. Raters may also be asked
appraisal system to identify how frequently they observe a competency or skill (e.g., always, sometimes,
for managers that
seldom, never).
includes evaluations
from a wide range of The results of a 360-degree feedback system show how the manager was rated on
persons who interact each item. The results also show how self-evaluations differ from evaluations from the
with the manager. The other raters. Typically managers review their results, seek clarification from the rat-
process includes self- ers, and set specific development goals based on the strengths and weaknesses identi-
evaluations as well as
fied.38 Table 9.6 shows the type of activities involved in using 360-degree feedback for
evaluations from the
manager’s boss, sub- development.39
ordinates, peers, and The benefits of 360-degree feedback include collecting multiple perspectives of man-
customers. agers’ performance, allowing employees to compare their own personal evaluations with
the views of others, and formalizing communications about behaviors and skills rat-
ings between employees and their internal and external customers. Several studies have
shown that performance improves and behavior changes as a result of participating in
upward feedback and 360-degree feedback systems.40 The most change occurs in indi-
viduals who receive lower ratings from others than they gave themselves (overraters).
Table 9.5
Skills Related to Managerial Success
Resourcefulness Can think strategically, engage in flexible problem solving,

and work effectively with higher management.
Doing whatever it takes Has perseverance and focus in the face of obstacles.
Being a quick study Quickly masters new technical and business knowledge.
Building and mending relationships Knows how to build and maintain working relationships with
co-workers and external parties.
Leading subordinates Delegates to subordinates effectively, broadens their oppor-
tunities, and acts with fairness toward them.
Compassion and sensitivity Shows genuine interest in others and sensitivity to subordi-
nates’ needs.
Straightforwardness and composure Is honorable and steadfast.
Setting a developmental climate Provides a challenging climate to encourage subordinates’
development.
Confronting problem subordinates Acts decisively and fairly when dealing with problem
subordinates.
Team orientation Accomplishes tasks through managing others.
Balance between personal life and work Balances work priorities with personal life so that neither is
neglected.
Decisiveness Prefers quick and approximate actions to slow and precise
ones in many management situations.
Self-awareness Has an accurate picture of strengths and weaknesses and is
willing to improve.
Hiring talented staff Hires talented people for the team.
Putting people at ease Displays warmth and a good sense of humor.
Acting with flexibility Can behave in ways that are often seen as opposites.
SOURCE: Adapted with permission from C. D. McCauley, M. M. Lombardo, and C. J. Usher, “Diagnosing Management Development Needs: An Instru-
ment Based on How Managers Develop,” Journal of Management 15 (1989), pp. 389–403.
Table 9.6
1. Understand strengths and weaknesses. Activities in Using
Review ratings for strengths and weaknesses. 360-Degree
Identify skills or behaviors where self and others’ (manager, peer, customer) Feedback for
ratings agree and disagree. Development
2. Identify a development goal.
Choose a skill or behavior to develop.
Set a clear, specific goal with a specified outcome.
3. Identify a process for recognizing goal accomplishment.
4. Identify strategies for reaching the development goal.
Establish strategies such as reading, job experiences, courses, and relationships.
Establish strategies for receiving feedback on progress.
Establish strategies for reinforcing the new skill or behavior.
Potential limitations of 360-degree feedback include the time demands placed on the
raters to complete the evaluations, managers seeking to identify and punish raters who
provided negative information, the need to have a facilitator help interpret results, and
companies’ failure to provide ways that managers can act on the feedback they receive
(development planning, meeting with raters, taking courses).
In effective 360-degree feedback systems, reliable or consistent ratings are pro-

vided, raters’ confidentiality is maintained, the behaviors or skills assessed are
job-related (valid), the system is easy to use, and managers receive and act on the
feedback.41
Technology allows 360-degree questionnaires to be delivered online to the raters.
This increases the number of completed questionnaires returned, makes it easier to pro-
cess the information, and speeds feedback reports to managers.
Regardless of the assessment method used, the information must be shared with
the employee for development to occur. Along with assessment information, the
employee needs suggestions for correcting skill weaknesses and using skills already
learned. These suggestions might be to participate in training courses or develop
skills through new job experiences. Based on the assessment information and avail-
able development opportunities, employees should develop action plans to guide their
self-improvement efforts.
At AlliedBarton Security Systems, its 360-degree feedback report maps onto the
company’s core values and what it calls its Leadership Non-Negotiables.42 The pro-
cess is linked to an online talent tool kit which gives managers leadership tips based
on their 360-degree feedback. The CEO of Food4Less sought 360-degree feedback
from his executive on his leadership skills.43 After receiving the report of his results
he met with his executive team to share what he learned, to thank them for their
feedback, and to publicly commit to working on several key areas identified in the
assessment. Following the CEO’s lead, each member of his executive team also par-
ticipated in a 360-degree assessment of their leadership skills. St. Joseph’s Hospital
and Medical Center is a nonprofit hospital that provides a wide range of health, social,
and support services.44 St. Joseph’s has transitioned from a local community hospital
to a research-based hospital with nationally recognized programs in selected fields
of medicine. This meant recruiting and adding new physicians, some of whom have
significant leadership responsibilities over departments, faculty, and resident physi-
cians. St. Joseph’s used 360-degree feedback to identify, measure, and emphasize
those competencies necessary for these leaders. St. Joseph’s developed the 360-degree
assessment with a consulting firm. Based on the 360-degree assessments, one-on-one
coaching was provided to give the hospital leaders insights into how to develop their
competencies.
JOB EXPERIENCES
LO 9-6 Most employee development occurs through job experiences:45 relationships, problems,
Explain how job experi- demands, tasks, or other features that employees face in their jobs. A major assumption
ences can be used for of using job experiences for employee development is that development is most likely to
skill development.
occur when employees are given stretch assignments. Stretch assignments refer to
assignments in which there is a mismatch between the employee’s skills and past experi-
Job Experiences ences and the skills required for success on the job. To succeed in their jobs, employees
The relationships, prob-
lems, demands, tasks,
must stretch their skills—that is, they are forced to learn new skills, apply their skills
and other features that and knowledge in a new way, and master new experiences.46 New job assignments help
employees face in their take advantage of employees’ existing skills, experiences, and contacts, while helping
jobs. them develop new ones.47 Job experiences are used for development in companies of all
sizes but their type and availability vary.48 Large companies such as HCA Inc. with
195,000 employees in the health care business have the ability to provide high potential
employees with many different kinds of developmental experiences. For example, an
administrator can begin working in a position in a smaller heath care facility, and then Stretch Assignments
move to a larger facility including a hospital or heath care business. Smaller companies Job assignments in
which there is a mis-
might not have the same type or number of development experiences at work, but can
match between an
encourage employees to get relevant experiences outside of work. For example, the CEO employee’s skills and
at Pitney Bowes learned a lot about conflict management through his role as vice presi- past experiences and
dent of his homeowners association. Regardless of the size of the company, for job expe- the skills required for
riences to be an effective development activity they should be tailored to employees’ success on the job.
development needs and goals.
Most of what we know about development through job experiences comes from a
series of studies conducted by the Center for Creative Leadership.49 Executives were
asked to identify key career events that made a difference in their managerial styles
and the lessons they learned from these experiences. The key events included those
involving the job assignment (such as fixing a failing operation), those involving
interpersonal relationships (getting along with supervisors), and the specific type
of transition required (situations in which the executive did not have the necessary
background). The job demands and what employees can learn from them are shown
in Table 9.7.
One concern in the use of demanding job experiences for employee development is
whether they are viewed as positive or negative stressors. Job experiences that are seen
as positive stressors challenge employees to stimulate learning. Job challenges viewed
as negative stressors create high levels of harmful stress for employees exposed to them.
Recent research findings suggest that all of the job demands, with the exception of
obstacles, are related to learning.50 Managers reported that obstacles and job demands
related to creating change were more likely to lead to negative stress than the other job
demands. This suggests that companies should carefully weigh the potential negative
consequences before placing employees in development assignments involving obstacles
or creating change.
Table 9.7
Job Demands What Employees Can Learn Job Demands and
Transitions Handling responsibilities that are new, different, or broader than What Employees Can
those in previous job Learn From Them
Change Developing new strategic direction, reorganizing, growing or
reducing staff, or responding to rapid change; dealing with poor
performing employees
High Level of Making highly visible and important decisions that impact the
Responsibility business; managing multiple groups, functions, products, or
departments; dealing with external stakeholders such as unions,
government agencies, local politicians
Nonauthority Getting work done by influencing persons over whom you
Relationships have no direct authority such as peers, boss, and external
stakeholders
Obstacles Coping and succeeding despite adverse business conditions, a
lack of top management or peer support and encouragement, or
working with a boss who has poor management skills or a differ-
ent management stylem
SOURCE: C. D. McCauley, L. J. Eastman, and J. Ohlott, “Linking Management Selection and Development through
Stretch Assignments,” Human Resource Management 84 (1995), pp. 93–115. Copyright © 1995 Wiley Periodicals, Inc.,
a Wiley Company.
Although the research on development through job experiences has focused on execu-
tives and managers, line employees can also learn from job experiences. As we noted
earlier, for a work team to be successful, its members now need the kinds of skills that
only managers were once thought to need (such as dealing directly with customers, ana-
lyzing data to determine product quality, and resolving conflict among team members).
Besides the development that occurs when a team is formed, employees can further
develop their skills by switching work roles within the team.
Figure 9.4 shows the various ways that job experiences can be used for employee
development. These include enlarging the current job, job rotation, transfers, promotions,
downward moves, and temporary assignments. For companies with global operations
(multinationals), it is not uncommon for employee development to involve international
assignments that require frequent travel or relocation. The “Competing through Sustain-
ability” box describes how less-experienced lawyers are developing skills through pro
bono work in the community.
Enlarging the Current Job

Job Enlargement Job enlargement refers to adding challenges or new responsibilities to employees’ cur-
Adding challenges or rent jobs. This could include special project assignments, switching roles within a work
new responsibilities to an team, or researching new ways to serve clients and customers. For example, an engineer-
employee’s current job.
ing employee may join a task force developing new career paths for technical employ-
ees. Through this project work, the engineer may lead certain aspects of career path
development (such as reviewing the company’s career development process). As a result,
the engineer not only learns about the company’s career development system, but uses
leadership and organizational skills to help the task force reach its goals. Some compa-
nies are enlarging jobs by giving two managers the same responsibilities and job title
Figure 9.4
How Job
Experiences Are Promotion
Used for Employee
Development
Enlargement of
current
Job rotation Transfer

(lateral move) (lateral move)
job
experiences
Temporary
Downward assignments,
move projects, and
volunteer work
Legal Representation Benefits the Community and Associates’ Skills
Like their counterparts at can get experience putting wit- pro bono case-
other legal firms, junior, less- nesses on the stand or cross- work often motivates
experienced lawyers at Sidley examining them. Also, they can associates to become board
Austin learn about the trial process expand their personal network members or fundraisers for the
through traditional development and the firm’s knowledge by community service organizations
methods like reading books and working on immigration or cus- whose clients they represent.
cases, conducting mock deposi- tody cases that the firm doesn’t
tions and trials, and observing typically deal with in its for-profit DISCUSSION QUESTIONS
more senior lawyers in the court- business. The firm tracks each 1. Job demands help employees
room. But then they do pro bono associate’s skills and experi- stretch their skills. What job
work (work for no pay) in which ences regardless of whether demands does pro bono work
they serve disadvantaged clients they were developed in a pro present to inexperienced
in one of the 18 communities bono case or a client paying lawyers?
where Sidley Austin has offices. regular fees. Besides develop- 2. What should Sidley Austin do
Pro bono work is especially ing skills, working on pro bono to ensure that job demands
valuable for developing the cases helps associates feel sat- are not too stressful and
firm’s associates because they isfied with their work because overwhelming for the junior
get to work through an actual they have made a difference in lawyers?
case from the beginning to the their clients’ lives, and the firm SOURCE: Based on K. Everson, “Sidley Austin
end, participating in each step. gets positive recognition for Harnesses Pro Bono Experience,” Chief Learn-
For example, junior associates supporting the community. The ing Officer, December 2014, pp. 64–65.
and allowing them to divide the work (two-in-a-box).51 This helps managers learn from
a more experienced employee; helps companies fill jobs that require multiple skills;
and, for positions requiring extensive travel, ensures that one employee is always on site
to deal with work-related issues. For example, at Cisco Systems, the head of the Cisco
routing group, who was trained as an engineer but now works in business development,
shared a job with an engineer. Each employee was exposed to the other’s skills, which
has helped both perform their jobs better.
Job Rotation and Lateral Moves

Job rotation gives employees a series of job assignments in various functional areas of Job Rotation
the company or movement among jobs in a single functional area or department. Job The process of sys-
rotation involves a planned sequence of jobs that the employee is expected to hold, tematically moving a
single individual from
while lateral moves may not necessarily involve a predetermined sequence of jobs or one job to another over
positions. For example, at AT&T, 40% of the company’s managers made a lateral the course of time. The
move in 2013.52 In her 11-year career at AT&T, one manager has held six different job assignments may
positions, and she never had the same title for more than three years. In her last posi- be in various functional
tion she was in charge of hiring, reporting to executives, and training and supporting areas of the company
or movement may
all sellers located in her region. Now, she has taken a position as a director of call be between jobs in a
centers. This position has a greater scope and more responsibilities than her previous single functional area
position (she oversees about 1,700 employees). At Stryker Orthopaedics the sales or department.
department allows employees the opportunity to experience five different functional
397
areas with sales so that employees can decide which areas they might be most inter-
ested in working in.53
Job rotation helps employees gain an overall appreciation of the company’s goals,
increases their understanding of different company functions, develops a network of
contacts, and increases their skills.54 To attract and retain Millennials, General Motors
uses internships and functional job rotation programs to give them responsibility for real
jobs and projects and to help them explore career paths.55 At TJX, retailer of off-price
clothes and home fashions, buyers need to understand consumer and fashion trends and
develop relationships with vendors.56 Buyers’ training includes classroom instruction
on topics such as finance so they understand the results of their buying decisions and
mentoring with more experienced buyers. After completing the training they spend time
in the planning organization, which allocates merchandise to stores. The last step in
becoming a buyer is to move between departments, brands, and locations, which exposes
them to different parts of the business. The moves include both U.S. and international
locations, which help them gain global experience. Working in different parts of the
business helps the buyers develop their communications and negotiation skills and gain
confidence in their buying decisions, which can involve hundreds or millions of items.
Despite its advantages, there are several potential problems with job rotation for both
the employee and the work unit. The rotation may cause employees to adopt a short-
term perspective when problem-solving. Employees’ satisfaction and motivation may be
adversely affected because they find it difficult to develop functional specialties and they
don’t spend enough time in one position to receive a challenging assignment. Productiv-
ity losses and workload increases may be experienced by both the department gaining a
rotating employee and the department losing the employee due to training demands and
loss of a resource.
Transfers, Promotions, and Downward Moves

Upward, lateral, and downward mobility is available for development purposes in most
Transfer companies.57 In a transfer, an employee is assigned a job in a different area of the com-
The movement of an
pany. Transfers do not necessarily increase job responsibilities or compensation. They
employee to a differ-
ent job assignment in are likely lateral moves (a move to a job with similar responsibilities). Promotions are
a different area of the advancements into positions with greater challenges, more responsibility, and more
company. authority than in the previous job. Promotions usually include pay increases.
A downward move occurs when an employee is given less responsibility and author-
Promotions ity.58 This may involve a move to another position at the same level (lateral demotion), a
Advancement into temporary cross-functional move, or a demotion because of poor performance. Tempo-
positions with greater rary cross-functional moves to lower-level positions, which give employees experience
challenge, more
responsibility, and
working in different functional areas, are most frequently used for employee develop-
more authority than the ment. For example, engineers who want to move into management often take lower-level
employee’s previous positions (like shift supervisor) to develop their management skills.
job. Because of the psychological and tangible rewards of promotions (such as increased
feelings of self-worth, salary, and status in the company), employees are more willing to
Downward Move accept promotions than lateral or downward moves. Promotions are more readily avail-
A job change involv- able when a company is profitable and growing. When a company is restructuring or
ing a reduction in an
employee’s level of
experiencing stable or declining profits’—especially if numerous employees are inter-
responsibility and ested in promotions and the company tends to rely on the external labor market to staff
authority. higher-level positions—promotion opportunities may be limited.59
Transfers, job rotation, promotions, lateral moves, and downward moves may
involve relocation within the United States or to another country. This can be stressful
not only because the employee’s work role changes, but if the employee is in a two-
career family, the spouse must find new employment. Also, the family has to join a
new community. Transfers disrupt employees’ daily lives, interpersonal relationships,
and work habits.60 People have to find new housing, shopping, health care, and lei-
sure facilities, and they may be many miles from the emotional support of friends
and family. They also have to learn a new set of work norms and procedures; they
must develop interpersonal relationships with their new managers and peers; and they
are expected to be as productive in their new jobs as they were in their old jobs even
though they may know little about the products, services, processes, or employees for
whom they are responsible.
Because transfers can provoke anxiety, many companies have difficulty getting
employees to accept them. Research has identified the employee characteristics associ-
ated with a willingness to accept transfers:61 high career ambitions, a belief that one’s
future with the company is promising, and a belief that accepting a transfer is necessary
for success in the company. Employees who are not married and not active in the com-
munity are generally most willing to accept transfers. Among married employees, the
spouse’s willingness to move is the most important influence on whether an employee
will accept a transfer.
Unfortunately, many employees have difficulty associating transfers and downward
moves with development. They see them as punishments rather than as opportunities to
develop skills that will help them achieve long-term success with the company. Many
employees decide to leave a company rather than accept a transfer. Companies need to
successfully manage transfers not only because of the costs of replacing employees but
because of the costs directly associated with them. For example, GTE spends approxi-
mately $60 million a year on home purchases and other relocation costs such as tem-
porary housing and relocation allowances.62 One challenge companies face is learning
how to use transfers and downward moves as development opportunities—convincing
employees that accepting these opportunities will result in long-term benefits for them.
To ensure that employees accept transfers, promotions, and downward moves as
development opportunities, companies can provide
∙ Information about the content, challenges, and potential benefits of the new job and
location.
∙ Involvement in the transfer decision by sending the employees to preview the new
location and giving them information about the community.
∙ Clear performance objectives and early feedback about their job performance.
∙ A host at the new location to help them adjust to the new community and workplace.
∙ Information about how the job opportunity will affect their income, taxes, mortgage
payments, and other expenses.
∙ Reimbursement and assistance in selling and purchasing or renting a place to live.
∙ An orientation program for the new location and job.
∙ Information on how the new job experiences will support the employee’s career plans.
∙ Assistance for dependent family members, including identifying schools and child
care and elder care options.
∙ Help for the spouse in identifying and marketing skills and finding employment.63 Temporary
Assignments
Job tryouts such as
Temporary Assignments, Projects, Volunteer Work, and Sabbaticals employees taking on a
position to help them
Temporary assignments refer to job tryouts such as employees taking on a position to help determine if they are
them determine if they are interested in working in a new role, employee exchanges, sabbati- interested in working in
cals, and voluntary assignments. All temporary assignments have a predetermined ending a new role.
date after which the employees return to their permanent position. For example, Mondelez
International, a snack company with 100,000 employees, wanted to help its managers learn
about how to market its products using mobile devices. For several days, they sent their man-
agers to nine small mobile-technology companies to help them gain an understanding of
their entrepreneurial spirit and how quickly these companies generated ideas and built and
tested prototypes of new marketing efforts.64 An associate brand manager from PepsiCo’s
New York headquarters spent a week at Airbnb, a San Francisco–based start-up online travel
rental business with only 200 employees. Managers from the two companies hoped to learn
from each other’s brand management practices. Both companies have casual, collaborative
work environments. But compared to PepsiCo brand management, Airbnb’s brand manage-
ment is based more on instinct than on data analysis and the ideas of marketing agencies.
Marketing managers at Airbnb were interested in learning about how PepsiCo built data sets
of market research. To develop a broad understanding of the business, directors at Genen-
tech Inc. spend 10% of their time over six to nine months in a different function working on
special projects, participating in task forces, and shadowing business leaders.65
Employee exchange is another type of temporary assignment. Procter & Gamble
(P&G) and Google have swapped employees.66 Employees from the two companies par-
ticipate in each other’s training programs and attend meetings where business plans are
discussed. Both companies hope to benefit from the employee swap. Procter & Gamble is
trying to increase its understanding of how to market laundry detergent, toilet paper, and
skin cream products to a new generation of consumers who spend more time online than
watching television. Google wants to gain more ad revenue by persuading companies to
shift from showcasing their brands on television to video-sharing sites such as YouTube.
Sabbatical Temporary assignments can include a sabbatical. A sabbatical refers to a leave of
A leave of absence absence from the company for personal reflection, renewal, and skill development.
from the company Employees on sabbatical often receive full pay and benefits. Sabbaticals let employees get
for personal reflec-
tion, renewal, and skill
away from the day-to-day stresses of their jobs and acquire new skills and perspectives.
development. Sabbaticals also allow employees more time for personal pursuits such as writing a book
or spending more time with young children. Sabbaticals are common in a variety of
industries ranging from consulting firms to the fast-food industry.67 They typically range
from four to 10 weeks. Sabbaticals can involve travel, finishing a degree or other learning
opportunities, donating time to charity, working on research or new product development,
or working on a “green” cause. Birchbox Inc., an online beauty business, gives employees
a three-week sabbatical after they work for the company for three years.68 Birchbox
employees have an unlimited vacation policy, but they were reluctant to take off work for
more than one week. After taking the three week sabbatical employees returned to work
refreshed, and less-experienced employees learned new skills filling in for them.
Volunteer assignments can also be used for development. Volunteer assignments may
give employees opportunities to manage change, teach, have a high level of responsibil-
ity, and be exposed to other job demands shown earlier in Table 9.7. For General Mills,
volunteer assignments and involvement with community projects is one of the ways the
company lives its corporate values.69 Employees work in a wide variety of charities, with
duties ranging from serving meals to the homeless, painting child care center rooms, or
serving as corporate board members. Besides providing valuable services to community
organizations, General Mills believes volunteer assignments help employees improve
team relationships and develop leadership and strategic thinking skills.
INTERPERSONAL RELATIONSHIPS
LO 9-7
Develop successful Employees can also develop skills and increase their knowledge about the company and its
mentoring programs. customers by interacting with a more experienced organization member. Mentoring and
coaching are two types of interpersonal relationships that are used to develop employees.
Mentoring
A mentor is an experienced, productive senior employee who helps develop a less expe- Mentor
rienced employee (the protégé). Because of the lack of potential mentors, and recogniz- An experienced,
ing that employees can benefit from relationships with peers and colleagues, some productive senior
employee who helps
companies have initiated and supported group and peer mentoring. develop a less experi-
Most mentoring relationships develop informally as a result of interests or values enced employee.
shared by the mentor and protégé. Research suggests that employees with certain per-
sonality characteristics (like emotional stability, the ability to adapt their behavior based
on the situation, and high needs for power and achievement) are most likely to seek a
mentor and be an attractive protégé for a mentor.70 Mentoring relationships can also
develop as part of a formal mentoring program, that is, a planned company effort to
bring together successful senior employees with less experienced employees. Table 9.8
shows examples of how companies are using formal mentoring programs. Mentoring
programs have many important purposes including socializing new employees, develop-
ing managers, and providing opportunities for women and minorities to share experi-
ences and gain the exposure and skills needed to move into management positions.
Table 9.8
Examples of Mentoring Programs
SCC Soft Computer—Every new hire is assigned a mentor. The mentor creates a personalized learning pass-
port including the new employee’s photo and identifies the competency areas the new hire needs to develop.
After identifying the competency the mentor is responsible for, the mentor follows up with the employee.
When the employee’s personal learning passport is complete they are eligible for advancement.
Microsoft—The mentoring program includes career development mentoring and peer mentoring. Career
development mentoring focuses on career and professional development through structured, year-long
cross-group mentoring. Peer mentoring is less structured and focuses on transfer of work-related knowledge
among members of the same work team.
The Sacramento Municipal Utility District (SMUD)—Includes a one-year mentoring program in its Building
Leadership Talent program. The program matches protégés with mentors who are outside their business unit.
SMUD provides an orientation and half-day session for the mentors that includes skill building, role-playing,
a process model for effective mentoring, templates for documenting goals and progress toward meeting the
goals, skill practice, and web-based training.
Sodexo—Peer-to-peer mentoring is a program managed directly by Sodexo’s Network Groups. Networks are
organized around a common dimension of diversity and are created by employees who want to raise aware-
ness in Sodexo of their identity groups. They include network groups based on national orientation, race,
sexual preference, military service, and intergenerations. The Spirit of Mentoring Bridge Programs are infor-
mal divisional pairings in which newly hired and front-line managers come together to expand professional
development opportunities and increase the depth and diversity of Sodexo’s management.
Agilent Technologies—The Next Generation Leadership Program accelerates development for top talent by
matching senior executives with high potential.
McDonald’s—Offers a virtual online mentoring program that employees can use to build their skill sets and
develop relationships.
Aditya Birla Minacs—The Altitude program is a career progression program designed to support front-line
staff transition to a team leader role. Program outcomes include self-identified action items that the staff
intends to complete to aid their career progression. Mentor Magic is a program in which successful supervi-
sors based on their experience and performance mentor front-line staff on the action items.
SOURCES: Based on “Training Top 125: Aditya Birla Minacs,” Training, January/February 2014, p. 101; www.sodexousa.com, website for Sodexo, Inc.;
“Best Practices and Outstanding Initiatives,” Training, January/February 2011, pp. 94–98; “Training Top 125,” Training, January/February 2011,
pp. 54–93: R. Emelo, “Conversations with Mentoring Leaders,” T + D, June 2011, pp. 32–37.
Developing Successful Mentoring Programs. One major advantage of formalized

mentoring programs is that they ensure access to mentors for all employees, regardless
of gender or race. An additional advantage is that participants in the mentoring relation-
ship know what is expected of them.71 One limitation of formal mentoring programs is
that mentors may not be able to provide counseling and coaching in a relationship that
has been artificially created.72 To overcome this limitation, it is important that men-
tors and protégés spend time discussing work styles, their personalities, and their back-
grounds, which helps build the trust needed for both parties to be comfortable with their
relationship.73 Toshiba America Medical Systems doesn’t have a formal mentoring pro-
gram. However, Toshiba encourages informal mentoring from the first day employees
are hired. Both managers and HR business partners take the time to help new employees
meet their colleagues and show them around the workplace.74
Table 9.9 presents the characteristics of a successful formal mentoring program.
Mentors should be chosen based on interpersonal and technical skills. They also need to
be trained.75 For mentors, protégés, and the company to get the most out of mentoring,
tools and support are needed.76 A key to successful mentoring programs is that the men-
tor and protégé are well-matched and can interact with each other face-to-face, virtually,
or using social media.
EVIDENCE-BASED HR
A mentoring program for new regional sales managers at SAP, a global business
software company, has many characteristics of a successful mentoring program.
The mentoring program helps new sales managers understand company resources,
identify experts to add to their sales network, assimilate into the company culture,
and practice discovering clients, account plans, and presentations. Mentors track
protégés’ progress on sales plans, customer and prospective customer meetings, and
closed deals. Mentors first interact with their protégés, new regional sales managers,
when they accept their employment offer. The six-month mentoring program initially
focuses on support for using sales tools and processes and learning the company cul-
ture. Next, territory planning, account prioritization, and internal and external net-
work building are emphasized. Mentors are certified by the International Coaching
Federation. They use a learning path designed to direct the new manager to training
courses, job experience, and informal learning opportunities that match their needs.
The mentors and new managers use social collaboration tools to share best practices,
discuss challenges, and provide support to each other. Mentors use different types
of data so they are prepared to meet each new manager’s needs. They review their
resume to determine the types of courses or personal support that may be helpful.
Also, mentors review customer reports for each manager to track their progress and
identify points of emphasis during their weekly discussions. A study comparing new
sales managers who were mentored with those who were not found that mentored
managers have more than a 300% improvement in closed sales deals, more than three
times made quota, and turnover was down 80%.
SOURCE: Based on J. Dearborn, “Sinking Fast,” T + D, December 2013, pp. 44–47.
Web-based matching systems are also available to help match mentors and protégés. Soft-
ware is also available to track mentors’ and protégés’ work, help build development plans,
and schedule mentor and protégé meetings.77 For example, at Cartus, a relocation company,
Table 9.9
Characteristics of Successful Formal Mentoring Programs
1. Mentor and protégé participation is voluntary. Relationship can be ended at any time without fear of
punishment.
2. The mentor–protégé matching process does not limit the ability of informal relationships to develop.
For example, a mentor pool can be established to allow protégés to choose from a variety of qualified
mentors.
3. Mentors are chosen on the basis of their past record in developing employees, willingness to serve as
a mentor, and evidence of positive coaching, communication, and listening skills.
4. Mentor–protégé matching is based on how the mentor’s skills can help meet the protégé’s needs.
5. The purpose of the program is clearly understood. Projects and activities that the mentor and protégé are
expected to complete are specified.
6. The length of the program is specified. Mentor and protégé are encouraged to pursue the relationship
beyond the formal period.
7. A minimum level of contact between the mentor and protégé is specified. Mentors and protégés need to
determine when they will meet, how often, and how they will communicate outside the meetings.
8. Protégés are encouraged to contact one another to discuss problems and share successes.
9. The mentor program is evaluated. Interviews with mentors and protégés give immediate feedback regard-
ing specific areas of dissatisfaction. Surveys gather more detailed information regarding benefits received
from participating in the program.
10. Employee development is rewarded, which signals to managers that mentoring and other development
activities are worth their time and effort.
employees who are interested in being either a mentor or protégé can apply to participate in
a mentoring program. Employees provide a profile of their interests, expertise, and experi-
ences. Software matches mentors and protégés based on the profiles. Six months after the
mentoring relationship is started, the software prompts them to report their progress.
Benefits of Mentoring Relationships. Both mentors and protégés can benefit from a
mentoring relationship. Research suggests that mentors provide career and psycho-social
support to their protégés. Career support includes coaching, protection, sponsorship, and Career Support
providing challenging assignments, exposure, and visibility. Psychosocial support includes Coaching, protec-
serving as a friend and a role model, providing positive regard and acceptance, and creating tion, sponsorship, and
providing challenging
an outlet for the protégé to talk about anxieties and fears. Additional benefits for the protégé assignments, exposure,
include higher rates of promotion, higher salaries, and greater organizational influence.78 and visibility.
Mentoring relationships provide opportunities for mentors to develop their inter-
personal skills and increase their feelings of self-esteem and worth to the organization. Psychosocial
For individuals in technical fields such as engineering or health services, the protégé Support
may help them gain knowledge about important new scientific developments in their Serving as a friend and
field (and therefore prevent them from becoming technically obsolete). Tamara Trum- role model, provid-
ing positive regard
mer summarizes some of the benefits she gained from mentoring relationships: “I found
and acceptance, and
mentors in two of my earlier companies, both male and female managers who ‘taught creating an outlet for a
me the ropes’ in an informal sense by giving me inside information about the company, protégé to talk about
certain executives—and even such practical things as how to conduct business travel and anxieties and fears.
handle an expense account.”79 One mentor arranged for her to travel from the remote
manufacturing plant where she worked to the corporate office and set up meetings to
meet key employees she would have to work with. Her mentors have also included co-
workers, peers, and even subordinates who have taught her computer software skills. As
a result of her positive experiences as a protégé Trummer now mentors others employees.
Reverse Mentoring Reverse mentoring refers to mentoring in which younger employees mentor more senior
Business situation in employees. For example, approximately 100 employees have been involved in reverse
which younger employ-
mentoring at MasterCard.80 In one of the relationships, a 24-year-old with two years’ expe-
ees mentor more senior
employees. rience in digital communications was paired as a mentor with a 50-year-old executive. The
executive wanted to learn how to use social media to relate better to MasterCard’s Millen-
nial employees and customers and to refocus the company’s image to a technology com-
pany rather than a credit card company. A reverse mentoring program at Hartford Financial
Services Group led to benefits for mentors, protégés, and the company. The program led to
changing rules to allow employees to use social media for work and more executives using
an internal social network. Mentors filed a patent application on how online public safety
data might be used by insurance underwriters to assess risks. Also, within a year of partici-
pating in the program, almost all of the mentors were promoted.
Mentoring can also occur between mentors and protégés from different organiza-
tions. Websites such as Everwise are available to help find online mentors. For example,
Amy Dobler wanted to enhance her career at Jive Software so she went online and was
matched with Edel Keville, a human resources vice president at Levi Strauss & Com-
pany.81 Using Everwise, she completed an online questionnaire about her personality,
education, career path, and personal goals. Both women had similar personalities and
career paths in human resources and technology. After the online match, an Everwise
relationship manager personally introduced the two women. The advice, guidance, and
support that Dobler received from Keville in the mentoring relationship over a few
months helped her gain confidence needed to present to senior managers, lead interna-
tional training sessions, and improve her delegation skills.
Coaching
LO 9-8 A coach is a peer or manager who works with an employee to motivate him, help him
Describe how to train develop skills, and provide reinforcement and feedback. There are three roles that a
managers to coach coach can play.82 Part of coaching may be one-on-one with an employee (such as giving
employees.
feedback). Another role is to help employees learn for themselves. This involves helping
them find experts who can assist them with their concerns and teaching them how to
Coach
obtain feedback from others. Third, coaching may involve providing resources such as
A peer or manager
who works with an mentors, courses, or job experiences that the employee may not be able to gain access to
employee to motivate without the coach’s help.
her, help her develop Consider how Walgreens, PwC, and University Hospitals use coaching.83 Coach-
skills, and provide ing sessions are part of Walgreens’ executive development program. Executives meet
reinforcement and
for nine days of formal learning that includes face-to-face instruction, discussion, team
feedback.
building exercises, and action learning projects. They also are encouraged during and
after the program to share ideas and get involved in discussions on Walgreens’ social
collaboration site. Each executive is involved in six coaching sessions, which reinforce
learning and support their individual development. PwC’s leadership development pro-
gram “Discover” focuses on newly promoted senior associates increasing their skills in
making effective decisions. Senior associates are typically struggling to balance careers
with family, community and personal choices. The goals of the program are to help
participants maximize their personal energy, clarify their values, identify their focus,
and make conscious rather than reactive decisions. In the Explore phase of the program,
participants complete pre-work assignments such as “Discover Your Values” and discuss
the results with life coaches. Participants work with the coaches to create “Who Am
I?” stories. At University Hospitals coaching is used as part of an executive develop-
ment program designed for physician and functional leaders. The participants receive
one-on-one coaching and also become certified coaches themselves. This allows them in
the future to serve as formal coaches for other potential leaders. The one-on-one coach-
ing they receive emphasizes discovering their ideal self, understanding their real self,
creating a learning agenda, experimenting with new behaviors, and leveraging trusting
relationships. It uses 360-feedback to help them recognize differences between their real
self and ideal self and prepare a learning agenda to narrow this gap using new behaviors
and personal relationships.
Research suggests that coaching helps managers improve by identifying areas for
improvement and setting goals.84 Getting results from a coaching relationship can take at
least six months of weekly or monthly meetings. To be effective, a coach generally con-
ducts an assessment, asks questions that challenge the employee to think deeply about
his or her goals and motives, helps the employee create an action plan, and follows up
regularly to help the employee stay on track. Employees contribute to the success of
coaching when they persevere in practicing the behaviors identified in the action plan.85
Special Issues in Employee Development

MELTING THE GLASS CEILING LO 9-9
A major development issue facing companies today is how to get women and minorities Discuss what compa-
nies are doing for melt-
into upper-level management positions—how to melt the glass ceiling. Surveys show
ing the glass ceiling.
that in Fortune 500 companies women represent less than 3% of CEOs and approxi-
mately 18% of executive officers.86 Two-thirds of companies lack specific programs tar-
Glass Ceiling
geted at the needs of women leaders. Twenty-three percent of companies offer some A barrier to advance-
activities or programs targeted to the needs of women. These activities include flexible ment to higher-level
scheduling, diversity recruiting, and coaching and mentoring. One of the dilemmas is jobs in the company
that companies may be reluctant to treat women any differently than men from a leader- that adversely affects
women and minorities.
ship development perspective despite acknowledging that women lack executive spon-
The barrier may be
sors or mentors, have insufficient experience, and need better work/life balance. This due to lack of access
barrier may be due to stereotypes or company systems that adversely affect the develop- to training programs,
ment of women or minorities.87 The glass ceiling is likely caused by lack of access to development experi-
training programs, appropriate developmental job experiences, and developmental rela- ences, or relationships
(e.g., mentoring).
tionships (such as mentoring).88 For example, Mary Barra made history when she
became the first woman chief executive officer of global carmaker, General Motors.89
Prior to becoming CEO, Barra was in a product development job, an operational job
critical to the company’s success. But 55% of women are in functional roles such as law-
yers, chief of finance, or human resources, which may not put them in the career path
needed to become a CEO. Women and minorities often have trouble finding mentors
because of their lack of access to the “old boy network,” managers’ preference to interact
with other managers of similar status rather than with line employees, and intentional
exclusion by managers who have negative stereotypes about women’s and minorities’
abilities, motivation, and job preferences.90 Research has found no gender differences in
access to job experiences involving transitions or creating change.91 However, male
managers receive significantly more assignments involving high levels of responsibility
(high stakes, managing business diversity, handling external pressure) and appreciation
for their contributions than female managers of similar ability and managerial level.
Also, female managers report experiencing more challenge due to lack of personal sup-
port (a type of job demand considered to be an obstacle that has been found to relate to
harmful stress) and appreciation for their contributions than male managers. Career
encouragement from peers and senior managers does help women advance to the higher
Table 9.10
Recommendations Make sure senior management supports and is involved in the program.
for Melting the Glass Make a business case for change.
Ceiling Make the change public.
Gather data on problems causing the glass ceiling using task forces, focus groups,
and questionnaires.
Create awareness of how gender attitudes affect the work environment.
Force accountability through reviews of promotion rates and assignment decisions.
Promote development for all employees.
SOURCES: Based on B. Groysberg and K. Connolly, “Great Leaders Who Make the Mix Work,” Harvard Business
Review, September 2013, pp. 68–76; D. McCracken, “Winning the Talent War for Women,” Harvard Business Review,
November–December 2000, pp. 159–67.
management levels.92 Managers making developmental assignments need to carefully

consider whether gender biases or stereotypes are influencing the types of assignments
given to women versus men.
Many companies are making efforts to melt the glass ceiling.93 AstraZeneca, a bio-
pharmaceutical company, helps develop women leaders through providing workshops,
formal mentoring programs, and leadership courses. In its commercial operations, an
18-month development program is available for mid-level employees. Fifty percent
of those enrolled in the development program are female. Johnson & Johnson (J&J)
has more than doubled women at the corporate executive level to 33% and seen a 29%
increase in the number of women senior managers. J&J has taken steps to get women
into important positions they need to grow and develop to meet their career goals and
to position them for top management and executive positions. J&J is willing to take
risks on employees wanting to develop skills and their careers through providing stretch
assignments, mentoring, and coaching. For example, early in her career a woman who
is now a vice president at J&J was sent to Switzerland as part of a team to launch a
new business. She also spent nine years working in manufacturing, supply chain, and
planning before switching to marketing based on the support of J&J’s vice president
for marketing who had recognized her skills and potential. J&J also supports women’s
career progress by allowing them to turn down an opportunity for a leadership position,
promotion, or other opportunity if other priorities, such as family, are more important at
that point in time in their career. Women are not seen as uninterested in their career as a
result of turning down such opportunities but are considered again when they are avail-
able. Table 9.10 provides recommendations for melting the glass ceiling and helping
retain talented women.
LO 9-10
Use the 9-box grid
for identifying where SUCCESSION PLANNING
employees fit in a
succession plan and Succession planning refers to the process of identifying and tracking high-potential
construct appropriate employees who are capable of moving into different positions in the company resulting
development plans for from planned or unplanned job openings due to turnover, promotion, or business growth.
them. Succession planning is often discussed when considering company’s managers or top
leaders but it is an important consideration for any job. Succession planning helps orga-
Succession Planning nizations in several different ways.94 It requires senior management to systematically
The identification and review leadership talent in the company. It ensures that top-level managerial talent is
tracking of high-potential
employees capable of available. It provides a set of development experiences that managers must complete to
filling higher-level mana- be considered for top management positions; this avoids premature promotion of manag-
gerial positions. ers who are not ready for upper management ranks. Succession planning systems also
Table 9.11
1. Identify what positions are included in the plan. The Process of
2. Identify the employees who are included in the plan. Developing a
3. Develop standards to evaluate positions (e.g., competencies, desired experi- Succession Plan
ences, desired knowledge, developmental value).
4. Determine how employee potential will be measured (e.g., current performance
and potential performance).
5. Develop the succession planning review.
6. Link the succession planning system with other human resource systems, includ-
ing training and development, compensation, performance management, and
staffing systems.
7. Determine what feedback is provided to employees.
8. Measure the effectiveness of the succession plan.
SOURCES: Based on W. Rothwell, “The Future of Succession Planning,” T + D, September 2010, pp. 51–54;
B. Dowell, “Succession Planning,” in Implementing Organizational Interventions, ed. J. Hedge and E. Pulaskos
(San Francisco: Jossey-Bass, 2002), pp. 78–109; R. Barnett and S. Davis, “Creating Greater Success in Succession
Planning,” Advances in Developing Human Resources 10 (2008), pp. 721–39.
help attract and retain managerial employees by providing them with development
opportunities that they can complete if upper management is a career goal for them.
High-potential employees are those the company believes are capable of being success- High-Potential
ful in higher-level managerial positions such as general manager of a strategic business Employees
unit, functional director (such as director of marketing), or chief executive officer Employees the com-
pany believes are capa-
(CEO).95 High-potential employees typically complete an individual development pro- ble of being successful
gram that involves education, executive mentoring and coaching, and rotation through in high-level manage-
job assignments. Job assignments are based on the successful career paths of the manag- ment positions.
ers whom the high-potential employees are being prepared to replace. High-potential
employees may also receive special assignments, such as making presentations and serv-
ing on committees and task forces.
Despite the importance of succession planning, many companies do not do it well. A
recent survey found that a approximately one-third of senior-level executives were satis-
fied or very satisfied with their company’s succession planning programs and less than
one-quarter believed their company had developed a strong pool of candidates ready to
fill top leadership positions.96 The dissatisfaction with succession planning may result
from the tendency to focus only on managers at the vice president level or above, failing
to identify successors because they don’t want to risk potential leaders leaving the com-
pany because they are discouraged and disappointed, and a short-term focus rather than
a long-term process designed to develop “bench strength.” Bench strength refers to hav- Bench Strength
ing a pool of talented employees who are ready when needed. The business strategy
Table 9.11 shows the process used to develop a succession plan.97 The first step is to of having a pool of
talented employees
identify what positions are included in the succession plan, such as all management posi- who are ready when
tions or only certain levels of management. The second step is to identify which employ- needed to step into a
ees are part of the succession planning system. For example, in some companies only new position within the
high-potential employees are included in the succession plan. Third, the company needs organization.
to identify how positions will be evaluated. For example, will the emphasis be on com-
petencies needed for each position or on the experiences an individual needs to have
before moving into the position? Fourth, the company should identify how employee
potential will be measured. That is, will employees’ performance in their current jobs as
well as ratings of potential be used? Will employees’ position interests and career goals
be considered? Fifth, the succession planning review process needs to be developed.
Typically, succession planning reviews first involve employees’ managers and human
resources. A talent review could also include an overall assessment of leadership talent
in the company, an identification of high-potential employees, based on their perfor-
mance and potential, and a discussion of plans to keep key managers from leaving the
company. Many companies use the 9-box grid for conducting the succession planning
9-box grid review. The 9-box grid is a three-by-three matrix used by groups of managers and execu-
A three-by-three matrix tives to compare employees within one department, function, division, or the entire com-
used by groups of man- pany.98 The 9-box grid is used for analysis and discussion of talent, to help formulate
agers and executives
to compare employees
effective development plans and activities, and to identify talented employees who can
within one department, be groomed for top-level management positions in the company. As shown in Figure 9.5
function, division, or the one axis of the matrix is based on an assessment of job performance. The other axis is
entire company. typically labeled “potential” or “promotability.” Typically, managers’ assessment of per-
formance (based on the company’s performance management system) and potential
influences employees’ development plans. For example, as shown in Figure 9.5, “Stars”
should be developed for leadership positions in the company.
For example, CHG Healthcare Services’ goal was to increase the number of company
leaders by 15% and reduce leaders’ turnover.99 CHG used the 9-box to identify poten-
tial leaders and develop leadership bench strength. Employees were evaluated based on
their performance and potential. Employees who were identified as high performers
with high potential were selected to go through a 360-degree assessment of their skills.
This assessment was used in a leadership program designed specifically to develop their
potential and skills to ensure they were ready for promotion. The results have been posi-
tive. Leadership turnover has decreased by one-third, internal promotion rates for lead-
ers have increased nearly 50%, and the leader-to-employee ratio has improved 24%.
Contrast the development plans of “Stars” with employees in the other areas of the
grid. The development plans for “Poor Employees” emphasize performance improvement
Figure 9.5
Example of a 9-Box
Grid
7 8
9
Technical/ Subject Ag ile
Star
Expert Nonperformer
Performance
4 5 6
Strong Core Rising
Contributor Employee Star
3
1 2
Potential
Poor Inconsistent
May be
Employee Employee
Misplaced
Potential or Promotability
in their current position rather than getting them challenging new job experiences. If they
do not improve in their current position they are likely to be fired. “Technical/Subject
Experts” are outstanding performers but have low potential for leadership positions. Their
development plans likely emphasize keeping their knowledge, skills, and competencies
current and getting them experiences to continue to motivate them and facilitate creativity
and innovation. “Potential May Be Misplaced” employees may have just taken a new posi-
tion and haven’t had the time to demonstrate high performance or these employees’ knowl-
edge, skills, or competencies might not match their job requirements. Their development
plans might emphasize moving them to a position that best matches their skill set or if they
have just moved to the job, insuring that they get the training and development opportuni-
ties and resources necessary to help them attain high performance levels. “Core Employ-
ees” are solid but not outstanding performers who have moderate potential. Development
plans for these employees will include a mix of training and development designed to
help insure their solid performance continues. Also, their development plans likely include
some development experiences that can help grow their skills and determine their interest
and ability to perform in positions requiring different skills and/or more responsibility.
Sixth, succession planning is dependent on other human resource systems, including
compensation, training and development, and staffing. Incentives and bonuses may be
linked to completion of development opportunities. Activities such as training courses,
job experiences, mentors, and 360-degree feedback should be part of high-potential
employees’ development plans. Companies need to make decisions such as will they
fill an open management position internally with a less-experienced employee who will
improve in the role over time, or will they hire a manager from outside the company who
can immediately deliver results. Seventh, employees need to be provided with feedback
on future moves, expected career paths, and development goals and experiences. Finally,
the succession planning process needs to be evaluated. This includes identifying and
measuring appropriate results outcomes (such as reduced time to fill manager positions,
increased use of internal promotions) as well as collecting measures of satisfaction with
the process (reaction outcomes) from employees and managers. Also, modifications that
will be made to the succession planning process need to be identified, discussed, and
implemented. The “Competing through Globalization” box describes how Dow Chemi-
cal develops leaders by sending employees to work in unfamiliar environments.
Turnover is common in Valvoline Instant Oil Change’s industry.100 This means that
succession planning and developing bench strength are critical for all employees. Each
month managers rate all their employees on their readiness for promotion to their next
job level and provide an overall evaluation of when they are ready such as “today” or
“within six months.” Managers work with employees on development plans designed to
get them to be ready today. The development plans and evaluations are entered into an
online system that allows higher-level managers to identify stores and areas where talent
is not available in order to improve succession plans. Managers can identify employees,
known as “blockers,” who are not willing or able to develop further but are in positions
that would be considered as a promotion for other employees. Succession planning has
initiated a demand for training across the entire career path to ensure that assistant man-
agers are developed as well as senior technicians who might take their jobs and new
technicians who need to be ready to take on more responsibilities. Top-level managers
use the online system to identify if talent is available to expand stores in a geographic
area. Also, the company includes the number of managers available for promotion on
their balanced scorecards, which measure company performance.
Blue Cross Blue Shield of Michigan (BCBSM) identifies and develops the company’s
next generation of leaders as well as talented employees.101 Members of the executive
Dow Chemical Develops Leaders by Sending
Them to Work in Unfamiliar Surroundings
As Dow Chemical expands where to grow plants that could and values of the
its global presence, it needs provide medicine for malaria and people in the communities to
employees who have the ability working with a trade school to create meaningful, accepted,
to network and develop rela- develop education in science, and useful solutions. They
tionships with local commercial technology, engineering, and have represented Dow Chemi-
and government leaders. Dow’s math curricula. cal in news interviews, which
leadership development pro- Program participants spend enhanced their media relations
gram, Leadership in Action, is five months virtually planning skills and understanding of how
part of Dow’s approach to meet- and collaborating from their to best represent the company.
ing the world’s basic needs by home offices. This helps them
matching its employees with develop their consulting skills DISCUSSION QUESTION
organizations that need support and adapt to the unexpected What are the advantages and
for sustainable development such as the sudden loss of elec- disadvantages of the Leader-
projects, especially in business tricity or telephone service. After ship in Action program com-
growth areas for Dow. High- working virtually for five months pared to more traditional ways
potential employees are orga- the group travel to the host of developing leaders such as
nized in teams who work with country to examine their finished formal courses (e.g., an MBA
nongovernment organizations projects. The team members program) or giving them stretch
on projects that meet commu- develop skills in solving prob- assignments?
nity needs in Ethiopia, Ghana, lems in a culture and community SOURCES: Based on K. Everson, “Dow
and other countries where Dow that are extremely different from Chemical’s New Formula for Global Leaders,”
is considering opening busi- the ones they are accustomed Chief Learning Officer, April 2015, pp. 42–43,
49; company website, “Mission & Vision” and
nesses. Some of the projects to experiencing. They focus on “Leadership in Action: Ethiopia,” www.dow
have included determining understanding social structures .com, accessed April 14, 2015.
team have formal succession plans. BCBSM conducts companywide talent reviews to
identify current and future skill strengths and weaknesses. BCBSM uses a 9-box grid to
assess performance and potential. Management teams meet to discuss the 9-box results
for their employees individually and as a group. Part of the meeting is devoted to ensur-
ing that managers are using similar standards for evaluating employee performance and
likelihood of future advancement. After the talent reviews are completed, BCBSM holds
talent summits to ensure that managers across all divisions understand the company’s
talent, their development needs, and are aware of cross-division job openings and talent
strengths and weaknesses. Supporting this process, BCBSM conducts an annual talent
inventory. Employees are asked to identify their career interests and skills. This informa-
tion is used in manager–employee discussions of BCBSM’s talent needs, their individual
development plans, career goals, and development activities.
Paychex bases succession planning on its leadership competency model.102 Pay-
chex uses the 9-box grid to identify leaders with high performance potential. Potential
evaluations are based on agility, ability, and aspiration. Succession candidates partici-
pate in two leadership development programs. Each succession candidate develops an
410
individual development plan. The individual development plans are designed to meet
business needs and competency gaps through development activities known at Paychex
as the 3Es: education, exposure, and experience. A dedicated “leadership developer”
works with the employee and his or her manager to provide coaching, help with the
individual development plan, and monitor progress. Last year, over 1,700 executives,
senior executives, managers, and supervisors completed assessment of their leadership
competencies, performance, and potential. The succession planning process has resulted
in over 25% of senior managers, managers, and supervisors identified as ready for a
promotion to the next level within one to two years, succession plans for all officer and
senior manager positions at Paychex, and an increase of 18% in open senior management
positions filled with internal candidates.
One of the important issues in succession planning is deciding whether to tell employ-
ees if they are on or off the list of potential candidates for higher-level manager posi-
tions.103 There are several advantages and disadvantages that companies need to consider.
One advantage to making a succession planning list public or telling employees who are
on the list is that they are more likely to stay with the company because they understand
they likely will have new career opportunities. Another is that high-potential employees
who are not interested in other positions can communicate their intentions. This helps the
company avoid investing costly development resources in them and allows the company
to have a more accurate idea of its high-potential managerial talent. The disadvantages of
identifying high-potential employees are those not on the list may become discouraged and
leave the company or changes in business strategy or the employees’ performance could
take them off the list. Also, employees might not believe they have had a fair chance to
compete for leadership positions if they already know that a list of potential candidates has
been established. One way to avoid these problems is to let employees know they are on
the list but not discuss a specific position they will likely reach. Another is to frequently
review the list of candidates and clearly communicate plans and expectations. Managers
at Midmark Corporation, a medical equipment manufacturer based in Versailles, Ohio,
identify successors every six months as part of the company’s performance review process
and produce a potential list of candidates. Some employees are also labeled as high poten-
tial and others are identified as having high potential for leadership positions. Employees
with high potential for leadership positions are considered for challenging development
assignments involving overseas relocation. Using interviews the company determines if
employees on the succession list are interested in and qualified for leadership positions.
A LOOK BACK
ESPN’s Employee Development Programs
The chapter opener described ESPN’s employee development programs.
QUESTIONS
1. ESPN requires all employees to complete an individual development plan (IDP).
What should be included on an effective development plan?
2. How could ESPN identify employees with the potential for top leadership
positions?
3. Why does most development occur at ESPN through experiences rather than
by attending courses?
SUMMARY
This chapter emphasized the various development methods employee (a mentor) can help employees better understand
that companies use: formal education, assessment, job expe- the company and gain exposure and visibility to key persons
riences, and interpersonal relationships. Most companies in the organization. Part of a manager’s job responsibility
use one or more of these approaches to develop employees. may be to coach employees. Regardless of the development
Formal education involves enrolling employees in courses approaches used, employees should have a development
or seminars offered by the company or educational institu- plan to identify (1) the type of development needed, (2)
tions. Assessment involves measuring the employee’s per- development goals, (3) the best approach for development,
formance, behavior, skills, or personality characteristics. and (4) whether development goals have been reached. For
Job experiences include job enlargement, rotating to a new development plans to be effective, both the employee and
job, promotions, or transfers. A more experienced, senior the company have responsibilities that need to be completed.
KEY TERMS
Development, 379 In-basket, 390 Sabbatical, 400
Protean career, 379 Role-plays, 390 Mentor, 401
Psychological success, 379 Performance appraisal, 392 Career support, 403
Development planning system, 381 Upward feedback, 392 Psychosocial support, 403
Action plan, 383 360-degree feedback systems, 392 Reverse mentoring, 404
Formal education programs, 386 Job experiences, 394 Coach, 404
Tuition reimbursement, 388 Stretch assignments, 395 Glass ceiling, 405
Assessment, 389 Job enlargement, 396 Succession planning, 406
Myers-Briggs Type Inventory Job rotation, 397 High-potential employees, 407
(MBTI)®, 389 Transfer, 398 Bench strength, 407
Assessment center, 390 Promotions, 398 9-box grid, 408
Leaderless group discussion, 390 Downward move, 398
Interview, 390 Temporary assignment, 399
1. How could assessment be used to create a productive activities at one time. She asks you to outline the type of
work team? assessment program you believe would do the best job of
2. List and explain the characteristics of effective identifying employees who will be successful managers.
360-degree feedback systems. What will you tell her?
3. Why do companies develop formal mentoring programs? 5. Many employees are unwilling to relocate because they
What are the potential benefits for the mentor? For the like their current community, and spouses and children
protégé? prefer not to move. Yet employees need to develop new
4. Your boss is interested in hiring a consultant to help iden- skills, strengthen skill weaknesses, and be exposed to
tify potential managers among current employees of a new aspects of the business to prepare for management
fast-food restaurant. The manager’s job is to help wait on positions. How could an employee’s current job be
customers and prepare food during busy times, oversee changed to develop management skills?
all aspects of restaurant operations (including scheduling, 6. What are some examples of sabbaticals and why are they
maintenance, on-the-job training, and food purchase), beneficial?
and help motivate employees to provide high-quality ser- 7. What is coaching? Is there one type of coaching?
vice. The manager is also responsible for resolving dis- Explain.
putes that might occur between employees. The position 8. Why are many managers reluctant to coach their
involves working under stress and coordinating several employees?
9. Why should companies be interested in helping employ- 12. Nationwide Financial, a 5,000-employee life insurance
ees plan their development? What benefits can compa- company based in Columbus, Ohio, found that its man-
nies gain? What are the risks? agement development program contained four types of
10. What are the manager’s roles in a development system? managers. One type, unknown leaders, have the right
Which role do you think is most difficult for the typical skills but their talents are unknown to top managers in the
manager? Which is the easiest role? List the reasons why company. Another group, arrogant leaders, believe they
managers might resist involvement in career management. have all the skills they need. What types of development
11. Draw the 9-box grid. How is it useful for succession program would you recommend for these managers?
planning?
Go to www.keirsey.com. Complete the Keirsey Tempera- development? What might be some disadvantages of using
ment Sorter. What did you learn about yourself? How this instrument?
could the instrument you completed be useful for employee
EXERCISING STRATEGY
Leadership Development at Raytheon
At Raytheon, a leader in the defense industry, leadership devel- teams have to be able to draw upon the functional expertise of
opment focuses on high-potential early career leaders from all members. The simulation requires participants to use tools
different functional areas including information technology, and processes that the company uses to manage costs, exe-
human resources, supply chain, engineering, and business cute projects, and measure success. Teams need to balance
development. The program includes rotational assignments, both long- and short-term goals to insure they can success-
and functional and cross-functional learning opportunities fully compete against each other. There are multiple rounds of
that are related to the company’s competency model. The pro- competition with information provided on each team’s effec-
gram includes more than 100 employees in each class. The tiveness. This information is used for the next decisions the
learning environment is team-based and problem-focused team needs to make.
to develop critical knowledge sharing, business acumen,
QUESTIONS
and team leadership that are needed by Raytheon’s manag-
1. What other types of development activities should Raytheon
ers. The capstone event for the program is a simulation that
consider for its leadership development program? Provide a
mirrors real market share and profit challenges faced by Ray-
rationale for your recommendations.
theon’s leaders. Twenty-five-person teams participate in the
2. What interpersonal skills could be improved by partici-
challenge. Each team has two engineers and the other three
pating in the simulation? Explain how.
team members are from other business functions. The simu-
lation is a test of how well the participants can apply what SOURCE: Based on M. Teeley, “Raytheon Challenges High-Tech Talent,”
they learned in the program. To succeed in the simulation the Training, May/June 2014, pp. 12–13.
MANAGING PEOPLE
Employee Development Contributes to Winning the Battle Against Cancer
The American Cancer Society (ACS) is a nonprofit, nation- cures for cancer, and helping those who have cancer to fight
wide, community-based voluntary health organization dedi- the disease. ACS is headquartered in Atlanta, Georgia, and
cated to creating a world without cancer. ACS strives to save has regional and local offices throughout the United States
lives by helping people stay well, and get well, by finding that support 11 geographical divisions to ensure a presence
in every community. The corporate office in Atlanta is and planning and carrying out fundraising events. All deliv-
responsible for overall strategic planning, corporate support ered content is evaluated on the extent to which it is related
services including training, development, and implementa- to the job, staff member performance, and the organization’s
tion of research programs, health programs, a 24-hour call mission. The Nationwide Manager Development Program is
center, and providing technical support and materials to designed to help build management strength for ACS. The
regional and local offices. Regional and local offices deliver program is marketed as an “adventure in management” and
patient programs and services and engage in fundraising its design is intended to make training engaging, enjoyable,
activities. and enriching for the participants. The 18-month program
The philosophy of the talent development department helps participants learn management concepts using virtual
is to provide “the right learning solution at the right time discussion forums and e-learning. Also, participants are put
for the right person.” One guiding principle is to support into learning teams including members representing a diver-
and drive the business through employee development and sity of thought, tenure, and experience. These teams engage
training. Another is that ACS wants employees to grow and in action learning, which focuses on developing manage-
develop, which is captured by the slogan “save lives, ful- ment skills while developing solutions to business issues
fill yours.” Staff are encouraged to participate in leadership and problems facing ACS.
development, mentoring, coaching, and job-specific train-
ing classes. For staff interested in pursuing formal educa- QUESTIONS
tion, ACS has partnerships with online universities. Also, 1. ACS uses a number of development activities to
staff are encouraged to work with their manager to establish develop staff members’ management and leadership
clear professional and development goals which map a path skills. Explain how succession planning would be use-
to career success. ful along with these activities for reviewing, preparing,
At ACS it is important for training and development pro- and identifying leadership talent at ACS.
grams to be realistic in terms of taking into account budget- 2. What can ACS do to ensure that women and minorities
ary constraints and job responsibilities. The programs need have a real potential to reach upper-level management
to be both efficient and effective and minimize the time that positions?
staff members are taken away from their primary responsi- SOURCES: Based on P. Harris, “Training as a Change Agent,” T + D, October
bilities such as helping patients, working with community, 2014, pp. 84–86; organization website, www.cancer.org, accessed May 26, 2015.
Employee Sabbatical Benefits Others at Little Tokyo Service Center
The 100 full-time and 50 part-time employees of the Little one. After all, he wasn’t burning out. But the staff member
Tokyo Service Center (LTSC) work to provide a range of explained that a sabbatical could help LTSC’s people learn
social services targeting Asians and Pacific Islanders in Los to operate more independently. When Watanabe mentioned
Angeles County. The organization’s focus is on the needs this to the board of directors, they encouraged him to apply.
of people in financial difficulty, with physical disabilities, With that backing, Watanabe took a three-month sabbati-
or struggling with language or cultural barriers. Services cal from LTSC. The first two months were devoted to travel:
include counseling, transportation, translation, and con- a tour of Israel and Egypt, a vacation in Tahiti, and a road
sumer education. Emergency care is provided in several dif- trip with his brother-in-law. After that, Watanabe stayed put
ferent Asian languages plus English and Spanish. LTSC also long enough to write an autobiography.
has sponsored the construction or renovation of community Watanabe found that stepping away for a few months
development projects including apartments and community freshened his perspective on LTSC. When he returned, he
facilities such as child care centers. applied his vision and renewed energy to restructure the
LTSC’s executive director, Bill Watanabe, says he “really agency through a merger of its community services center
loves” his work, and no wonder, given the organization’s and its community development corporation, and he acceler-
importance to the community. Consequently, the thought of ated progress on a community organizing project. He also
taking a sabbatical would not have occurred to him. But sev- launched more vigorous advocacy to build a community
eral years ago, Watanabe provided a professional reference gymnasium in the Little Tokyo neighborhood of Los Ange-
to a colleague who had applied to the Durfee Foundation les, drawing positive attention from politicians and funding
for a grant to fund a sabbatical. A staff member at the foun- sources.
dation suggested that Watanabe, too, might benefit from While Watanabe felt personally restored during his time
a sabbatical. His initial response was that he didn’t need away, he believes the agency benefited, too. In particular, he
discovered that his absence provided developmental oppor- 2. Imagine that LTSC has called you in as a consultant
tunities for others at LTSC. The agency’s deputy director before Watanabe is to start his sabbatical. The agency
served as interim executive director while Watanabe was has asked you to help obtain the maximum develop-
away, and two employees reporting to the deputy direc- mental benefit from the sabbatical arrangement. How
tor shouldered the deputy’s responsibilities. One of them would you recommend that Watanabe, the board of
has since been promoted. Building on these experiences, directors, and the second tier of management proceed?
the second tier of management at LTSC has taken more 3. Keeping in mind that an agency like LTSC would have
direct control of the agency’s day-to-day activities, freeing funding and just a few senior managers, suggest two
Watanabe to concentrate on broader strategy. Their greater additional development activities that are likely to be
preparation also amounts to a kind of succession planning. most beneficial to the organization, and explain why
According to LTSC’s board chairman, “If Bill were to leave you chose them.
tomorrow, the organization would be in very good hands.” SOURCES: Deborah S. Linnell and Tim Wolfred, Creative Disruption:
Sabbaticals for Capacity Building and Leadership Development in the
QUESTIONS Nonprofit Sector (CompassPoint Nonprofit Services, 2009), p. 8; and Little
1. Based on the information given, how well did Little Tokyo Service Center, “About LTSC,” corporate website, www.ltsc.org,
Tokyo Service Center follow the career management accessed May 26, 2015.
process described in Figure 9.1 Which elements of that
system, if any, were missing?
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Employee Separation
and Retention
10
C H A P T E R
LEARNING OBJECTIVES
LO 10-1 Distinguish between involuntary and voluntary turnover,

and discuss how each of these forms of turnover can be
leveraged for competitive advantage. page 423
LO 10-2 List the major elements that contribute to perceptions of

justice and how to apply these in organizational contexts
involving discipline and dismissal. page 425
LO 10-3 Specify the relationship between job satisfaction and various

forms of job withdrawal, and identify the major sources
of job satisfaction in work contexts. page 437
LO 10-4 Design a survey feedback intervention program, and use this to

promote retention of key organizational personnel. page 445
420
>>>
Working at the Internal Revenues Service:
A Taxing Experience
Dating all the way back to biblical times, being a tax their money. Several years ago, one such taxpayer
collector has never been a popular occupation. How- flew a kamikaze mission with a single-engine plane
ever, one could argue that, at least when it comes into a Texas facility killing one worker and injuring
to working for the Internal Revenue Service in the many others.
United States, the job has never been more difficult. Not surprisingly, all of this has led to a high rate of
The agency has faced five straight years of budget voluntary turnover within the worker ranks. Between
cuts, with the biggest of these—a $346 million cut— the years 2010 and 2015, 15,000 employees quit
implemented in 2015. This last cut came as a result their jobs, and this is just the tip of a demographic
of congressional outrage when the agency was iceberg. The IRS has less than 2,000 employees who
charged with politically mishandling requests for tax- are under the age of 30, and half of those are part
exempt status from Tea Party and other Republican- time. Over 50% of the workforce will be eligible to
leaning groups. One could argue that these historic retire by 2019, and there is very little hope that many
cuts came at a time when the complexity of the work, of the most experienced agents will stick around
due to the recent passage of the Affordable Care Act one day longer than they need to when it comes to
with its complicated set of tax subsidies, was higher retirement.
than ever. Clearly, no one enjoys paying their taxes, and
These cuts have certainly trickled down to the thus, few are shedding any tears for these workers.
workforce where morale has never been lower. Sala- However, the government does require money to
ries at the agency have risen only 2% the last five operate, and many fear that employee turnover and
years, and the slashing of administrative support has morale problems are cutting into the agency’s ability
left agents with a host of low-level clerical duties that to accomplish their mission. Audits are at historically
cut into the more substantive parts of the job. Facili- low levels, and many criminal investigations of known
ties have been allowed to decay, and the computers tax evaders have been delayed or placed on hold. As
and software that agents work with are estimated to one IRS veteran noted in despair, “I shouldn’t have
be three generations behind what one would find to say this but the IRS brings in about 93% of the
in the private sector. Office supplies are nowhere revenue in this country. We’re not soldiers but we are
to be found, and workers have to provide their own serving our country.”
pens, paper, and other basic necessities for perform-
SOURCES: D. F. Kettl, “Why the War on the IRS Makes No Cents,” Gov-
ing their jobs. On top of all of this, worker safety is ernment Executive, June 30, 2015, www.govexec.com; D. Leonard and
always an issue due to the crazed nature of some R. Rubin, “The Taxman Bummeth,” Bloomberg Businessweek, April 13,
2015, pp. 50–55; G. Korte, “IRS to Lose Tax Collectors, Do Fewer Audits
taxpayers who feel that the government is stealing in 2015,” USA Today, January 13, 2015, www.usatoday.com.
421
422 CHAPTER 10 Employee Separation and Retention
Introduction
Every executive recognizes the need for satisfied, loyal customers. If the firm is publicly
held, it is also safe to assume that every executive appreciates the need to have satisfied,
loyal investors. Customers and investors provide the financial resources that allow the
organization to survive. However, not every executive understands the need to gener-
ate satisfaction and loyalty among employees. For example, as we see in the opening
vignette, dissatisfaction and turnover at the Internal Revenue Service (IRS) has threat-
ened the ability of this agency to carry out its mission, and since this agency collects
almost all the revenue that runs the United States, this could be considered a threat to
national security. Job satisfaction is also critical to the missions of business organiza-
tions in the private sector of the economy. This may even be the deciding factor when
it comes to who wins and who loses in the competitive market because retention rates
among employees are related to retention rates among customers.1 In fact, research has
established a direct link between employee retention rates and sales growth and compa-
nies that are cited as one of the “100 Best Companies to Work For” routinely outperform
their competition on many other financial indicators of performance. This is especially
the case in the service industry where the direct contact between customers and employ-
ees enhances the relationship between employee satisfaction and customer satisfaction.
For example, Costco Wholesale is well-known throughout the retail industry for treat-
ing its employees better than most of its competitors. Costco pays its hourly workers
over $20 an hour compared to the industry average of $12 an hour. Costco also provides
company-sponsored health insurance to all employees, as well as tuition reimbursement
programs that allow employees who start out at the lowest level of the shop floor to
climb the corporate ladder. The result of this is that voluntary turnover within the organi-
zation is very low for the retail industry. The turnover rate among employees is less than
5% in a cut-throat industry where the average is closer to 30%. This feeds directly into
Costco’s business model and strategic plan where, due to their emphasis on low prices,
80% of their profit comes from membership fees. Despite the fact that their membership
fees are 20% higher than Sam’s Club, over 90% of customers renew each year, provid-
ing a stable and predictable source of income. CEO Craig Jelinek notes, “We know it’s
a lot more profitable in the long term to minimize employee turnover and maximize
employee productivity, commitment and loyalty. If you treat consumers with respect and
treat employees with respect, good things are going to happen to you.”2
In addition to holding onto key personnel, another hallmark of successful firms is
their ability and willingness to dismiss employees who are engaging in counterproduc-
tive behavior. It is somewhat ironic that one of the keys to retaining productive employees
is ensuring that these people are not being made miserable by supervisors or co-workers
who are engaging in unproductive, disruptive, or dangerous behavior. Unfortunately,
surveys indicate that many managers—indeed as many as 70%—struggle to give frank
and honest feedback to poorly performing subordinates, and then wind up experiencing
and tolerating poor performance for very long periods.3
Thus, to compete effectively, organizations must take steps to ensure that good per-
formers are motivated to stay with the organization, whereas chronically low performers
are allowed, encouraged, or, if necessary, forced to leave. Retaining top performers is not
always easy, however. Competing organizations are constantly looking to steal top per-
formers, and “poaching talent” is becoming an increasingly common way for organiza-
tions to build themselves up, while at the same time, tearing their competitors down.4 It
is also not nearly as easy to fire employees as many people think. The increased willing-
ness of people to sue their employer, combined with an unprecedented level of violence
CHAPTER 10 Employee Separation and Retention 423
in the workplace, has made discharging employees who lack talent legally complicated
and personally dangerous.5 For example, in 2014, a former employee at United Parcel
Services shot and killed two supervisors who he believed were responsible for his termi-
nation decision.6
The purpose of this chapter (the last in Part 3 of this book) is to focus on employee
separation and retention. The material presented in Part 3’s previous two chapters
(“Performance Management” and “Employee Development”) can be used to help estab-
lish who are the current effective performers as well as who is likely to respond well to
future developmental opportunities. This chapter completes Part 3 by discussing what
can be done to retain high-performing employees who warrant further development as
well as managing the separation process for low-performing employees who have not
responded well to developmental opportunities.
Since much of what needs to be done to retain employees involves compensation and
benefits, this chapter also serves as a bridge to Part 4, which addresses these issues in
more detail. The chapter is divided into two sections. The first examines involuntary Involuntary
turnover, that is, turnover initiated by the organization (often among people who would Turnover
prefer to stay). The second deals with voluntary turnover, that is, turnover initiated by Turnover initiated by
the organization (often
employees (often whom the company would prefer to keep). Although both types of among people who
turnover reflect employee separation, they are clearly different phenomena that need to would prefer to stay).
be examined separately.
Voluntary Turnover
Turnover initiated by
Managing Involuntary Turnover employees (often whom

the company would
Despite a company’s best efforts in the area of personnel selection, training, and design prefer to keep).
of compensation systems, some employees will occasionally fail to meet performance
requirements or will violate company policies while on the job. For example, in 2012, LO 10-1
Secret Service members responsible for protecting the President of the United States on Distinguish between
his upcoming trip to Colombia were caught bringing prostitutes to their hotel rooms. involuntary and volun-
tary turnover, and dis-
Secret Service work rules forbid bringing any foreign national, let alone prostitutes, to cuss how each of these
a security zone prior to a Presidential visit, and hence these employees had to be ter- forms of turnover can
minated.7 However, problems at this agency persisted, and in 2015, the terminations be leveraged for com-
climbed higher into the organizational ranks when four top Secret Service officers were petitive advantage.
also removed from their jobs following an incident where a man carrying a knife jumped
the White House fence and managed to run all the way into the mansion before being
caught. The new top official noted that “change is necessary to gain a fresh perspective
on how we conduct business,” and this is the rationale behind most such terminations.8
When events like this happen organizations need to invoke a discipline program that
could ultimately lead to the individual’s discharge. For a number of reasons, discharging
employees can be a very difficult task that needs to be handled with the utmost care and
attention to detail. First, legal aspects to this decision can have important repercussions
for the organization. Historically, in the absence of a specified contract, either the
employer or the employee could sever the employment relationship at any time. The Employment-at-Will
severing of this relationship could be for “good cause,” “no cause,” or even “bad cause.” Doctrine
Over time, this policy has been referred to as the employment-at-will doctrine. This The doctrine that, in
employment-at-will doctrine has eroded significantly over time, however. Today employ- the absence of a spe-
ees who are fired sometimes sue their employers for wrongful discharge. cific contract, either an
employer or employee
A wrongful discharge suit typically attempts to establish that the discharge either could sever the
(1) violated an implied contract or covenant (that is, the employer acted unfairly) or employment relation-
(2) violated public policy (that is, the employee was terminated because he or she refused ship at any time.
to do something illegal, unethical, or unsafe). Wrongful discharge suits can also be filed
as a civil rights infringement if the person discharged is a member of a protected group.
For example, in 2015, 10 African American employees at McDonald’s sued the company
alleging that they were fired because of their race. In fact, the manager at the franchise
was quoted as saying that he “needed to get the ghetto out of the store.” McDonald’s
Corporation had no intention of defending this manager but tried to argue that this was
an issue between the employees and the “franchisee” (i.e., the local manager) not the
“franchiser” (i.e., the corporate entity). The National Labor Relations Board did not see
it that way and ruled against the corporation.9
The number of such “protected groups” is large and includes racial minorities,
women, older workers (over 40 years of age), homosexuals, disabled workers (including
the obese), whistle-blowers, people who have filed workers compensation claims, and
if one counts reverse discrimination claims—Caucasians. As noted by Lisa Cassilly, a
defense attorney for the firm Alston and Bird, “It’s difficult to find someone who doesn’t
have some capacity to claim protected status.”10 This means that in almost any instance
when someone is fired for poor performance, the alternative possibility that this person
was a victim of discrimination can be raised.
Not surprisingly, this has led to an increase in litigation. Although the research sug-
gests that a plaintiff usually loses a wrongful termination case, the high cost of litigating
the case makes some employers reluctant to fire employees, even when they are low per-
formers. When this happens, the employer’s short-term emphasis on staying out of court
has come into conflict with the long-term need to develop a competitive workforce.
For example, one reaction to this dilemma is enduring long stretches of poor perfor-
mance in order to create the extensive “paper trail” that would support a negative action.
While HR professionals often point the finger of blame at supervisors who have not done
a diligent job documenting past performance problems, supervisors often turn around
and accuse HR of being “nervous Nellies” who never seem satisfied with the amount
of evidence provided by supervisors. Moreover, keeping poor performers in their roles
does not directly affect HR professionals every day, like it does supervisors, who have
to watch helplessly as the morale of the rest of the workforce erodes. There is nothing
more corrosive to team-based structures than wide variability in effort and performance
between different members. As one member of a research team in a pharmaceutical firm
noted with respect to the idea of “carrying” a poor performer for fear of litigation, “As a
female and also of a minority race, I am appalled and saddened by this scenario as I must
bear the weight of this constant underperformer.”11
Another questionable reaction is to initiate punitive actions short of termination, in
an effort to get the employee to quit on his or her own. This reaction is often a result of
frustrated supervisors, who, unable to fire someone because of HR, resort to punish-
ing the employee in other ways. This might include giving the person a low-level work
assignment, a downsized office, or some other form of undesirable treatment. The prob-
lem with this approach, however, is that it might be construed as “retaliation,” and the
employer could be sued for this, even if the original discrimination suit is dismissed.
Finally, a third unsustainable reaction is to pay off the employee with thousands of
dollars in excess severance pay in return for waiving their right to sue for wrongful dis-
missal. That is, even if the employer feels the case is unwarranted, in order to avoid liti-
gation itself, the employer may offer the terminated employee $20,000 or more to waive
their right to sue. The problem with this strategy is that it sets the expectation that all
poor performers are entitled to compensation on their way out the door, and this eventu-
ally increases the amount of potential future litigation by rewarding frivolous charges.
As defense attorney Mark Dichter notes, “I can design HR policies that can virtually
eliminate your risk of facing employment claims, but you’ll have

a pretty lousy workforce. At the end of the day, you have to run
your business.”12
Zero tolerance for poor performers is a critical element of suc-
cess, especially for new and small firms when there is a great deal
on the line. For example, new start-ups are notorious for terminat-
ing workers ruthlessly in the early stages of their development,
and firing people after just three days is not uncommon. Yammer,
a social networking site for businesses, fired over 30% of its
employees in its first few years of doing business. Adam Pisoni,
the senior technical chief at Yammer, boasts, “We are just really
good about eliminating people whose skills were lacking and bru-
tally honest when it comes to evaluating newcomers.”13 Within
this industry, where “failing fast” is considered a virtue, helping
an employee move on from a situation where the fit is bad may
result in that person moving on to a place where the fit is better.
For example, Paul English was fired from one start-up, NetCentric
Corporation, and this experience led him back to his roots as a
coder, and this eventually led him to start his own business that he
sold for millions of dollars. English’s strategy with newcomers at
his own start-up—not surprisingly—was equally tough. When it © WIN-Initiative/Getty Images
comes to poor performers, English notes, “You’ve got to cut that Start-up companies are notorious for
tumor out. If you can’t fix it, you’ve got to get rid of it.”14 terminating employees in a ruthless manner
The costs associated with letting poor performers stay on in the early days of their development.
within the organization cannot be discounted. Organizations that introduce forced dis-
tribution rating systems where low performers are systematically identified and, where
necessary, eliminated from payrolls often experience quick improvement gains in the
range of 40%.15 Given the critical financial and personal risks associated with employee
dismissal, it is easy to see why the development of a standardized, systematic approach
to discipline and discharge is critical to all organizations. These decisions should not be
left solely to the discretion of individual managers or supervisors. In the next section we
explore aspects of an effective discipline and discharge policy.
PRINCIPLES OF JUSTICE
As we noted earlier in Chapter 8, outcome fairness refers to the judgment that people LO 10-2
make with respect to the outcomes received relative to the outcomes received by other List the major elements
people with whom they identify (referent others). Clearly, a situation where one person is that contribute to per-
ceptions of justice and
losing his or her job while others are not is conducive to perceptions of outcome unfair- how to apply these in
ness on the part of the discharged employee. The only thing worse than losing one’s job organizational contexts
might be losing one’s job and then being prevented from seeking a similar job elsewhere. involving discipline and
Employers are increasingly asking would-be hires to sign noncompete clauses in their dismissal.
hiring paperwork. A noncompete clause means that if the employee is terminated or
voluntarily leaves the job, this person cannot seek new employment at a firm in the same Outcome Fairness
industry. Traditionally, these kinds of clauses were aimed at high-paid jobs such as top- The judgment that peo-
level executives or senior technical personnel who, due to their positions, had access ple make with respect
to critical proprietary knowledge about the company’s strategy or technology. These to the outcomes
received relative to
contacts were jointly negotiated and were generally considered “fair.” Today, however, the outcomes received
these contracts have trickled down to low-paid, entry-level employees where there is by other people with
little negotiation. For example, Jimmy Johns, the ubiquitous sandwich-making franchise, whom they identify.
makes all employees sign a noncompete clause as a matter of standard business practice.
Although the company has never tried to stop some minimum-wage employees from
taking all their knowledge to Blimpie’s or some other chain, the mere fact that they have
the clause strikes many as unbalanced and unfair.16
Whereas outcome justice focuses on the ends, procedural and interactional justice
focus on means. If methods and procedures used to arrive at and implement decisions
that impact the employee negatively are seen as fair, the reaction is likely to be much
Procedural Justice more positive than if this is not the case. Procedural justice focuses specifically on the
A concept of justice methods used to determine the outcomes received. Table 10.1 details six key principles
focusing on the meth-
that determine whether people perceive procedures as being fair. Even given all the neg-
ods used to determine
the outcomes received. ative ramifications of being dismissed from one’s job, the person being dismissed may
accept the decision with minimum anger if the procedures used to arrive at the decision
are consistent, unbiased, accurate, correctable, representative, and ethical. When the
procedures for the decisions are perceived in this fashion, the individual does not feel
unfairly singled out, and this helps maintain his or her faith in the system as a whole,
even if he or she is unhappy with the specific decision that was triggered by the
system.17
Lack of bias and informational accuracy are the most critical features of the six, and
the potential for subjective judgments to be biased means that employers often have
to go beyond simple supervisor evaluations in most cases.18 In an effort to ensure that
they have an airtight case many employers have turned to private investigators to collect
objective evidence where necessary. For example, when a Florida hospital suspected a
worker who claimed she was out with the flu for three days was actually totally healthy,
they hired a private investigator to look into the case. In fact, the woman had gone to
Universal Studio theme parks those days and the investigation uncovered photos of her
from three different roller coaster rides (which routinely photograph riders and then try
to sell the pictures to them), as well as a video where she volunteered as part of an ani-
mal act—all time-stamped and dated. Needless to say, this led to a termination that the
worker was not interested in challenging.19
Interactional Justice Whereas procedural justice deals with how a decision was made, interactional justice
A concept of justice refers to the interpersonal nature of how the outcomes were implemented. For example,
referring to the inter- in many documented cases, after giving employees the news of their termination,
personal nature of how
the outcomes were
employers immediately have security guards whisk them out of the building with their
implemented. various personal items haphazardly thrown together in cardboard boxes. This strips the
Table 10.1
Six Determinants of (1) Consistency. The procedures are applied consistently across time and other
Procedural Justice persons.
(2) Bias suppression. The procedures are applied by a person who has no vested inter-
est in the outcome and no prior prejudices regarding the individual.
(3) Information accuracy. The procedure is based on information that is perceived to be
true.
(4) Correctability. The procedure has built-in safeguards that allow one to appeal mis-
takes or bad decisions.
(5) Representativeness. The procedure is informed by the concerns of all groups or
stakeholders (co-workers, customers, owners) affected by the decision, including the
individual being dismissed.
(6) Ethicality. The procedure is consistent with prevailing moral standards as they per-
tain to issues like invasion of privacy or deception.
Table 10.2
(1) Explanation. Emphasize aspects of procedural fairness that justify the decision. Four Determinants of
(2) Social sensitivity. Treat the person with dignity and respect. Interactional Justice
(3) Consideration. Listen to the person’s concerns.
(4) Empathy. Identify with the person’s feelings.
person of their dignity, as well as their job, and employees who witness this happen to a
co-worker show a drastically lower level of organizational commitment from that day
forward.20 Table 10.2 lists the four key determinants of interactional justice. When the
decision is explained well and implemented in a fashion that is socially sensitive, consid-
erate, and empathetic, this helps defuse some of the resentment that might come about
from a decision to discharge an employee.
PROGRESSIVE DISCIPLINE AND ALTERNATIVE DISPUTE RESOLUTION

Except in the most extreme cases, employees should generally not be terminated for
a first offense. However, as the “Integrity in Action” box illustrates, this cannot be
avoided in some instances. Rather, termination should come about at the end of a
systematic discipline program. Effective discipline programs have two central com-
ponents: documentation (which includes specific publication of work rules and job
descriptions that should be in place prior to administering discipline) and progressive
punitive measures. Thus, as shown in Table 10.3, punitive measures should be taken
in steps of increasing magnitude, and only after having been clearly documented. This
may start with an unofficial warning for the first offense, followed by a written rep-
rimand for additional offenses. At some point, later offenses may lead to a temporary
suspension. Before a company suspends an employee, it may even want to issue a “last
chance notification,” indicating that the next offense will result in termination. Such
procedures may seem exasperatingly slow, and they may fail to meet one’s emotional
need for quick and satisfying retribution. In the end, however, when problem employ-
ees are discharged, the chance that they can prove they were discharged for poor cause
has been minimized.
At various points in the discipline process, the individual or the organization might
want to bring in outside parties to help resolve discrepancies or conflicts. As a last resort,
the individual might invoke the legal system to resolve these types of conflicts, but in
Table 10.3
OFFENSE An Example of
FREQUENCY ORGANIZATIONAL RESPONSE DOCUMENTATION a Progressive
Discipline Program
First offense Unofficial verbal warning Witness present
Second offense Official written warning Document filed
Third offense Second official warning, with threat Document filed
of temporary suspension
Fourth offense Temporary suspension and “last Document filed
chance notification”
Fifth offense Termination (with right to go to Document filed
arbitration)
INTEGRITY IN ACTION
Donald Trump Told: “You’re Fired!”
When Donald Trump announced by Trump and NBC. At first, Trump regarding
he was running for president in NBC’s reaction was more mea- immigrants, NBC is
2015 on the Republican ticket, sured, and representatives for ending its business relationship
he turned his stance on immigra- the company simply noted that with Mr. Trump.”
tion reform to a vicious attack on “Mr. Trump’s opinions do not
Mexicans the likes of which has represent those of NBC and we DISCUSSION QUESTIONS
never been seen in U.S. politics. do not agree with his positions 1. If you were training and
Trump declared, “When Mexico on a number of issues, includ- preparing to be part of the
sends its people they’re not ing his recent comments on Miss Universe Pageant and
sending their best. They’re send- immigration.” learned it would not be tele-
ing people that have a lot of prob- However, after receiving a vised as a result of NBC’s
lems and they’re bringing those petition signed by over 200,000 reaction to Trump’s com-
problems with them. They’re people, as well as being lashed ments, should you be free to
bringing drugs. They’re bringing on social media, NBC hardened sue either NBC or Trump?
crime. They’re rapists. And some, its position and severed all of 2. If a court injunction were
I assume, are good people.” its ties with Trump as well. The issued, and NBC had to air
The backlash against these network said it would no longer the pageant, would you boy-
comments was immediate and air the two pageants and that the cott the event if you were
intense, particularly within the television shows “The Appren- Miss Mexico?
Hispanic community. Univision, tice” and “Celebrity Apprentice” SOURCES: S. Tareen, A. Rappeport, “NBC
the largest Spanish-speaking will go forward without Trump. A to Donald Trump: You’re Fired,” The New York
broadcaster in the United States, new statement was released not- Times, June 29, 2015, www.nytimes.com; K.
Hagey, “NBC Cutting Ties with Donald Trump,”
quickly ended its relationship ing, “At NBC, respect and dignity The Wall Street Journal, June 29, 2015, www
with Trump, canceling plans to for all people are cornerstones of .wsj.com; A. Jones, “NBC Universal Cuts Ties
air the Miss USA and Miss Uni- our values, and due to the recent with Donald Trump,” CNN, June 29, 2015,
www.cnn.com.
verse pageants jointly owned derogatory comments by Donald
Alternative Dispute order to avoid this, more and more companies are turning to alternative dispute resolution
Resolution (ADR) (ADR). Alternative dispute resolution can take on many different forms, but in general,
A method of resolving
ADR proceeds through the four stages shown in Table 10.4. Each stage reflects a some-
disputes that does not
rely on the legal sys- what broader involvement of different people, and the hope is that the conflict will be
tem. Often proceeds resolved at earlier steps. However, the last step may include binding arbitration, where
through the four stages an agreed upon neutral party resolves the conflict unilaterally if necessary. The use of
of open door policy, ADR is growing rapidly among employers. In 2012, only 16% of employers required
peer review, mediation,
workers to sign away their legal rights to sue their employer in exchange for ADR proce-
and arbitration.
dures, but by 2014 this figure was up to 43%. Part of this was attributable to a 2011
Supreme Court ruling that upheld the legal status of pre-employment–required ADR
sign-offs. Prior to this ruling, many lower courts were vacating or striking down
ADR judgments, which meant that rather than staying out of court, ADR just added an
additional layer to the process. The Supreme Court removed this layer and ruled that
employees voluntarily signed the agreements. Thus they were bound to them, even
though they could not have been hired had they not signed. This makes ADR very attrac-
tive to employers and litigation costs associated with class action suits dropped by
roughly $150 million between 2011 and 2014.21
428
Table 10.4
Stages in Alternative
Stage 1: Open-door policy
Dispute Resolution
The two people in conflict (e.g., supervisor and subordinate) attempt to arrive at a settle-
ment together. If none can be reached, they proceed to
Stage 2: Peer review
A panel composed of representatives from the organization that are at the same level of
those people in the dispute hears the case and attempts to help the parties arrive at a
settlement. If none can be reached, they proceed to
Stage 3: Mediation
A neutral third party from outside the organization hears the case and, via a nonbinding
process, tries to help the disputants arrive at a settlement. If none can be reached, the
parties proceed to
Stage 4: Arbitration
A professional arbitrator from outside the organization hears the case and resolves it
unilaterally by rendering a specific decision or award. Most arbitrators are experienced
employment attorneys or retired judges.
Whereas ADR is effective in dealing with problems related to performance and inter-
personal differences in the workplace, many of the problems that lead an organization to
want to terminate an individual’s employment relate to drug or alcohol abuse. In these
cases, the organization’s discipline and dismissal program should also incorporate an
employee assistance program. Due to the increased prevalence of EAPs in organizations,
we describe them in detail here.
EMPLOYEE ASSISTANCE AND WELLNESS PROGRAMS

An employee assistance program (EAP) is a referral service that supervisors or employ- Employee
ees can use to seek professional treatment for various problems. EAPs vary widely, but Assistance
most share some basic elements. First, the programs are usually identified in official Programs (EAPs)
Employer programs that
documents published by the employer (such as employee handbooks). Supervisors (and attempt to ameliorate
union representatives, where relevant) are trained to use the referral service for employ- problems encountered
ees whom they suspect of having health-related problems. Employees are also trained to by workers who are
use the system to make self-referrals when necessary. drug dependent, alco-
Although originally targeted at the use of illegal drugs, many EAPs increasingly have holic, or psychologically
troubled.
had to deal with employees who have problems attributable to prescription drugs, espe-
cially painkillers. The percentage of workers who have tested positive for illegal drugs
has decreased steadily from 14% in 1988 to just 3% in 2013. However, positive tests for
painkillers such as Oxycontin and Vicodin rose 175% between 2005 and 2013 alone.22
Obviously, just because the drug might be prescribed for the worker does not mean that
this person, working under the drug’s influence, is not a safety threat to other workers of
customers. Thus, many organizations have zero tolerance policies for many prescription
drugs that are just as strict as their EAP policies for illegal drugs.23 Moreover, even if a
painkiller is legal in one country where the firm operated, it may not be legal in another
country. For example, in 2015, Julie Hamp, the most senior female executive at Toyota,
was forced to resign when she was arrested for being in possession of oxycodone—
another powerful painkiller—that just happened to be illegal in Japan.24
The key to the effectiveness of an EAP is striking the right balance between collect-
ing information that can be used to promote employee health on the one hand and the
employee’s right to privacy on the other. Many employees are afraid to come forward
Wearable Sensors Make Employers’ Hearts Race
It is not at all uncommon these one of its large customers. The as an invasion of
days to see people donning devices were able to identify a privacy. As Pam
wearable sensors like the Fitbit number of workers who were Dixon, executive director of the
Charge, the Nike Fuelband, the on the verge of developing World Privacy Forum, states, “It
Jawbone UP3, or the Microsoft diabetes and got them on a is going to be very important
Band. These wearable sen- path toward a healthier lifestyle. that as we move towards the
sors allow people to track their Similarly, at the oil company BP, future we don’t set up a system
daily activity levels, as well as the HR department gave 14,000 where people become pres-
health-related data such as body employees a free Fitbit if they sured into wearing devices to
temperature, heart rate, and would allow the company to monitor their health. That’s a
even blood pressure. Industry monitor their physical activity. real problem. That’s just not
researchers note that in 2014, Employees who logged over very free.”
42 million such devices were a million steps within a speci-
sold, up from 32 million in 2013. fied time period were rewarded DISCUSSION QUESTIONS
Clearly, people are increas- with lower premiums on their 1. If your employer were to give
ingly health conscious, and this insurance. you a free Fitbit in return for
technology is a logical step in Currently, most employer- the opportunity to download
obtaining the kind of informa- sponsored wearable device pro- your data at the end of each
tion people want to know about grams have been voluntary and day, would you sign up for
themselves. focused on rewards for healthy this trade?
However, due to the high behavior, not compulsory and 2. What kind of decisions should
cost of employee health care attached to punishments such employers be able to make
coverage, this information is as surcharges, but it is hard to based on this data and what
also something that is generat- anticipate what the future may kind of decisions should be
ing the interest of employers. hold. On the one hand, the abil- considered off base?
For example, one large health ity of an employer to monitor SOURCES: R. Pyrillis, “Collecting Health Data Is
insurer, Cigna, launched a the health of their employees All in the Wrist for Some Employers,” Workforce,
pilot program in 2014 where it just like the health of their stock February 24, 2015, www.workforce.com; B.
Walsh, “The Doctor on Your Wrist,” Time Maga-
distributed arm bands manu- price is tempting. On the other zine, November 14, 2014, pp. 35–38; P. Olson,
factured by Body Media to hand, many employees may “Wearable Tech Is Plugging into Health Insur-
thousands of employees at react negatively and see this ance,” Forbes, June 19, 2014, www.forbes.com.
with information that they think may damage their careers, and so it is in the employer’s
best interest to support people who do self-refer by keeping their information confiden-
tial, and then supporting them through counseling and rehabilitation.25 However, reha-
bilitation rates for alcohol- and drug-addicted workers are far from 100%, and so the
employer still has an obligation to monitor progress to make sure that these workers are
not a safety threat to others. For example, the EEOC ruled in 2014 that if a worker is
part of an EAP and being treated for alcoholism, a manager who knows this and sees this
person drinking alcohol at an office party is obligated to report this to the EAP. Again,
this may seem a violation of privacy, but this right has to be weighed against the other
employees’ right to a safe work place.26
Whereas EAPs deal with employees who have developed problems at work because
of health-related issues, employee wellness programs take a proactive and preemptive
focus on trying to prevent health-related problems in the first place. Employee wellness
430
programs come in many different sizes and varieties, so it is very difficult to make
general statements about their cost and effectiveness. Some companies just hand out
pamphlets on how to maintain better health and call that a wellness program.27 Other
programs attach wearable sensors like Fitbit to their employees, monitor their health
status continuously, provide company-sponsored facilities and medical staff to support
better health, and then reward employees financially for accomplishing health-related
goals.28 Indeed, as the “Competing through Technology” box illustrates, wearable sen-
sors are creating new and unprecedented opportunities to monitor employee health, but
here too privacy concerns may arise.
Some organizations even reach beyond the employee and offer incentives to the work-
er’s spouse and family. After all, if the organization is actually insuring everyone in the
family, there are savings to be made by placing the focus on the whole family. For exam-
ple, Aetna offers a $1,200 reward for employees who can get their spouse and children to
sign up for its corporate wellness program. These kinds of financial incentives typically
pay for themselves because research suggests that for large employers, every $1 spent on
wellness results in a savings of $3.27 when it comes to costs.29 Adding a social element
to wellness programs often increases participation rates and effectiveness, and so some
employers sponsor team-based competitions that pit various sub-units against each other
in an effort to spike interest and motivation. It is one thing to let yourself down and not
meet your exercise goals, but it is a different thing altogether when your failure results in
the failure of your team. For example, when employees in city government in Charlotte,
Virginia, were asked to participate in a six-week challenge where the only reward was
bragging rights within the organization, participation rates doubled and the employees
logged close to 9,000 hours of exercise.30 Similar competitions have been successfully
staged between various small businesses, who as a group tend to struggle when it comes
to offering wellness programs.31
Not all employees will necessarily respond to positive incentives like this, however,
and hence some companies take a more punitive approach to wellness. For example,
Michelin Tire Company not only collects health-related data from employees but in
addition punishes employees who fail to meet health goals. Michelin employees who
have high blood pressure or whose waistlines exceed a certain limit (40 inches for men
and 35 inches for women) are forced to pay an extra $1,000 for health care coverage.
This might seem pretty strict for a company whose mascot is the “spare-tired” Michelin
Man, but similar penalties have been levied by Miracle Gro, CVS Caremark, Honeywell,
and General Electric. All of these companies have found that people react more strongly
to threats of losses than promises of gains. Reward programs at these companies that
offered incentives to get healthier simply did not seem to work; however, punishment-
based programs definitely get people’s attention. These companies have also found that
roughly 80% of health care costs are generated by just 20% of the workers, and a stag-
gering 1% of workers generate 33% of the costs. Targeting these specific individuals has
proven to be an efficient way to get costs under control, but there are legal limits to how
far employers can go with these sorts of penalties.32
One of the major determinants of how far employee wellness programs can push their
employees is how central health is to effectively performing the work. In general, if one
defines obese as having a body mass index (BMI) of 30 or higher, there is an obesity
epidemic in the United States.33 The obesity rate for Americans doubled between 1993
and 2012, and for some organizations, this is a threat to their ability to accomplish their
mission. For example, the Federal Aviation Authority (FAA) passed a new rule in 2013
that any commercial or private pilot with a BMI of 40 or more has to be examined by
a sleep specialist to confirm that they do not have sleep apnea. Sleep apnea is highly
related to obesity, and the FAA identified over a half dozen incidents in 2012 where a
pilot fell asleep in the cockpit. This included a well-publicized case where a Bombardier
regional jet traveling to Hawaii overflew the airport where it was supposed to land by
30 miles after a 20-minute lapse in radio communication with the tower.34
Another organization that is highly concerned about obesity is the U.S. Federal
Bureau of Investigation (FBI). In 2015, the director of the agency issued a new require-
ment that its agents pass a fitness test once a year and that failure to do so will be part of
their annual performance evaluation and raise process. At one time, almost all members
of the FBI worked in highly active jobs in the field where they were chasing and arrest-
ing criminals. However, the threats of terrorism, cyber security, and large-scale fraud
have pushed many of the employees into offices where they sit behind computers for
very long stretches of time. This has had the predictable effects on obesity rates in the
agency, and in order to counter this, the agency now requires agents to be able to do 24
push-ups without stopping and 35 sit-ups in a minute. It also requires that agents be able
to sprint 300 yards in less than a minute and run a mile in under 12 minutes.35
Although financial costs are often the driving force behind these programs, one
should not lose sight of the fact that the quality of life enjoyed by employees both on
and off the job is also affected. For example, while some employees were suing Miracle
Gro over its program, another employee, Joe Pellegrini, was celebrating the fact that the
very same program saved his life. Although physically fit, Pellegrini’s health assess-
ment indicated a high level of cholesterol, and the company forced him to see a physi-
cian. That trip to the doctor revealed a 95% blockage in a heart valve that would have
probably killed him within five days. Obviously, Pellegrini has a different perception of
Miracle Gro’s policies than most employees, noting that when it came to his own life,
“It was that close.”36
OUTPLACEMENT COUNSELING
The permanent nature of an employee termination not only leaves the person angry, it
also leads to confusion as to how to react and in a quandary regarding what happens
next. If the person feels there is nothing to lose and nowhere else to turn, the potential for
violence or litigation is higher than most organizations are willing to tolerate. Therefore,
Outplacement many organizations provide outplacement counseling, which tries to help dismissed
Counseling employees manage the transition from one job to another. There is a great deal of vari-
Counseling to help dis-
ability in the services offered via outplacement programs, typically including career
placed employees man-
age the transition from counseling, job search support, résumé critiques, job interviewing training, and provi-
one job to another. sion of networking opportunities. Increasingly, these programs are moving online both
to reduce costs and in recognition that most job search activity now takes place online.
Face-to-face meetings between counselors and clients are largely becoming a thing of
the past, being replaced by web-based tools.37
Many have criticized the effectiveness of outplacement programs and charged that
the companies that offer the service care more about avoiding litigation and bad public
relations than getting former employees new jobs. Many programs take a “one-size-fits-
all” approach with standardized training programs not tailored to the specific needs of
clients and industries, as well as boilerplate resume services that wind up sending out
almost identical documents for different workers. The evidence suggests that 40% of
workers offered such services never show up, and another 30% quit after one or two
sessions.38 Still many employers are committed to these programs, and as you can see
in the “Evidence-Based HR” box, there is evidence that supports the business case for
this activity.
EVIDENCE-BASED HR
When it comes to outplacement activities, Bruce Williams, the executive director of
Employee Relations at Procter and Gamble, notes, “We care about our employees
and during times of change we offer outplacement services to those impacted to give
them career guidance and support. What’s more, employees that remain are assured
of our company’s commitment to our purpose and values knowing we are going to be
responsible and respectful.” All of this sounds good, but beyond sounding good, the
evidence also seems to support the value of outplacement activities for a number of
reasons according to a recent survey conducted by Right Management.
Specifically, when it comes to employee lawsuits, employers who offer outplace-
ment activities stand a 10% reduced likelihood of litigation by prior employees rela-
tive to companies that fail to provide such services. In addition, in terms of pre- and
post-evidence, roughly 20% of employers who engaged in outplacement activities
reported that turnover among employees that remained went down after the initiation
of such programs. Recruitment costs for new employees were also reported to be 24%
lower for firms that provide this sort of employee assistance. Finally, 38% of employ-
ers that offered outplacement saw an increase in employee satisfaction one year after
the downsizing event compared to just 14% for employers who did not offer such
services.
SOURCE: B. Lowsky, “Inside Outplacement,” Workforce, July 2014, pp. 37–38.
At the very least, though, outplacement counseling can help people realize that losing a
job is not the end of the world and that other opportunities exist. For example, when John
Morgridge was fired from his job as branch manager at Honeywell, it made him realize
that his own assertiveness and need for independence were never going to cut it in a large,
bureaucratic institution like Honeywell. Morgridge took his skills and went on to build
computer network maker Cisco Systems, which is now worth more than $1 billion.39 This
is a success story for Morgridge, but the fact that a major corporation like Honeywell let
his talent go certainly reflects a lost opportunity for the company. Retaining people who
can make such contributions is a key to gaining and maintaining competitive advantage.
The second half of this chapter is devoted to issues related to retention.
Managing Voluntary Turnover

In the first section of this chapter, our focus was on how to help employees who were not
contributing to the organization’s goal in a manner that protected the firm’s ability to com-
pete, and on how to support former employees’ transition into alternative employment.
In this second section, we focus on the other side of the separation equation—preventing
employees who are highly valued by the organization from leaving (and perhaps even
joining the competition). At the organizational level, turnover results in lowered work
unit performance, which, in turn, harms the firm’s financial performance.40 This causal
chain is especially strong when the organization is losing its top performers. Research
suggests that some of the organization’s top performers are up to 300% more productive
than average employees, and retaining these workers is especially difficult.41
Moreover, if your organization has a reputation for being successful, you become
an especially attractive target to external forces that may look to steal your talent.
For example, because of its positive reputation, Apple has always been a company that
has had to work hard to hold onto its valued employees. Tesla Motors has hired over 150
former Apple executives, designers, and engineers in the last few years alone. Part of
Tesla’s competitive strategy is to exploit the fact that software has gone from providing
10% of the value of a car to 60%, and thus the skills and orientation of former Apple
employees are a great fit for Tesla’s business model.42 Although this hiring pattern might
be good news for Tesla, it is just the tip of the iceberg when it comes to losing valuable
talent. As we saw in Chapter 5, stopping employee attrition was the driving factor behind
an illegal anti-trust informal agreement between high tech companies to not recruit from
each other—led by Steve Jobs, the CEO of Apple at that time.
There are many different reasons why one may be attached to his or her job, and employ-
ers need to recognize this in their efforts to retain workers. For example, pay and job secu-
rity used to be the primary drivers of retention for older generations of workers, but this is
not always the case today. The evidence seems to suggest that younger employees prefer
benefits to cash, and generally want to work in an environment that is fun, collaborative
and provides a great deal of immediate feedback and opportunities for development. This
generation of employees has a lot to offer employers, including the fact that they are tech-
nically skilled, racially diverse, socially interconnected and collaborative. However, the
annual rate of voluntary turnover among millennials tends to be higher than that associ-
ated with other generations, and this has led some to conclude that they are impatient and
entitled. Still, as one experienced manager notes, “If they don’t feel like they’re making a
contribution to a company quickly, they don’t stay, but if you provide them with the right
environment, they’ll work forever—around the clock.”43 In this section of the chapter, we
examine the job withdrawal process that characterizes voluntary employee turnover, and
we illustrate the central role that job satisfaction plays in this process.
PROCESS OF JOB WITHDRAWAL

Job withdrawal is a set of behaviors that dissatisfied individuals enact to avoid the work
situation. The right side of Figure 10.1 shows a model grouping the overall set of behav-
iors into three categories: behavior change, physical job withdrawal, and psychological
Progression of job withdrawal.
Withdrawal We present the various forms of withdrawal in a progression, as if individuals try
Theory that dissatisfied the next category only if the preceding is either unsuccessful or impossible to imple-
individuals enact a set
of behaviors in succes-
ment. This theory of progression of withdrawal has a long history and many adherents.44
sion to avoid their work For example, someone who is dissatisfied with the job or organization might not be
situation. able to just jump to another job right away but will instead either disengage temporarily
Figure 10.1
An Overall Model of the Job Dissatisfaction–Job Withdrawal Process
Causes of job Manifestations of job

dissatisfaction
disposition Job
dissatisfaction
(through absenteeism or tardiness) or psychologically (through lower job involvement

and organizational commitment) until the right opportunity comes along.45 Others have
suggested that there is no tight progression in that any one of the categories can com-
pensate for another, and people choose the category that is most likely to redress the
specific source of dissatisfaction.46 Still other theories maintain that turnover is set up by
a general level of persistent dissatisfaction that then is triggered abruptly by some single
disruptive event at work that either pushes the employee away (such as a dispute with a
supervisor or co-worker) or pulls the employee away (an alternative employment oppor-
tunity).47 This model focuses on “the straw that breaks the camel’s back” but shares with
all the other theories an emphasis on job dissatisfaction as the necessary but insufficient
cause of turnover. Regardless of what specific theory one endorses, there is a general
consensus that withdrawal behaviors are clearly related to one another, and they are all at
least partially caused by job dissatisfaction.48
Behavior Change
One might expect that an employee’s first response to dissatisfaction would be to try
to change the conditions that generate the dissatisfaction. This can lead to supervisor–
subordinate confrontation, perhaps even conflict, as dissatisfied workers try to bring
about changes in policy or upper-level personnel. Although at first this type of conflict
can feel threatening to the manager, on closer inspection, this is really an opportunity
for the manager to learn about and perhaps solve an important problem. When prop-
erly channeled by a secure and supportive leader, “voicing opportunities” for lower-level
employees can often result in substantial organizational improvements and prevent turn-
over among highly engaged employees.49
Less constructively, employees can initiate change through whistle-blowing (making Whistle-blowing
grievances public by going to the media).50 Whistle-blowers are often dissatisfied individu- Making grievances
als who cannot bring about internal change and, out of a sense of commitment or frustra- public by going to the
media or government.
tion, take their concerns to external constituencies. For example, regardless of what others
thought of him, in his own mind Edward Snowden was doing the right thing. Concerned
that the National Security Agency was increasingly spying on U.S. citizens by collecting
information on over 10 million telephone calls, he went public with this information in June
2013. He felt he was doing his civic duty in trying to inspire a national debate on the
“security–privacy” trade-off that seemed to be taking place in the United States at that
time. He also knew the severity of his actions, noting, “I understand I will be made to suffer
for my actions, but I will be satisfied if the federation of secret law, unequal pardon and
irresistible executive powers that rule the world that I love are revealed for even an instant.”51
In the eyes of many people within the U.S. government, Edward Snowden was a trai-
tor. In the effort to thwart global terrorism, the program at the heart of this controversy
merely captured data on who was talking to whom, and not the content of any of those
conversations. The program was simply trying to lay out the social network of global
terrorists, part of which resides within the country’s borders. The data could be used to
secure a legal warrant for tapping a phone, but no phone was ever tapped illegally. How-
ever, by making the program public, Snowden tipped off potential terrorists to heretofore
unknown dangers, and thus aided and abetted them in the goal of avoiding detection.52
Whether or not Edward Snowden is a whistle-blower or traitor will be for history to
decide, but for ethicists, this example illustrates how the employee has to balance two
central trusts: the trust of his employer, who pays him to do specific work under a spe-
cific contract he willingly signed; and the trust of the larger society in which he resides
to protect its citizens from rogue companies or overreaching branches of government.53
Although this type of whistle-blowing activity has always taken place, the advent
of websites like Wikileaks has provided a more obvious and convenient outlet for this
activity. Wikileaks is most famous for collecting and publishing information provided
by government and military sources, but it has also threatened private companies such
as Bank of America.54 This type of whistleblowing is also on the rise because of a pro-
vision of the 2010 Dodd-Franks regulatory overhaul that encourages this behavior by
offering 30% of penalties collected by the government to individuals who help unearth
illegal actions, in an effort to compensate them for the risks they take.55 Because many
of these settlements involve multi-million-dollar settlements, this specific incentive can
be very powerful. For example, Floyd Landis, a former member of Lance Armstrong’s
cycling team, blew the whistle on an illegal doping scheme that Armstrong had denied
for many years. Because Armstrong’s team was funded by the U.S. Postal Service under
a contract that prohibited the use of banned substances, the government sought $100
million in retribution from the team, 30% of which could go to Landis.56
Physical Job Withdrawal

If the job conditions cannot be changed, a dissatisfied worker may be able to solve the
problem by leaving the job. This could take the form of an internal transfer if the dissat-
isfaction is job-specific (the result of an unfair supervisor or unpleasant working condi-
tions). On the other hand, if the source of the dissatisfaction relates to organizationwide
policies (lack of job security or below-market pay levels), organizational turnover is
likely. As we indicated earlier, there is a negative relationship between turnover rates
and organizational performance, and it is generally very costly to replace workers—
especially high performers in skilled jobs.57
Another way of physically removing oneself from the dissatisfying work short of quit-
ting altogether is to be absent. Although less financially disruptive relative to having an
employee quit his or her job, absenteeism is still costly for many employers, especially
very small companies where it is often harder to make up for a single person’s absence.
The direct cost of employee absenteeism has been estimated to represent roughly 2% of
payroll; however, there are also indirect costs of absenteeism. For example, the employer
may need to pay a replacement worker or pay other workers overtime to make up for the
person who failed to show up. In addition, production might be reduced and customers
may have to wait longer for services. When these indirect costs are added to the equa-
tion, absenteeism costs closer to 4% of payroll.58
Psychological Withdrawal
When dissatisfied employees are unable to change their situation or remove themselves
physically from their jobs, they may psychologically disengage themselves from their
Job Involvement
The degree to which jobs. Although they are physically on the job, their minds may be somewhere else.
people identify them- This psychological disengagement can take several forms. First, if the primary dis-
selves with their jobs. satisfaction has to do with the job itself, the employee may display a very low level of
job involvement. Job involvement is the degree to which people identify themselves with
Organizational their jobs. People who are uninvolved with their jobs consider their work an unimportant
Commitment aspect of their lives. A second form of psychological disengagement, which can occur
The degree to which when the dissatisfaction is with the employer as a whole, is a low level of organizational
an employee identifies
with the organization
commitment. Organizational commitment is the degree to which an employee identifies
and is willing to put with the organization and is willing to put forth effort on its behalf. Individuals who feel
forth effort on its behalf. they have been unjustly treated by their employer often respond by reducing their level
of commitment and are often looking for the first good chance to quit their jobs. In con-
trast, employees who are involved in their job and committed to their employer are much
more likely to respond to problems by speaking up, voicing their concerns, and trying to
change what they may consider a bad situation. Most whistle-blowers tend to be people
committed to their jobs and organizations, not people who forget about their jobs the
moment they leave the workplace.59
JOB SATISFACTION AND JOB WITHDRAWAL

As we saw in Figure 10.1, the key driving force behind all the different forms of job LO 10-3
withdrawal is job satisfaction, which we will define as a pleasurable feeling that results Specify the relationship
between job satisfac-
from the perception that one’s job fulfills or allows for the fulfillment of one’s important
tion and various forms
job values.60 This definition reflects three important aspects of job satisfaction. First, job of job withdrawal,
satisfaction is a function of values, defined as “what a person consciously or uncon- and identify the major
sciously desires to obtain.” Second, this definition emphasizes that different employees sources of job satisfac-
have different views of which values are important, and this is critical in determining the tion in work contexts.
nature and degree of their job satisfaction. The third important aspect of job satisfaction
is perception. An individual’s perceptions may not be a completely accurate reflection of Job Satisfaction
reality, and different people may view the same situation differently. A pleasurable feeling
that results from the
In particular, people’s perceptions are often strongly influenced by their frame of perception that one’s
reference. A frame of reference is a standard point that serves as a comparison for other job fulfills or allows for
points and thus provides meaning. For example, a nurse might compare her salary to the the fulfillment of one’s
salaries of other nurses and her overall satisfaction with pay depends on this comparison important job values.
as much as the absolute value of pay itself. A female nurse in 2011 made, on average, a
little over $50,000 a year in salary. This is a healthy salary, and she might be satisfied Frame of Reference
with this salary until she learns that, on average, a male nurse doing the same work made A standard point that
slightly over $60,000 a year.61 These kinds of frame-of-reference effects are powerful, serves as a comparison
for other points and
and many companies try to reduce the impact of these kinds of social comparisons by thus provides meaning.
making pay levels secret. However, as work becomes more collaborative and team-
oriented, there is increasing demand for transparency about pay, and even team member
input into pay decisions. Balancing team members’ need-to-know with privacy con-
cerns, as well as the need to mitigate conflict between team members who disagree
about their relative worth is increasingly a struggle in many business contexts.62
SOURCES OF JOB DISSATISFACTION

Many aspects of people and organizations can cause dissatisfaction among employees.
Managers and HR professionals need to be aware of these because they are the levers
which can raise job satisfaction and reduce employee withdrawal.
Unsafe Working Conditions

Earlier in this chapter we discussed the employer’s role in helping employees stay
healthy via employee assistance programs for specific problems like drug addiction and
alcohol dependency, as well as general wellness initiatives to promote health and reduce
health care–related expenditures. Obviously, if employers care this much about the risk
employees are exposed to off the job, there needs to be an even more important emphasis
on risk exposure that occurs on the job.
Of course, each employee has a right to safe working conditions, and previously in
this book (see Chapter 3) we reviewed the Occupational Safety and Health Act of 1970
(OSHA), which spells out those rights in a very detailed fashion. We also discussed in
that chapter how to develop safety awareness programs that identify and communicate
job hazards, as well as how to reinforce safe work practices that would allow one to pass
an OSHA inspection. Although our emphasis in that chapter on safety was primarily
directed at legal compliance, we need to revisit the topic in this chapter, because OSHA
is not the only audience that is likely to evaluate the safety of jobs. The perception and
reaction of the organization’s own employees to working conditions has implications
for satisfaction, retention, and competitive advantage that go well beyond merely meet-
ing the legal requirements. That is, if applicants or job incumbents conclude that their
health or lives are at risk because of the job, attracting and retaining workers will be
impossible.
Not all jobs pose safety risks, but the nature of the work in a whole host of jobs
makes managing safety-related perceptions critical. This includes jobs such as fishing
boat operators, timber cutters, airline pilot/flight attendants, structural metal workers,
garbage collectors, and taxi drivers/chauffeurs, which all have been identified as jobs
where people are most likely to be involved in fatal accidents. In fact, in these job cat-
egories alone, close to 1,000 people die annually. Other jobs that rate low in terms of
fatal accidents rate higher in nonfatal accidents, and this includes many jobs in eating
establishments, hospitals, nursing homes, convenience stores, and the long-haul trucking
industry. Still other jobs pose risks in terms of contracting occupational diseases due to
exposure to chemicals. Finally, some jobs create health risks simply because of the long
hours and high stress that are associated with them.63 This was highlighted recently by
several cases in the aviation industry where air traffic controllers who were working at
night were found to be sleeping on the job because of extended hours. For example, in
one case, a lone controller was working on less than two hours’ sleep in the previous
24 hours, and this was a contributing factor in the crash of ComAir Flight 191 in Lexing-
ton, Kentucky.64 In general, working at night runs counter to the basic physiology of the
human body and disrupts one’s natural circadian rhythm, which in turn causes a whole
host of physical problems. Thus, working at night has to be considered a safety issue in
any job that states this as a task requirement in the job description.65
Personal Dispositions
Because dissatisfaction is an emotion that ultimately resides within the person, it is not
surprising that many who have studied these outcomes have focused on individual dif-
ferences. For example, in Chapter 6, we described the Five Factor Model of Personal-
ity, and several of these traits have been linked to higher turnover intentions and actual
turnover. In general, turnover is more likely to be an issue for employees who are low in
emotional stability, low in conscientiousness, and low in agreeableness.66
Negative Affectivity Negative affectivity is a term used to describe a dispositional dimension that reflects
A dispositional dimen- pervasive individual differences in satisfaction with any and all aspects of life. Individu-
sion that reflects
als who are high in negative affectivity report higher levels of aversive mood states,
pervasive individual dif-
ferences in satisfaction including anger, contempt, disgust, guilt, fear, and nervousness across all contexts (work
with any and all aspects and nonwork). People who are high in negative affectivity tend to focus extensively on
of life. the negative aspects of themselves and others. They also tend to persist in their negative
attitudes even in the face of organizational interventions, such as increased pay levels,
that generally increase the levels of satisfaction of other people.67 All of this implies that
some individuals tend to bring low satisfaction with them to work. Thus these people
may be relatively dissatisfied regardless of what steps the organization or the manager
takes. On the other hand, research suggests that people who are positive tend to work
harder, are more likely to be committed to the organization, get paid more, and get
promoted more often.68 Like anything, however, one can get too much of a good thing,
and if a work group is made up of people who are all high in positive affect, they are
often overly optimistic and fail to engage in a sufficient level of critical thinking regard-
ing what might go wrong with plans or projects. Thus, when it comes to team composi-
tion, a built-in “devil’s advocate” can be a highly valuable member.69
The evidence on the linkage between these kinds of traits and job satisfaction sug-
gests the importance of personnel selection as a way of raising overall levels of employee
satisfaction. If job satisfaction remains relatively stable across time and jobs because of
characteristics like negative affectivity, this suggests that transient changes in job sat-
isfaction will be difficult to sustain in these individuals, who will typically revert to
their “dispositional” or adaptation level over time. Thus, some employers actually try to
screen for this when selecting job candidates. For example, at Zappos, the online retailer
of shoes and apparel, CEO Tony Hsieh notes that “We do our best to hire positive people
and put them where their positive thinking is reinforced.”70
Tasks and Roles

As a predictor of job dissatisfaction, nothing surpasses the nature of the task itself. Many
aspects of a task have been linked to dissatisfaction. Several elaborate theories relating
task characteristics to worker reactions have been formulated and extensively tested. We
discussed several of these in Chapter 4. In this section we focus on three primary aspects
of tasks that affect job satisfaction: the complexity of the task, the amount of flexibility in
where and when the work is done, and, finally, the value the employee puts on the task.71
With a few exceptions, there is a strong positive relationship between task complexity
and job satisfaction. That is, the boredom generated by simple, repetitive jobs that do
not mentally challenge the worker leads to frustration and dissatisfaction.72 Many have
attributed much of the recent labor unrest in China to this specific aspect of the work.
For example, the Han Hoi riot started as a minor fracas between two young workers
but soon escalated into a pitched battle that involved over 2,000 employees and 5,000
paramilitary forces. The two workers, who everyone agrees started the riot, were from
different regions and had just finished a stressful 12-hour shift at the factory that makes
iPod and iPads. The work was boring and low paid, and frustrations boiled over when a
small argument turned into a shoving and pushing match. Witnesses claim that security
workers at the plant overreacted to the incident and began brutally beating the two young
people. At that point, hundreds of workers rushed the security personnel and returned
the favor. Soon, more and more security personnel were called to the scene, followed
by more and more restive workers. A major revolt was under way and when it was over,
40 people were hospitalized and the facility had to be shut down for days after fires and
looting left many stretches of the campus that housed close to 80,000 workers gutted.73
This instance of labor unrest received a great deal of national attention in China due to
its severity, but as the “Competing through Globalization” box shows, labor unrest in
China is hardly relegated to factories.
This riot was just one of many that put a spotlight on the tension between Chinese
factories that base their business model on low cost-strategies that create low-scope
jobs and unpleasant working conditions, and a new generation of Chinese workers who
seem less willing to tolerate those conditions. Chinese authorities recognize this prob-
lem, and Han Hoi spokesman Louis Woo summed up the experience by noting, “We
cannot argue that manufacturing jobs are exciting for workers. It’s kind of boring and
requires a lot of hard work, so we may have to change that rather than hoping the work-
ers will change.”74
Driven to Distraction: Chinese Taxi Drivers
Protest Working Conditions
Worker strikes are common in cars in the middle of the street, unregistered vehi-
Chinese factories as many young preventing the flow of any traffic. cles and ride-hailing apps in 2015,
people rebel against long hours, In one case in Nanjing, this prac- as well as a plan to reduce rental
low pay, and monotonously tice resulted in violence when prices. Time will only tell if these
boring work. However, when it fights broke out between taxi moves will calm the situation, but
comes to government concern, drivers and other motorists who clearly the meter is running on
the biggest fear is the increas- were viewed simply as collateral the need for change.
ing frequency and intensity of damage by the protestors.
strikes by taxi drivers. As Wang As is often the case, the moti- DISCUSSION QUESTIONS
Kan, a professor at the Chinese vation driving this labor unrest 1. Is the “collateral damage”
Institute of Industrial Relations, is poor working conditions. The incurred by nondisputants, that
notes, “For factory strikes, no average city taxi driver works is, law-abiding innocent driv-
matter how big, the government 13-hour days in congested and ers who were affected by the
can censor the news and usually polluted traffic, earning roughly taxi drivers’ strike, “fair game”
no one knows about it because 3,000 yuan ($500) a month. Most when it comes to winning a
most are located outside the city. drivers do not own their own labor dispute such as this?
But with taxi strikes, everyone cabs because government-issued 2. If you were part of the collateral
in the city feels it. This is bad for licenses are scarce and costly, damage in this case, whom
social stability.” and thus, they have to pay high would you blame more—the
The strikes are hardly a local rental fees to use cars owned by drivers or the government?
phenomenon isolated in one others. Then, on top of all of this, SOURCES: D. Roberts, “The Fury of the
city; instead demonstrations the taxi drivers have to compete Chinese Cabbie,” Bloomberg Businessweek,
have broken out in 10 different with “black cars”—that is, unreg- February 1, 2015; A. Jacobs, “Strikes by Taxi
Drivers Spread Across China,” The New York
cities in 2014 alone. In many istered and unlicensed vehicles Times, January 14, 2015, www.nytimes.com; S.
cases, the drivers use social that use apps like Uber. The Yan, “Taxi Drivers Strike in China over Steep
media to organize mass park- government, listening to these Fees and Uber,” CNN Money, January 14, 2015,
http://money.cnn.com.
outs where they just stop their concerns, announced a ban on
One of the major interventions aimed at reducing job dissatisfaction by increasing job
complexity is job enrichment. As the term suggests, this intervention is directed at jobs
that are “impoverished” or boring because of their repetitive nature or low scope. Many
job enrichment programs are based on the job characteristics theory discussed earlier in
Job Rotation Chapter 4. For example, many job enrichment programs provide increased opportunities
The process of sys- for workers to have input into important organizational decisions that involve their work,
tematically moving a and this has been routinely found to reduce role conflict and ambiguity.
single individual from
one job to another over Another task-based intervention is job rotation. This is a process of systematically moving
the course of time. The a single individual from one job to another over the course of time. Although employees may
job assignments may not feel capable of putting up with the dissatisfying aspects of a particular job indefinitely,
be in various functional they often feel they can do so temporarily. Job rotation can do more than simply spread out
areas of the company the dissatisfying aspects of a particular job. It can increase work complexity for employees
or movement may
be between jobs in a and provide valuable cross-training in jobs so that employees eventually understand many
single functional area different jobs. This makes for a more flexible workforce and increases workers’ appreciation
or department. of the other tasks that have to be accomplished for the organization to complete its mission.
440
Because of the degree to which nonwork roles often spill over and affect work roles,
and vice versa, a second critical aspect of work that affects satisfaction and retention is the
degree to which scheduling is flexible. To help employees manage their multiple roles,
companies have turned to a number of family-friendly policies to both recruit new tal-
ent and hold onto the talent they already have. These policies may include provisions for
child care, elder care, flexible work schedules, job sharing, telecommuting, and extended
maternal and paternal leaves.75 When it comes to maternity and paternity leave, however,
most employers in the United States do far less than what one sees in the rest of the world.
Although the Family Medical Leave Act does require employers to give parents 12 weeks
of leave after having a child, this is an unpaid leave, and many employees cannot afford
to go that long without pay—especially after just having a baby. In terms of international
rankings, the United States ranks last, tied with Liberia, Papua New Guinea, and Suri-
name as one of the only four countries that does not offer paid leave for new parents.76 In
addition to the direct costs of taking time off to be with children, however, are the indirect
costs that come about because of social norms in the United States that seem to punish
both parents for taking time off. Research indicates that women who reduce their hours
of work for family reasons incur a 10% penalty in lifetime earnings. This penalty is even
larger for men—estimated at over 15%.77 Although the family-friendly programs create
some headaches for managers in terms of scheduling work and reporting requirements,
they have a number of demonstrable benefits. First, the provision of these sorts of benefits
is a recruitment aid that helps employers attract potential job applicants.78 Second, once
hired, flexible work arrangements result in reduced absenteeism. Third, over the long term,
these programs result in higher levels of employee commitment to the organization.79
By far, the most important aspect of work in terms of generating satisfaction is the
degree to which it is meaningfully related to core values of the worker. The term prosocial Prosocial Motivation
motivation is often used explicitly to capture the degree to which people are motivated to The degree to which
help other people. When people believe that their work has an important impact on other people are ener-
gized to do their jobs
people, they are much more willing to work longer hours.80 This prosocial motivation because it helps other
could be directed at co-workers and has been found to relate to helping behavior.81 This people.
form of motivation can also be triggered by recognizing that one’s work has a positive
impact on those who benefit from one’s service, such as customers or clients.82 In con-
trast, when one’s social needs are thwarted, they often react negatively and in self-
defeating ways that drive people further away from them.83
In addition to prosocial motivation, work may have meaning for someone because
they see it as a calling that gives their lives purpose. In this case, the exact tasks that go
into the work may not even matter, but rather everything depends upon the outcome that
results from that work. For example, Michael Pratt, a researcher who has studied mean-
ing at work extensively often recounts a fable of bricklayers all working at the same site
who are asked what they are doing. One sighs and states sadly that “I am putting one
brick on top of another.” A second says with indifference that that he is “making six
pence an hour.” The third responds excitedly exclaiming “I am building a cathedral!” All
three workers are doing the same work, but one person finds meaning in it where others
do not, and this makes all the difference when it comes to job satisfaction.84
Supervisors and Co-workers

The two primary sets of people in an organization who affect job satisfaction are co-
workers and supervisors. A person may be satisfied with her supervisor for one of two
reasons. First, the job incumbent may see her supervisor as having “warmth,” that is,
genuinely caring about the worker and respecting him or her as a person. Thus, being
in a culture where people are generally civil and polite makes people feel their own
Lights Out for Late Night Workers
For many employees—and of looking at one’s smartphone for most jobs are
especially working parents—the after 9 PM has demonstrable not quite as critical as those
best time of the day to really get negative effects on sleeping pat- associated with commercial
some quality work done comes terns. The blue light emitted by aviation, if the job is worth doing
when they are out of the office a smartphone is the single most right, it’s worth doing right after a
and the kids are asleep. This is disruptive band of light when it good night’s sleep.
the new 9 to 11 PM work shift, and comes to inhibiting the sleep-
although the short-term benefits promoting chemical, melatonin. DISCUSSION QUESTIONS
of leveraging these two hours When one combines this chemi- 1. Is it fair for an employer to ask
for work may seem to be in cal reaction with the chemical people who already put in an
the best interests of employers reaction caused by workplace 8-hour day to work 9 to 11 PM
and employees, new evidence stress experienced right before without overtime pay?
suggests that the long-term bedtime, as researcher Chris 2. If an employer does not
problems associated with this Barnes notes, “smartphones are require this, but people do
practice outweigh its benefits. almost perfectly designed to dis- it anyway in order to get
In particular, research shows rupt sleep.” ahead, should the employer
that working right up until its The negative effects of discourage or prevent it in
“lights out for bed” is highly dis- sleep deprivation on employee order to promote long-term
ruptive of sleep, which in turn performance and safety are sustainability?
harms employee engagement well-known, and for some occu- SOURCES: B. Stone, “The New Night Shift,”
and performance the next day. pations, like airline pilots, there Bloomberg Businessweek, August 7, 2014,
Lack of performance on that next are strict rules that enforce sleep pp. 87–89; R. Pyrillis, “Sleep Derailed,” Work-
force, July 2014, pp. 29–31; C. M. Barnes, K.
day then prompts even more discipline. An airline will routinely Lanaj, and R. Johnson, “Research: Using a
late-night workload that creates ground flights for lack of crew Smartphone After 9 PM Leaves Workers Disen-
a vicious cycle of sleep depriva- rest, and although the safety gaged,” Harvard Business Review, January 15,
2014, https://hbr.org.
tion. Indeed, the mere practice and performance implications
dignity and worth above and beyond their contributions to the work itself. Incivility
causes stress and research shows that people who are treated rudely have a hard time
focusing on the task, and instead, ruminate about their poor treatment and ways to per-
haps get even.85 Many employers recognize this fact and the tolerance that organizations
once had for tough and cruel bosses is no longer accepted today. For example, in 2014,
Jill Abramson, the editor of The New York Times was removed from her position because
of “her arbitrary decision-making, a failure to consult and bring colleagues with her,
inadequate communication, and mistreatment of colleagues.”86
Second, as just mentioned, people may be satisfied with their supervisor because they
provide support that helps them achieve their own goals. That is, although it is nice to have
a supervisor and co-workers who are warm, it is also critical that these people are “compe-
tent” in terms of helping the worker and his or her team get the mission accomplished. In
fact, when given a choice between a leader who was warm but incompetent or a leader who
was cold but competent, 70% opted for the cold and competent leader.87 Still, nothing beats
that combination of high warmth and high competence in a leader, and employees led by
a supervisor who is viewed as both supportive and competent will work longer hours and
delay gratification in terms of rewards trusting that something good will eventually come
to them from all their hard work. However, as the “Competing through Sustainability” box
442
shows, a leader focused on long-term results may display both warmth and competence by
limiting the number of hours his or her staff works.
Supervisors are not the only potential source of social warmth and support, and in
many cases, abuse by co-workers can have an even more profound negative influence
on one’s job satisfaction. For example, one 2012 survey indicated that 35% of respon-
dents reported being bullied by co-workers on the job. Workplace bullying is defined as
repeated health-harming mistreatment by one or more perpetrators at work that takes the
form of verbal abuse and offensive conduct that is threatening, humiliating or intimidat-
ing to the point where it prevents work from getting done. Unlike abusive bosses, who
often let up once a specific task is accomplished, bullying by co-workers tends to be a
constant, unrelenting process. Although it is common for high schools to adopt non-
bullying rules, this has not been the case among employers, even though bullies rarely
stop being bullies simply because they graduated from high school.88
Because a supportive environment reduces dissatisfaction, many organizations foster
team building both on and off the job (such as via softball or bowling leagues). The idea
is that group cohesiveness and support for individual group members will be increased
through exposure and joint efforts. Although management certainly cannot ensure
that each stressed employee develops friends, it can make it easier for employees to
interact—a necessary condition for developing friendship and rapport. In fact, results of
surveys indicate that endorsing the item “Most of my closest friendships are with people
at work” is one of the most powerful tools for predicting turnover.89
Pay and Benefits

We should not discount the influence of the job incumbent, the job itself, and the sur-
rounding people in terms of influencing job satisfaction, but for most people, work is
their primary source of income and financial security. Pay is also seen as an indicator of
status within the organization as well as in society at large. Thus, for many individuals,
the standing of their pay relative to those within their organization, or the standing of
their pay relative to others doing similar work for other employers, becomes even more
important than the level of pay itself.90 Thus, for some people, pay is a reflection of
self-worth, so pay satisfaction takes on critical significance when it comes to retention.91
The role of pay and benefits is so large that we devote the entire next part of this book
to these topics. Within this chapter we focus primarily on satisfaction with two aspects
of pay (pay levels and benefits) and how these are assessed within the organization.
Methods for addressing these issues are discussed in Part 4 of this book.
One of the main dimensions of satisfaction with pay deals with pay levels relative to
market wages. When it comes to retention, employees being recruited away from one
organization by another are often lured with promises of higher pay levels. In fact, exit
surveys of high-performing employees who have left their organization indicate “better
pay” as the reason in over 70% of the cases compared to only 33% who indicate “better
opportunity.” Ironically, when the managers of those same workers are polled, 68% cite
“better opportunity” versus 45% who indicate it was “better pay,” suggesting quite a dif-
ference of opinion.92 As labor markets started tightening up in 2015, many employers
recognized the need to raise pay levels in order to stop attrition, even companies such
as Walmart, which base their entire business model on cutting costs. Walmart boosted
the pay of all their employees to $10 an hour in 2015, well above the minimum wage,
in order to retain their most experienced personnel and reduce the need to hire and train
new workers. Chief Executive Doug McMillon, who initiated the raises, noted, “We want
associates who care about the company and are highly engaged about the business.”93
Satisfaction with benefits is another important dimension of overall pay satisfac-

tion. Because many individuals have a difficult time ascertaining the true dollar value
of their benefits package, however, this dimension may not always be as salient to
people as pay itself. To derive competitive advantage from benefits’ expenditures,
it is critical not only to make them highly salient to employees, however, but also
link them to the organization’s strategic direction. For example, Starbucks wanted
to attract workers who were smart and valued education, but could not necessarily
afford to hire people with college educations. As we discussed in Chapters 1 and 2,
Starbucks started a tuition reimbursement program that would pay for employees who
pursued their bachelor’s degree at Arizona State University. The cost of program was
roughly $45,000 per employee over the course of the four years, but the company saw
this as a great way of attracting and retaining the kind of employee that fit their busi-
ness model.94
MEASURING AND MONITORING JOB SATISFACTION

Most attempts to measure job satisfaction rely on workers’ self-reports. There is a
vast amount of data on the reliability and validity of many existing scales as well as
a wealth of data from companies that have used these scales, allowing for compari-
sons across firms. Established scales are excellent places to begin if employers wish
to assess the satisfaction levels of their employees. An employer would be foolish
to “reinvent the wheel” by generating its own versions of measures of these broad
constructs. Of course, in some cases, organizations want to measure their employees’
satisfaction with aspects of their work that are specific to that organization (such as
satisfaction with one particular health plan versus another). In these situations the
organization may need to create its own scales, but this will be the exception rather
than the rule.
One standardized, widely used measure of job satisfaction is the Job Descriptive
Index (JDI). The JDI emphasizes various facets of satisfaction: pay, the work itself,
supervision, co-workers, and promotions. Table 10.5 presents several items from
the JDI scale. Other scales exist for those who want to get even more specific about
Table 10.5
Sample Items from Instructions: Think of your present work. What is it like most of the time? In the blank
a Standardized Job beside each word given below, write
Satisfaction Scale Y for “Yes” if it describes your work
(the JDI) N for “No” if it does NOT describe your work
? if you cannot decide
Work Itself Pay Promotion Opportunities
? Routine ? Less than I deserve ? Dead-end job
? Satisfying ? Highly paid ? Unfair policies
? Good ? Insecure ? Based on ability
Supervision Co-workers
? Impolite ? Intelligent
? Praises good work ? Responsible
? Doesn’t supervise enough ? Boring
SOURCE: W. K. Balzar, D. C. Smith, D. E. Kravitz, S. E. Lovell, K. B. Paul, B. A. Reilly, and C. E. Reilly, User’s Manual for
the Job Descriptive Index (JDI) (Bowling Green, OH: Bowling Green State University, 1990).
different facets of satisfaction. For example, although the JDI we just examined
assesses satisfaction with pay, it does not break pay up into different dimensions.95
The Pay Satisfaction Questionnaire (PSQ) focuses on these more specific dimen-
sions (pay levels, benefits, pay structure, and pay raises); thus this measure gives a
more detailed view of exactly what aspects of pay are most or least satisfying.96
Although satisfaction surveys used to be a once-a-year affair, increasingly technol-
ogy is creating opportunities for firms and managers to get more rapid feedback. Pulse
surveys are very short questionnaires that go out every day or once a week that focus on
a small set of specific questions—perhaps even just one question—which the company
wants to keep track of over time.97 The idea behind these quick-fire polls is to uncover
issues faster and as they develop rather than wait until the end of the year when the issue
may have festered. Also, these surveys tend to avoid long-term memory problems that
reduce the value of once-a-year questionnaires. Usually these surveys are anonymous
in order to reduce fear of voicing one’s opinions, and organizations try to show demon-
strable actions taken soon after issues are raised.98
SURVEY-FEEDBACK INTERVENTIONS
Regardless of what measures are used or how many facets of satisfaction are assessed, a LO 10-4
systematic, ongoing program of employee survey research should be a prominent part of Design a survey feed-
any human resource strategy for a number of reasons. First, it allows the company to back intervention
program, and use this
monitor trends over time and thus prevent problems in the area of voluntary turnover to promote retention
before they happen. For example, Figure 10.2 shows the average profile for different of key organizational
personnel.
Figure 10.2
Average Profile for Different Facets of Satisfaction over Time
Very
satisfied
Satisfied
Neutral
2011
Dissatisfied 2013
2015
Very
dissatisfied
Work Promotion Supervisor Co-workers Pay Benefits Pay Pay

itself opportunities level structure raises
Satisfaction with:
facets of satisfaction for a hypothetical company in 2011, 2013, and 2015. As the figure
makes clear, the level of satisfaction with promotion opportunities in this company has
eroded over time, whereas the satisfaction with co-workers has improved. If there was a
strong relationship between satisfaction with promotion opportunities and voluntary
turnover among high performers, this would constitute a threat that the organization
might need to address via some of the techniques discussed in our previous chapter,
“Employee Development.”
A second reason for engaging in an ongoing program of employee satisfaction surveys
is that it provides a means of empirically assessing the impact of changes in policy (such
as introduction of a new performance appraisal system) or personnel (e.g., introduction
of a new CEO) on worker attitudes. Figure 10.3 shows the average profile for different
satisfaction facets for a hypothetical organization one year before and one year after a
merger. An examination of the profile makes it clear that since the merger, satisfaction
with supervision and pay structure has gone down dramatically, and this has not been
offset by any increase in satisfaction along other dimensions. Again, this might point
to the need for training programs for supervisors (like those discussed in Chapter 7) or
changes in the pay system (like those discussed in Chapter 11). This was the exact pat-
tern of results that was found by HCL Technologies, an India-based technology services
provider. More specifically, the company learned from its survey that its variable pay-
for-performance program was creating too many wild swings in the workers’ paychecks,
and many were leaving to take jobs with more stable month-to-month paychecks. The
company responded by reducing the variable component in pay from 30% to just 10%.
The result was an increase in customer satisfaction, a 140% growth in revenue, and a
50% reduction in turnover.99
Figure 10.3
Average Profile for Different Facets of Satisfaction before and after a Major Event
Very
satisfied
Satisfied
Premerger
Neutral
Dissatisfied Postmerger
Very
dissatisfied

Satisfaction with:
Third, when these surveys incorporate standardized scales like the JDI, they often
allow the company to compare itself with others in the same industry along these dimen-
sions. For example, Figure 10.4 shows the average profile for different satisfaction facets
for a hypothetical organization and compares this to the industry average. Again, if we
detect major differences between one organization and the industry as a whole (on over-
all pay levels, for example), this might allow the company to react and change its policies
before there is a mass exodus of people moving to the competition.
According to Figure 10.4, the satisfaction with pay levels is low relative to the
industry, but this is offset by higher-than-industry-average satisfaction with bene-
fits and the work itself. As we showed in Chapter 6 (“Selection and Placement”),
the organization might want to use this information to systematically screen people.
That is, the fit between the person and the organization would be best if the company
selected applicants who reported being most interested in the nature of the work
itself and benefits, and rejected those applicants whose sole concern was with pay
levels.
Within the organization, a systematic survey program also allows the company to
check for differences between units and hence benchmark “best practices” that might
be generalized across units. For example, Figure 10.5 shows the average profile for five
different regional divisions of a hypothetical company. The figure shows that satisfaction
with pay raises is much higher in one of the regions relative to the others. If the overall
amount of money allocated to raises was equal through the entire company, this implies
that the manner in which raises are allocated or communicated in the Midwest region
might be something that the other regions should look into.
Figure 10.4
Average Profile for Different Facets of Satisfaction versus the Industry Average
Very
satisfied
Satisfied
Organization
Average
Neutral
Dissatisfied
Industry
Average
Very
dissatisfied

Satisfaction with:
Figure 10.5
Average Profile for Different Facets of Satisfaction for Different Regional Divisions
Very
satisfied
Satisfied Midwest
Neutral
West
Dissatisfied
Very
dissatisfied

Satisfaction with:
Finally, although the focus in this section has been on surveys of current employees,
any strategic retention policy also has to consider surveying people who are about
to become ex-employees. Exit interviews with departing workers can be a valuable
tool for uncovering systematic concerns that are driving retention problems. If prop-
erly conducted, an exit interview can reveal the reasons why people are leaving. For
example, results from recent exit interviews among employees show that there are two
distinct groups of people who are leaving their jobs—one set of workers who can-
not get enough hours and a second set of workers who are working too many hours.
This may seem ironic and counterintuitive, but in some ways it actually makes sense
given the way work is increasingly structured around two distinct classes of workers—
hourly and salaried. That is, because they are being paid by the hour, it makes sense
for employers to limit the amount of time hourly workers spend on the job. They want
to avoid paying any overtime hours (valued at time and a half), but beyond that, they
may even try to limit the number of hours below 30 in order to avoid having to pay
for mandated health care.100 Thus, many hourly workers cannot get enough work.101
In contrast, salaried employees represent a fixed rather than variable cost, and hence
there is pressure to make these individuals work very long hours, including nights and
weekends. Many of these workers wind up not taking vacation days that are provided
to them or work while on vacation.102 Obviously, it would benefit everyone in the
workforce to help smooth out some of this over- and under-demand for labor, but this
shows the pervasive power of rules regarding pay and pay structure—the topic of the
next section of this book.
A LOOK BACK
Job Satisfaction, Retention and the IRS
In the story that opened this chapter, we saw how recent cutbacks at the IRS, when
combined with the traditional challenges associated with the job of tax collectors,
created high levels of dissatisfaction and voluntary turnover rates among workers
at the agency. A key factor influencing the ability of any organization to accomplish
its mission is who is leaving and who is staying when it comes to turnover. Orga-
nizations need to have policies in place that make it easy and advantageous for
low performers to leave (involuntary turnover) but make it difficult and costly for
high performers to leave (voluntary turnover). Managing the “flow” of employees
thus becomes a critical source of competitive advantage and is often the difference
between survival and bankruptcy.
QUESTIONS
1. In what ways does an organizational crisis like that faced by the IRS make it
easier for firms to manage involuntary turnover?
2. In what ways does an organizational crisis like that faced by the IRS make it
more difficult for firms to manage voluntary turnover?
3. What role can employee attitude surveys play in maintaining a loyal and
engaged workforce? What are some of the challenges associated with getting
accurate and reliable information from employee surveys, and how can a sur-
vey process “backfire” in terms of harming, rather than helping, a firm’s efforts?
SUMMARY
This chapter examined issues related to employee separation not invite retaliation, and voluntary turnover among high
and retention. Involuntary turnover reflects a separation ini- performers is kept to a minimum. Retaliatory reactions to
tiated by the organization, often when the individual would organizational discipline and dismissal decisions can be
prefer to stay a member of the organization. Voluntary turn- minimized by implementing these decisions in a manner
over reflects a separation initiated by the individual, often that promotes feelings of procedural and interactive justice.
when the organization would prefer that the person stay a Voluntary turnover can be minimized by measuring and
member. Organizations can gain competitive advantage monitoring employee levels of satisfaction with critical fac-
by strategically managing the separation process so that ets of job and organization, and then addressing any prob-
involuntary turnover is implemented in a fashion that does lems identified by such surveys.
KEY TERMS
Involuntary turnover, 423 Alternative dispute resolution Job involvement, 436
Voluntary turnover, 423 (ADR), 428 Organizational commitment, 436
Employment-at-will Employee assistance programs Job satisfaction, 437
doctrine, 423 (EAPs), 429 Frame of reference, 437
Outcome fairness, 425 Outplacement counseling, 432 Negative affectivity, 438
Procedural justice, 426 Progression of withdrawal, 434 Job rotation, 440
Interactional justice, 426 Whistle-blowing, 435 Prosocial motivation, 441
1. The discipline and discharge procedures described in this What are the critical differences between these interven-
chapter are systematic but rather slow. In your opinion, tions, and under what conditions might one be preferable
should some offenses lead to immediate dismissal? If so, to the others?
how would you justify this to a court if you were sued for 4. If off-the-job stress and dissatisfaction begin to create
wrongful discharge? on-the-job problems, what are the rights and responsi-
2. Organizational turnover is generally considered a nega- bilities of the human resource manager in helping the
tive outcome, and many organizations spend a great deal employee to overcome these problems? Are intrusions
of time and money trying to reduce it. What situations into such areas an invasion of privacy, a benevolent and
would indicate that an increase in turnover might be just altruistic employer practice, or simply a prudent finan-
what an organization needs? Given the difficulty of termi- cial step taken to protect the firm’s investment?
nating employees, what organizational policies might be 5. Discuss the advantages of using published, stan-
used to retain high-performing workers, and at the same dardized measures in employee attitude surveys. Do
time, increase attrition among low-performing workers? employers ever need to develop their own measures for
3. Three popular interventions for enhancing worker satis- such surveys? Where would one turn to learn how to
faction are job enrichment, job rotation, and role analysis. do this?
The characteristics of your job influence your overall satisfac- Add the scores for the pairs of items that measure each job
tion with the job. One way to be satisfied at work is to find a job characteristic. A higher score for a characteristic means that
with the characteristics that you find desirable. The following characteristic is more important to you.
assessment is a look at what kind of job is likely to satisfy you. Skill Variety: The degree to which a job requires you to use
The following phrases describe different job characteristics. a variety of skills.
Read each phrase, then circle a number to indicate how much
of the job characteristic you would like. Use the following Item 1: _____ + Item 7: _____ = _____
scale: 1 = very little; 2 = little; 3 = a moderate amount; 4 = Task Identity: The degree to which a job requires completion
much; 5 = very much. of a whole and identifiable piece of work.
Item 4: _____ + Item 9: _____ = _____
1. The opportunity to perform a number 12345
of different activities each day Task Significance: The degree to which a job has an impact
on the lives or work of others.
2. Contributing something significant to the 12345
company Item 2: _____ + Item 6: _____ = _____
3. The freedom to determine how to do my 12345 Autonomy: The degree to which a job provides freedom,
job empowerment, and discretion in scheduling the work and
4. The ability to see projects or jobs 12345 determining processes and procedures for completing the
through to completion, rather than per- work.
forming only one piece of the job Item 3: _____ + Item 8: _____ = _____
5. Seeing the results of my work, so I can 12345
get an idea of how well I am doing the job Feedback: The degree to which carrying out job-related
tasks and activities provides you with direct and clear infor-
6. A feeling that the quality of my work is 12345
mation about your effectiveness.
important to others in the company
7. The need to use a variety of complex skills 12345 Item 5 _____ + Item 10: _____ = _____
8. Responsibility to act and make decisions 12345
SOURCE: Adapted from R. Daft and R. Noe, Organizational Behavior (New
independently of managers or supervisors York: Harcourt, 2001).
9. Time and resources to do an entire 12345
piece of work from beginning to end
10. Getting feedback about my performance 12345
from the work itself
EXERCISING STRATEGY
Churning About to Heat Up
Traditionally, the U.S. workforce has had one of the highest conducted by HR software vendor Cornerstone OnDemand
rates of voluntary turnover in the world, and this is actually estimated that 25% of employees were looking to change
considered a source of competitive advantage. Unlike lay- jobs in the 2013–2015 time period. Many of these work-
offs that reduce the overall size of the economy, people who ers suffered through years of increased workloads with-
turn over voluntarily often have lined up better jobs already, out increased pay during the recession and are looking to
and thus, create a new job opening for someone else after improve their situation as the economy continues to heat up.
they leave. Thus, this kind of “churning” does not affect the For businesses, the cost of this churning is close to
size of the economy and results in a better person-job fit $2 trillion due to the need to recruit and train new workers.
for many people. It also rewards good employers who can This cost is not distributed evenly across employers, how-
attract the best workers and punishes employers who fail to ever. Organizations that were not able to keep up employee
meet the needs of the workforce, thus “thinning the herd” at morale are about to lose a large percentage of their most val-
the firm level. ued employees, whereas companies that met their employ-
The churn rate for the U.S. economy, however, is not what ees’ needs are likely to experience stability or growth. Thus,
is used to be, and many have pointed to this factor as one of churning streamlines the economy and creates efficiency by
the reasons for the weak nature of the most recent recovery. eliminating weak competitors and strengthening the most
Many workers during the recession were very reluctant to competitive firms.
leave their jobs, and this aversion to risk reduced the number
QUESTIONS
of job openings over and above what might be attributable
1. What are some of the steps organizations take to reduce
to the bad economy. One study suggested, for example, that
and avoid turnover among employees?
80% of the reduction in hiring during the 2007–2009 reces-
2. How does an increase in churn rates create strategic
sion was due to a reduction in churn rather than a decline in
opportunities for firms with strong reputations in the
job creation.
labor market?
All of this seems to be changing, however. Turnover
rates that stood at 9% in 2008 and 2009, jumped to 15% in SOURCES: D. Kanszak, “Turnover Rates Inching Up,” PR Web, June 27,
2010 and 2011. In addition, all signs pointed to even higher 2013, www.prweb.com; G. Kranz, “As Career Development Lags, Employees
Are Going Places,” Workforce, February 2013, p. 10; S. Halzack, “Worker
increases in 2012 and 2013. A national survey conducted Turnover Is Poised to Pick Up, Adding Urgency to Employers’ Focus on
by the Society of Human Resource Management indicated Retention,” Washington Post, January 22, 2013, www.washingtonpost.com;
that job satisfaction, a leading indicator of voluntary turn- B. Casselman, “Little Room for New Workers,” The Wall Street Journal,
over, was down over 80% in 2012, and a separate survey February 8, 2012, www.wsj.com.
MANAGING PEOPLE
Flextime: Has Its Time Come and Gone?
When Marissa Mayer was selected to be Yahoo’s CEO in In its defense, most research into the effects of flextime
2012, she became the 20th female CEO at a Fortune 500 suggests that it has benefits, and many companies are stand-
company. Since she and her husband were expecting their ing by their policies. For example, Medtronic’s operations in
first child when the news was announced, this made her Santa Rosa, California designated 15% of its workforce as
the only pregnant CEO at a Fortune 500 company. Cer- “home-office employees.” Most of those workers telecom-
tain expectations come with being the only mother-to-be mute from San Francisco, which is roughly one hour away
within the CEO ranks, but when Mayer announced that she by car. Medtronic swears by its program, noting that it saves
was ending Yahoo’s long-time policy allowing flextime at over $1 million a year in office space and boosts its ability
work, this was not one of them. Indeed, immediately after to attract top-level talent in the San Francisco area who are
her announcement, another long-time provider of flexible willing to commute one day a week, but not willing to move
work arrangements, Best Buy, followed her lead and ended or commute every day.
its program. This left many wondering whether or not the However, managing flextime employees can be chal-
time for flextime has come and gone. lenging for some managers because it forces them to
manage outcomes and results, and not just employee face- off users and advertisers from Yahoo over the years. Mayer
time. Jody Thompson, the original architect of the Best stressed that “people are more productive when they are
Buy flextime program, notes that “Demanding face-time alone, but they are more collaborative and innovative
from employees is typically a sign that supervisors are when they’re together.” Thus, the decision was a strategic
unable to lead effectively. They don’t know how to manage choice regarding how to best compete in that industry—no
performance, so they manage people’s time.” more, no less.
Mayer was quick to note that her decree was not meant
to be a sweeping condemnation against flextime in general, QUESTIONS
but rather she was just saying that it was not right for Yahoo 1. Discuss how the nature of a company’s workers and
at this specific time. There were two issues that led to the nature of the work itself might influence when and
Mayer’s somewhat controversial policy change. First, inter- where flextime is a good policy and where it is a poor
nal evidence from VPN logs showed that Yahoo’s work- strategy.
at-home staff did not seem to be working very hard when 2. Why might a “one-size-fits-all policy” for flextime be
measured in terms of hours actually logged. The percep- unrealistic?
tion that some of the employees were abusing the privilege
was widespread and created conflict with employees who SOURCES: E. Fraunheim, “Reflecting on Flexing,” Workforce Management,
June 2013, pp. 28–37; R. Bell, “Turning Their Backs on Telecommuting,”
were not abusing the privilege. Second, Mayer believed Workforce Management, April 2013, p. 46; A.Efrati and J. Letzing, “Google’s
that Yahoo needed to come up with creative solutions to Mayer Takes Over as Yahoo Chief,” The Wall Street Journal, July 17, 2012,
compete with Google and Facebook, which had siphoned www.wsj.com.
Learning to Show Appreciation at Datotel
Datotel is a St. Louis company whose name explains what this, he sets aside part of regular management meetings—
it does. The name combines the word data with the word part of each daily phone meeting and 15 minutes of each
hotel, and it uses its computers to safely store backups of weekly in-person meeting—to discuss employee accom-
its client companies’ data. It’s a fast-growing business, and plishments. Whenever a manager notes that an employee
for founder David Brown, one important challenge has been has done something extraordinary, Brown asks for one of
making sure employees know the company appreciates them the managers besides the person’s direct supervisor to thank
even as everyone is scrambling to keep up with the demands the employee in person. Brown has also made a personal
of expanding a small business. commitment to write thank-you notes. In fact, with e-mail the
With about three dozen people to think about, Brown norm at his technology company, he makes some of the notes
first tried a methodical approach: He created an employee- stand out by writing them by hand and mailing them to the
of-the-month program in which the lucky recipient would employees at home.
receive a thank-you e-mail message, a $25 gift card, and rec- One employee who thinks the extra effort matters is
ognition for all employees to see on the company’s intranet. engineer Stephanie Lewis. One day Lewis returned home to
Brown saw this program as one he could readily find the find a note from Brown, observing that he had heard dur-
time to implement, and he hoped the reward and recognition ing management meetings that Lewis had done exception-
would inspire high levels of job involvement and organiza- ally well in working with a customer. Brown thanked her for
tional commitment. the effort. Lewis’s reaction: “It made me feel important to
One advantage of a small company is that you can get something so personal and unique” from her company’s
quickly see people’s reactions to your efforts. Unfortunately, busy leader.
what Brown saw on people’s faces and heard in their con- Just as communicating “thank you” has helped with motiva-
versations was that recipients of the employee-of-the-month tion, going the extra mile to communicate has helped Datotel’s
rewards were not exactly excited. The program was just too managers stay connected with one another and the company’s
formulaic and impersonal. If Datotel was to keep employees mission. As the company grew and jobs became more special-
engaged, it needed a different way to show that their efforts ized, Brown recognized that he would have to bring people
mattered. together formally to share information about what was happen-
So Brown tried a different approach, even though it requires ing. He began to call meetings once a quarter, and so that the
more effort. He committed his eight managers to noticing environment will be positive, he establishes a theme he thinks
and reporting employee accomplishments. To implement will get employees thinking and generate some fun. When
the theme was “Rumble in the Jungle,” the company leaders 2. Suggest several measures Datotel could use to evalu-
dressed as boxers, and when the theme was “Top Gun,” they ate the success of its employee retention efforts. Be
dressed as aviators and met in an airplane hangar. sure these are practical for a company of a few dozen
The effort to allow for fun is interwoven with the com- employees.
pany’s core values: passion, integrity, fun, teamwork, “supe- 3. In a company as small as Datotel, losing even one
rior business value,” and “improving the community in employee can present real difficulties. Suppose one of
which we work.” These aim to unite the employees in a com- Datotel’s managers begins to have performance prob-
mitment to customer service that gives the company an edge lems and seems unwilling or unable to improve. Sug-
in the industry. The values are also meant to be an advantage gest how you, as an HR consultant, could help David
for recruiting and retaining the best people. On Datotel’s Brown resolve this problem in a way that is fair to
website, the “Inside Datotel” page lists 10 reasons for want- everyone involved and that keeps the company moving
ing to work at the company, and the top reason is the core forward.
values: “Our Core Values represent everything that we stand
for, and we take pride in them.” SOURCES: Datotel corporate website, www.datotel.com, accessed July 8,
2015; Nadine Heintz, “Building a Culture of Employee Appreciation,” Inc.,
QUESTIONS September 2009, www.inc.com; Jeremy Nulik, “Never Stop Being a Student of
Business,” Small Business Monthly (St. Louis), July 2009, www.sbmon.com;
1. Based on the information given, which sources of job Christopher Boyce, “Engineer Finds Solution to Business Problem,” St. Louis
satisfaction has Datotel addressed? What other sources Post-Dispatch, June 12, 2009, Business & Company Resource Center, http://
might the company address, and how? galenet.galegroup.com.
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Pay Structure Decisions
PART FOUR
11
C H A P T E R
Compensation of Human Resources
LEARNING OBJECTIVES
LO 11-1 List the main decision areas and concepts in employee

compensation management. page 457
LO 11-2 Describe the major administrative tools used to

manage employee compensation. page 461
LO 11-3 Explain the importance of competitive labor market and product

market forces in compensation decisions. page 470
LO 11-4 Discuss the significance of process issues such as

communication in compensation management. page 474
LO 11-5 Describe new developments in the design of pay structures. page 475

LO 11-6 Explain where the United States stands from an
international perspective on pay issues. page 477
LO 11-7 Explain the reasons for the controversy over executive pay. page 482
LO 11-8 Describe the regulatory framework for employee compensation. page 483
456
>>>
Increasing Wages and Salaries: The Role of Labor
Market Competition and Business Strategy
Many companies have recently raised wage and consumer-oriented business” in the future. To
salary rates for their employees. Walmart, for execute that strategic change, the company says it
example, has raised its lowest pay rate to $9/hour. will need “a better and more informed work force.”
(Previously, employees in some states could earn So, competitive market forces play a role in pay
as little as $7.25/hour, the mandated federal mini- level decisions. Companies with low wages, many
mum wage.) Other retailers like Target and Gap employees, and high visibility, such as Walmart and
have made similar moves. McDonald’s has also McDonald’s, have also faced pressure (including pro-
raised its wages. The reasons they have given vary. tests) to raise wages so that their employees have a
One reason is that it is a necessary response to better chance of being able to live on their wages. It
the tightening of labor markets (i.e., more competi- is possible that such pressures, together with labor
tion for workers). That makes it more challenging market tightening, have played a role in recent pay
to compete to hire not only enough workers but increases at such companies. Some companies such
also workers of the necessary quality. Employee as Costco have long paid higher wages than com-
wages and benefits are a major share of total costs petitors in the belief that doing so can be good for
at these companies, and they traditionally seek to workers and good for the company, as long as the
keep a tight rein on such costs to keep their prod- higher wages bring advantages in terms of objec-
uct prices low for consumers and to generate profits tives such as good employee relations, retention,
for shareholders. productivity, quality, and/or innovation.
Aetna, an insurance company, has a different
SOURCES: S. Strom, “McDonald’s to Raise Pay at Outlets It Operates,”
business model that is somewhat less cost control The New York Times, April 2, 2015, p. B1; P. Zorro, “Target Says It Will
oriented. Aetna recently raised its lowest pay rate Raise Wages, Too,” The Wall Street Journal, March 19, 2015, p. B3;
M. Krantz, “Walmart’s Wages Get CEO’s Attention,” USA Today, March 2,
to $16 (from roughly $12/hour previously) because 2015, p. 2B; A. Matthews and T. Francis, “Aetna Sets Wage Floor: $16 an
it plans to move toward becoming a “much more Hour,” The Wall Street Journal, January 13, 2015, p. B1.
Introduction
From the employer’s point of view, pay is a powerful tool for furthering the organiza- LO 11-1
tion’s strategic goals. First, pay has a large impact on employee attitudes and behaviors. List the main decision
areas and concepts in
It influences the kind of employees who are attracted to (and remain with) the organiza-
employee compensa-
tion. In the chapter-opening story, Aetna decided to change its pay level in an effort to tion management.
attract a workforce more in line with its future business strategy. Pay can also be a pow-
erful motivational tool for aligning current employees’ interests with those of the broader
organization (an issue we address more fully in Chapter 12). Second, employee compen-
sation is typically a significant organizational cost and thus requires close scrutiny. As
Table 11.1 shows, total compensation (cash and benefits) accounts for 9% to 46% of
revenues, depending on the industry.
457
458 CHAPTER 11 Pay Structure Decisions
Table 11.1
Total Compensation INDUSTRY TOTAL COMPENSATION/REVENUES
as a Percentage of
Revenues, Median Hospitals 46%
by Industry Manufacturing 19
Utilities 15
Insurance/health care 9
All industries 22
SOURCE: Data from PwC Saratoga’s 2012/2013 U.S. Human Capital Effectiveness Report.
For Walmart and other companies, competing by keeping prices low for customers
translates into paying low wages and raising them only when pressure from labor market
competition (and perhaps from other sources, as we saw in the Chapter Opening) becomes
sufficiently strong, such as now, with growth in the economy and lower unemployment
rates. The economic cycle means economic activity and labor market competition will
eventually slow. When things slow down for companies, they often cut labor costs by
reducing headcount or reducing variable aspects of compensation (e.g., profit-sharing
bonuses or 401k retirement-plan contributions). But every company should plan ahead
for how they will have an efficient workforce in place and ready to go when the demand
for their products picks up again. For example, when Toyota paused automobile assembly
at U.S. plants due to slow sales, it did not lay off workers. It did offer a voluntary buyout
plan under which workers signing up received 10 weeks of salary plus 2 weeks salary for
every year worked. Workers who remained worked 36 hour rather than 40-hour weeks and
reallocated their time to receive increased training and look for new ways to reduce costs.
From the employees’ point of view, policies having to do with wages, salaries, and
other earnings affect their overall income and thus their standard of living. Both the level
of pay and its seeming fairness compared with others’ pay are important. Pay is also
often considered a sign of status and success. Employees attach great importance to pay
decisions when they evaluate their relationship with the organization. Therefore, pay
decisions must be carefully managed and communicated.
Total compensation, as noted, consists of cash compensation (salary, merit increases,
bonuses, stock options, and other incentives) and benefits (e.g., health insurance, paid
vacation, unemployment compensation). In the current chapter, we focus on salary lev-
els. In Chapter 12, we address merit increase and incentive issues. In Chapter 13, we
examine benefits decisions. Total rewards, total returns, and inducements are concepts
Pay Structure that include not only total compensation, but also any other (nonmonetary) rewards
The relative pay of
different jobs ( job (interesting or fulfilling work, good co-workers, development opportunities, recogni-
structure) and how tion) that are associated with the employment relationship. These nonmonetary rewards
much they are paid (pay are discussed in Chapters 4, 5, and 10. An organization must choose to what degree its
level). total rewards strategy depends on monetary rewards (compensation) and what mix of
compensation components will be used.
Pay Level Salary level decisions can be broken into two areas: pay structure and individual pay.
The average pay, In this chapter we focus on pay structure, which in turn entails a consideration of pay
including wages, sala-
ries, and bonuses, of
level and job structure. Pay level is defined here as the average pay (including wages,
jobs in an organization. salaries, and bonuses) of jobs in an organization. (Benefits also matter, but these are
discussed separately in Chapter 13.) Job structure refers to the relative pay of jobs in an
Job Structure organization. Consider the same two jobs in two different organizations. In Organiza-
The relative pay of jobs tion 1, jobs A and B are paid an annual average compensation of $40,000 and $60,000,
in an organization. respectively. In Organization 2, the pay rates are $45,000 and $55,000, respectively.
CHAPTER 11 Pay Structure Decisions 459
Organizations 1 and 2 have the same pay level ($50,000), but the job structures (relative
rates of pay) differ.
Both pay level and job structure are characteristics of organizations and reflect deci-
sions about jobs rather than about individual employees. This chapter’s focus is on why
and how organizations attach pay policies to jobs. In the next chapter we look within
jobs to discuss the different approaches that can determine the pay of individual employ-
ees as well as the advantages and disadvantages of these different approaches.
Why is the focus on jobs in developing a pay structure? As the number of employees
in an organization increases, so too does the number of human resource management
decisions. In determining compensation, for example, each employee must be assigned a
rate of pay that is acceptable in terms of external, internal, and individual equity (defined
later) and in terms of the employer’s cost. Although each employee is unique and thus
requires some degree of individualized treatment, standardizing the treatment of similar
employees (those with similar jobs) can help greatly to make compensation administra-
tion and decision making more manageable and more equitable. Thus pay policies are
often attached to particular jobs rather than tailored entirely to individual employees.
Equity Theory and Fairness

In discussing the consequences of pay decisions, it is useful to keep in mind that employ-
ees often evaluate their pay relative to that of other employees. Equity theory suggests
that people evaluate the fairness of their situations by comparing them with those of
other people.1 Equity is not equality. Equal pay for two workers with unequal contribu-
tions (inputs in equity theory) would likely be perceived as unfair if this information is
known, especially by the worker making the stronger contributions to the organization.
According to equity theory, a person (p) compares her own ratio of perceived outcomes
O (pay, benefits, working conditions) to perceived inputs I (effort, ability, experience) to
the ratio of a comparison other (o).
Op /Ip <, >, or = Oo /Io?
If p’s ratio (Op/Ip) is smaller than the comparison other’s ratio (Oo/Io), underreward
inequity results. If p’s ratio is larger, overreward inequity results, although evidence sug-
gests that this type of inequity is less likely to occur and less likely to be sustained
because p may rationalize the situation by reevaluating her outcomes less favorably or
inputs (self-worth) more favorably.2
The consequences of p’s comparisons depend on whether equity is perceived. If
equity is perceived, no change is expected in p’s attitudes or behavior. In contrast, per-
ceived inequity may cause p to restore equity. Some ways of restoring equity are counter-
productive, including (1) reducing one’s own inputs (not working as hard), (2) increasing
one’s outcomes (such as by theft), or (3) leaving the situation that generates perceived
inequity (leaving the organization or refusing to work or cooperate with employees who
are perceived as overrewarded).
Equity theory’s main implication for managing employee compensation is that to an
important extent, employees evaluate their pay by comparing it with what others get
paid, and their work attitudes and behaviors are influenced by such comparisons. For
example, consider the contract that shortstop Alex Rodriguez, now a New York Yankee
(or perhaps we should say, still a New York Yankee), signed years ago with the Texas
Rangers baseball team. One provision stated that during the the first several years of his
contract, his base compensation had to be at least $2 million higher than any other short-
stop in major league baseball. A second provision permitted Rodriguez to void seasons
in the latter years of his contract unless his base compensation was at least $1 million
higher than any position player in major league baseball. Otherwise, Rodriguez would
be free to leave his current team. These provisions that pegged Rodriguez’s pay to other
players’ pay provide a compelling example of the importance of being paid well in rela-
tive terms. (We later learned that “A-Rod” apparently felt compelled to break some rules
in hopes of helping his on-field performance live up to his pay.)
Another implication is that employee perceptions are what determine their evalua-
tion. The fact that management believes its employees are paid well compared with those
of other companies does not necessarily translate into employees’ beliefs. Employees
may have different information or make different comparisons than management. For
example, Toyota recently set a goal to move from using wages in the U.S. auto industry
as the standard of comparison to using the (lower) prevailing wages in the state where
each plant is located. To do so, however, Toyota recognizes its “challenge will be how
to educate team members and managers . . . so they can understand and accept [this]
change.”
Two types of employee social comparisons of pay are especially relevant in mak-
ing pay level and job structure decisions. (See Table 11.2.) First, external equity pay
comparisons focus on what employees in other organizations are paid for doing the
same general job. Such comparisons are likely to influence the decisions of applicants
to accept job offers as well as the attitudes and decisions of employees about whether to
stay with an organization or take a job elsewhere. (See Chapters 5 and 10.) The organiza-
tion’s choice of pay level influences its employees’ external pay comparisons and their
consequences. A market pay survey is the primary administrative tool organizations use
in choosing a pay level.
Second, internal equity pay comparisons focus on what employees within the same
organization, but in different jobs, are paid. Employees make comparisons with lower-
level jobs, jobs at the same level (but perhaps in different skill areas or product divi-
sions), and jobs at higher levels. These comparisons may influence general attitudes of
employees; their willingness to transfer to other jobs within the organization; their will-
ingness to accept promotions; their inclination to cooperate across jobs, functional areas,
or product groups; and their commitment to the organization. The organization’s choice
Table 11.2
Pay Structure Concepts and Consequences
PAY STRUCTURE ADMINISTRATIVE FOCUS OF EMPLOYEE CONSEQUENCES OF

DECISION AREA TOOL PAY COMPARISONS EQUITY PERCEPTIONS
Pay level Market pay surveys External equity External employee move-
ment (attraction and retention
of quality employees); labor
costs; employee attitudes
Job structure Job evaluation Internal equity Internal employee move-
ment (promotion, transfer,
job rotation); cooperation
among employees; employee
attitudes
of job structure influences its employees’ internal comparisons and their consequences.
Job evaluation is the administrative tool organizations use to design job structures.
In addition, employees make internal equity pay comparisons with others perform-
ing the same job. Such comparisons are most relevant to the following chapter, which
focuses on using pay to recognize individual contributions and differences.
We now turn to ways to choose and develop pay levels and pay structures, the conse-
quences of such choices, and the ways two administrative tools—market pay surveys and
job evaluation—help in making pay decisions.
Developing Pay Levels

MARKET PRESSURES
Any organization faces two important competitive market challenges in deciding what to LO 11-2
pay its employees: product market competition and labor market competition.3 Describe the
major administra-
tive tools used to
manage employee
Product Market Competition compensation.
First, organizations must compete effectively in the product market. In other words, they
must be able to sell their goods and services at a quantity and price that will bring a suf-
ficient return on their investment. Organizations compete on multiple dimensions (qual-
ity, service, and so on), and price is one of the most important dimensions. An important
influence on price is the cost of production.
An organization that has higher labor costs than its product market competitors will
have to charge higher average prices for products of similar quality. Thus, for example,
if labor costs are 30% of revenues at Company A and Company B, but Company A has
labor costs that are 20% higher than those of Company B, we would expect Company A
to have product prices that are higher by (0.30 × 0.20) = 6%. At some point, the higher
price charged by Company A will contribute to a loss of its business to competing com-
panies with lower prices (like Company B). Until recently, in the automobile industry,
hourly labor cost (including not only wages, but also retiree and active worker benefits
such as health care) in assembly plants averaged $75 for the U.S. Big Three (Chrysler,
General Motors, Ford), compared to $52 for Toyota and Honda plants in the United
States. On average, it takes roughly 30 hours to assemble a car. So, the labor cost per
car for the Big Three was $30 × $75 = $2,250, compared to $30 × $52 = $1,560 for
Toyota and Honda. That labor cost disadvantage had to have been offset by superior
vehicle quality, performance, and so forth for the Big Three to make a profit. The bank-
ruptcies at Chrysler and General Motors indicate that was not possible. More recently,
the U.S. Big Three have reduced their labor costs to $49/hour at Chrysler and $59/hour
at GM and Ford by hiring new workers at lower wages and by reducing benefits costs.4
That is a major change, now putting them in the same range as Honda’s and Toyota’s
$50/hour to $55/hour U.S. labor cost. As a result, the Big Three have become much
more competitive and their financial performance has improved dramatically. Toyota’s
labor costs have risen over time in the United States due to the inevitable aging of its
workforce and the associated increased health care and retiree benefits. In a sense, it
is going through the same life cycle as the Big Three did. In contrast, a newly opened
plant, such as the Volkswagen plant in Chattanooga, Tennessee, is estimated to have
hourly labor costs of $27 initially.5 That $27 per hour cost to build Volkswagen Pas-
sats in Tennessee is much lower than Volkswagen’s hourly labor cost to build cars in
Germany, which has been estimated as high as nearly $100 (when the euro was at its
strongest against the U.S. dollar, but more recently is estimated to be about $38/hour).6
Due to this labor cost saving (and due to lower costs for parts, transportation, and so
forth), Volkswagen expected to be able to reduce the price of a Passat from $28,000
(when it was built in Germany) to $20,000 when it was first built in Tennessee. As we
will see in the “Competing through Globalization” box later in the chapter, even lower
labor costs can be found in Mexico (and even lower labor costs than in Mexico in other
parts of the world). Audi, Honda, Mazda, and Nissan have all announced plans to open
new North American plants, but in Mexico. Only recently, for the first time in many
years, did an automobile company (Chinese-owned Volvo) announce plans to build a
new plant in the United States.7
The cost of labor is directly reflected in the price of the car. Therefore, product mar-
ket competition places an upper bound on labor costs and compensation. This upper
bound is more constrictive when labor costs are a larger share of total costs and when
demand for the product is affected by changes in price (i.e., when demand is elastic).
Unless higher labor costs are offset by higher worker productivity or desirable product
features that allow a higher product price, it will be difficult to sustain these relatively
high costs in a competitive product market. As we have noted, Volkswagen will be able
to lower the price of its Passat by producing it in the United States where its labor costs
will be lower than in Germany and lower than those of U.S. competitors. The search for
lower labor costs is a continuous process. As companies move production to low-wage
countries, wages there eventually rise, sometimes causing companies to move produc-
tion to countries with still lower wages.
What components make up labor costs? A major component is the average cost
per employee. This is made up of both direct payments (such as wages, salaries, and
bonuses) and indirect payments (such as health insurance, Social Security, and unem-
ployment compensation). A second component of labor cost is the staffing level (num-
ber of employees). Not surprisingly, financially troubled organizations often seek to cut
costs by focusing on one or both components. Staff reductions, hiring freezes, wage and
salary freezes, and sharing benefits costs with employees are several ways of making the
organization’s labor costs more competitive in the product market.
Labor Market Competition

A second important competitive market challenge is labor market competition, which
reflects the number of workers available relative to the number of jobs available. Short-
ages and surpluses influence pay levels. For example, as we saw in the chapter-opening
story, a shortage of workers will put upward pressure on wages and salaries, as organiza-
tions must pay to compete against other companies that hire similar employees. These
labor market competitors typically include not only companies that have similar prod-
ucts but also those in different product markets that hire similar types of employees. If
an organization is not competitive in the labor market, it will fail to attract and retain
employees of sufficient numbers and quality. For example, even if a computer manufac-
turer offers newly graduated electrical engineers the same pay as other computer manu-
facturers, if automobile manufacturers and other labor market competitors offer salaries
$5,000 higher, the computer company may not be able to hire enough qualified electrical
engineers. Labor market competition places a lower bound on pay levels.
EMPLOYEES AS A RESOURCE
Because organizations have to compete in the labor market, they should consider their
employees not just as a cost but as a resource in which the organization has invested and
from which it expects valuable returns.8 Although controlling costs directly affects an
organization’s ability to compete in the product market, the organization’s competitive
position can be compromised if costs are kept low at the expense of employee productiv-
ity and quality. Having higher labor costs than your competitors is not necessarily a con-
cern if you also have the best and most effective workforce, one that produces products
more efficiently and with better quality.
Pay policies and programs are one of the most important human resource tools for
encouraging desired employee behaviors and discouraging undesired behaviors. There-
fore, they must be evaluated not just in terms of costs but in terms of the returns they
generate—how they attract, retain, and motivate a high-quality workforce. For example,
if the average revenue per employee in Company A is 20% higher than in Company
B, it may not be important that the average pay in Company A is 10% higher than in
Company B.
DECIDING WHAT TO PAY

Although organizations face important external labor and product market pressures in
setting their pay levels, a range of discretion remains.9 How large the range is depends on
the particular competitive environment the organization faces. Where the range is broad,
an important strategic decision is whether to pay above, at, or below the market average.
The advantage of paying above the market average is the ability to attract and retain the
top talent available and help generate positive job attitudes (e.g., satisfaction), all of
which can translate into a highly effective and productive workforce. The disadvantage,
however, is the added cost.10
Under what circumstances do the benefits of higher pay outweigh the higher costs?
According to efficiency wage theory, one circumstance is when organizations have tech- Efficiency Wage
nologies or structures that depend on highly skilled employees. For example, organiza- Theory
A theory stating that
tions that emphasize decentralized decision making may need higher-caliber employees.
wages influence worker
Another circumstance where higher pay may be warranted is when an organization has productivity.
difficulties observing and monitoring its employees’ performance. It may therefore wish
to provide an above-market pay rate to ensure the incentive to put forth maximum effort.
The theory is that employees who are paid more than they would be paid elsewhere will
be reluctant to shirk because they wish to retain their good jobs.11 Interestingly, some
companies have decided that it sometimes makes sense to pay employees to leave if they
are staying only because of the money and despite being a better fit elsewhere. See the
“Competing through Sustainability” box.
MARKET PAY SURVEYS

To compete for talent, organizations use benchmarking, a procedure in which an organi- Benchmarking
zation compares its own practices against those of the competition. In compensation Comparing an orga-
nization’s practices
management, benchmarking against product market and labor market competitors is
against those of the
typically accomplished through the use of one or more pay surveys, which provide infor- competition.
mation on going rates of pay among competing organizations.
The use of pay surveys requires answers to several important questions:12
1. Which employers should be included in the survey? Ideally, they would be the key
labor market and product market competitors.
2. Which jobs are included in the survey? Because only a sample of jobs is ordinarily
used, care must be taken that the jobs are representative in terms of level, func-
tional area, and product market. Also, the job content must be sufficiently similar.
Pay to Quit
Zappos, an online shoe sales to quit (up to 3 months of sal- somewhere they
company, recently made major ary) if they don’t like the new don’t want to be
changes to its management sys- management system. Zappos isn’t healthy for the employee or
tem. There are now supposed also has an older program that the company.”
to be no job titles and traditional pays new hires $2,000 to quit if
bosses. In place of hierarchical, they feel they made a mistake DISCUSSION QUESTIONS
command-control decision taking a job at Zappos. Amazon, 1. What is the business case or
making, Zappos says it will have which acquired Zappos several rationale for paying employ-
self-governed teams (“circles”) in years ago, has also adopted a ees to quit?
an effort to make the organiza- similar program, which it calls 2. Should more companies
tion more innovative and faster Pay to Quit. Amazon makes the adopt such a program?
moving by eliminating hierarchy offer once per year to work- Explain.
and giving people more freedom ers in its “fulfillment centers” 3. Have you ever had a job
to come up with new ideas and (warehouses). In employees’ first where you would have quit if
act on them. One problem with year, they get paid $2,000 to there had been a “pay to quit”
successfully implementing such quit, which goes up by $1,000/ program? Why or why not?
a major change is that the peo- year to a maximum of $5,000. SOURCES: J. McGregor, “Zappos to Employ-
ple who fit a more hierarchical Jeff Bezos, the head of Ama- ees: Get Behind Our ‘No Bosses’ Approach,
system may not fit the new self- zon, has stated that Amazon or Leave with Severance,” The Washington
Post, March 31, 2015, www.washingtonpost.
management system. That lack wants ”to encourage folks to com; Kim Peterson, “Why Amazon Pays
of fit can generate resistance take a moment and think about Employees $5,000 to Quit,” CBS Money-
and poor execution. As one solu- what they really want. In the watch, accessed April 19, 2015, www.cbs.
news.com.
tion, Zappos will pay employees long run, an employee staying
3. If multiple surveys are used, how are all the rates of pay weighted and combined?
Organizations often have to weight and combine pay rates because different sur-
veys are often tailored toward particular employee groups (labor markets) or prod-
uct markets. The organization must decide how much relative weight to give to its
labor market and product market competitors in setting pay.
Several factors affect decisions on how to combine surveys.13 Product market com-
parisons that focus on labor costs are likely to deserve greater weight when (1) labor
costs represent a large share of total costs, (2) product demand is elastic (it changes in
response to product price changes), (3) the supply of labor is inelastic, and (4) employee
skills are specific to the product market (and will remain so). In contrast, labor market
comparisons may be more important when (1) attracting and retaining qualified employ-
ees is difficult and (2) the costs (administrative, disruption, and so on) of recruiting
replacements are high.
As this discussion suggests, knowing what other organizations are paying is only one
part of the story. It is also necessary to know what those organizations are getting in
return for their investment in employees. To find that out, some organizations examine
ratios such as revenues/employees and revenues/labor cost. The first ratio includes the
staffing component of employee cost but not the average cost per employee. The sec-
ond ratio, however, includes both. Note that comparing these ratios across organizations
requires caution. For example, different industries rely on different labor and capital
464
resources. So comparing the ratio of revenues to labor costs of a petroleum company

(capital intensive, high ratio) to a hospital (labor intensive, low ratio) would be like
comparing apples and oranges. But within industries, such comparisons can be useful.
Besides revenues, other return-on-investment data might include product quality, cus-
tomer satisfaction, and potential workforce quality (such as average education and skill
levels).
Rate Ranges
As the preceding discussion suggests, obtaining a single “going rate” of market pay is a
complex task that involves a number of subjective decisions; it is both an art and a sci-
ence. Once a market rate has been chosen, how is it incorporated into the pay structure?
Typically—especially for white-collar jobs—it is used for setting the midpoint of pay
ranges for either jobs or pay grades (discussed next). Market survey data are also often
collected on minimum and maximum rates of pay as well. The use of rate ranges per- Rate Ranges
mits a company to recognize differences in employee performance, seniority, training, Different employees in
the same job may have
and so forth in setting individual pay (discussed in the next chapter). For some blue-
different pay rates.
collar jobs, however, particularly those covered by collective bargaining contracts, there
may be a single rate of pay for all employees within the job.
Key Jobs and Nonkey Jobs

In using pay surveys, it is necessary to make a distinction between two general types of
jobs: key jobs (or benchmark jobs) and nonkey jobs. Key jobs (also known as benchmark Key Jobs
jobs) have relatively stable content and—perhaps most important—are common to many Benchmark jobs,
organizations. Therefore, it is possible to obtain market pay survey data on them. Note, used in pay surveys,
that have relatively
however, that to avoid too much of an administrative burden, organizations may not stable content and
gather market pay data on all such jobs. In contrast to key jobs, nonkey jobs are, to an are common to many
important extent, unique to organizations (and/or have content different from jobs in organizations.
other organizations having the same title). Thus, by definition, they cannot be directly
valued or compared through the use of market surveys. Therefore, they are treated differ- Nonkey Jobs
ently in the pay-setting process. Jobs that are unique
to organizations and
that cannot be directly
DEVELOPING A JOB STRUCTURE valued or compared
through the use of mar-
Although external comparisons of the sort we have been discussing are important, ket surveys.
employees also evaluate their pay using internal comparisons. So, for example, a vice
president of marketing may expect to be paid roughly the same amount as a vice presi-
dent of information systems because they are at the same organizational level, with simi-
lar levels of responsibility and similar impacts on the organization’s performance. A job
structure can be defined as the relative worth of various jobs in the organization, based
on these types of internal comparisons. We now discuss how such decisions are made. Job Evaluation
An administrative pro-
cedure used to mea-
Job Evaluation sure internal job worth.
One typical way of measuring internal job worth is to use an administrative procedure
called job evaluation. A job evaluation system is composed of compensable factors Compensable
and a weighting scheme based on the importance of each compensable factor to the Factors
The characteristics
organization. Simply stated, compensable factors are the characteristics of jobs that an of jobs that an orga-
organization values and chooses to pay for. These characteristics may include job com- nization values and
plexity, working conditions, required education, required experience, and responsibility. chooses to pay for.
Most job evaluation systems use several compensable factors. Job analysis (discussed in
Chapter 4) provides basic descriptive information on job attributes, and the job evalua-
tion process assigns values to these compensable factors.
Scores can be generated in a variety of ways, but they typically include input from a
number of people. A job evaluation committee commonly generates ratings. Although
there are numerous ways to evaluate jobs, the most widely used is the point-factor sys-
tem, which yields job evaluation points for each compensable factor.14
The Point-Factor System

After generating scores for each compensable factor on each job, job evaluators often
apply a weighting scheme to account for the differing importance of the compensable
factors to the organization. Weights can be generated in two ways. First, a priori weights
can be assigned, which means factors are weighted using expert judgments about the
importance of each compensable factor. Second, weights can be derived empirically
based on how important each factor seems in determining pay in the labor market. (Sta-
tistical methods such as multiple regression can be used for this purpose.) For the sake
of simplicity, we assume in the following example that equal a priori weights are cho-
sen, which means that the scores on the compensable factors can be simply summed.
Table 11.3 shows an example of a three-factor job evaluation system applied to three
jobs. Note that the jobs differ in the levels of experience, education, and complexity
required. Summing the scores on the three compensable factors provides an internally
oriented assessment of relative job worth in the organization. In a sense, the Programmer
Analyst job is worth 41% (155/110 − 1) more than the computer tech job, and the sys-
tems analyst job is worth 91% (210/110 − 1) more than the computer tech job. Whatever
pay level is chosen (based on benchmarking and competitive strategy), we would expect
the pay differentials to be somewhat similar to these percentages. The internal job evalu-
ation and external survey-based measures of worth can, however, diverge.
DEVELOPING A PAY STRUCTURE

In the example provided in Table 11.4, there are 15 jobs, 10 of which are key jobs. For
these key (also known as benchmark) jobs, both pay survey and job evaluation data are
available. For the five nonkey jobs, by definition, no survey data are available, only
job evaluation information. Note that, for simplicity’s sake, we work with data from
only two pay surveys and we use a weighted average that gives twice as much weight
to survey 1. Also, our example works with a single structure. Many organizations have
multiple structures that correspond to different job families (like clerical, technical, and
professional) or product divisions.
How are the data in Table 11.4 combined to develop a pay structure? First, it is impor-
tant to note that both internal and external comparisons must be considered in making
compensation decisions. However, because the pay structures suggested by internal and
Table 11.3
Example of a COMPENSABLE FACTORS
Three-Factor Job JOB TITLE EXPERIENCE EDUCATION COMPLEXITY TOTAL
Evaluation System
Computer tech 40 30 40 110
Programmer analyst 40 50 65 155
Systems analyst 65 60 85 210
Table 11.4
Job Evaluation and Pay Survey Data
SURVEY
KEY JOB SURVEY 1 SURVEY 2 COMPOSITE
JOB JOB? JOB TITLE EVALUATION (S1) (S2) (2/3*S1 + 1/3*S2)
A y Computer tech 110 $3,219 $2,770 $3,070

B y Engineering tech I 115 3,530 3,053 3,370
C y Programmer analyst 155 4,666 4,142 4,491
D n Industrial engineer 165 — — —
E n Compensation analyst 170 — — —
F y Accountant 190 5,781 4,958 5,507
G y Systems analyst 210 6,840 6,166 6,614
H n Director of personal 225 — — —
I y Software engineer 245 7,971 7,210 7,717
J y System analyst—senior 255 8,328 6,832 7,829
K y Accounting manager 270 9,389 9,043 9,274
L y Electrical engineer—senior 275 8,794 7,670 8,419
M n Accounting director 315 — — —
N y Director of engineering 320 11,242 10,515 11,000
O n Chief scientist 330 — — —
SOURCES: Adapted from S. Rynes, B. Gerhart, G. T. Milkovich, and J. Boudreau, Current Compensation Professional Institute (Scottsdale, AZ:
American Compensation Association, 1988); G. T. Milkovich and B. Gerhart, Cases in Compensation, Version 11.1e (2013). Reprinted with permission.
external comparisons do not necessarily converge, employers must carefully balance

them. Studies suggest that employers may differ significantly in the degree to which they
place priority on internal- or external-comparison data in developing pay structures.15
At least three pay-setting approaches, which differ according to their relative empha-
sis on external or internal comparisons, can be identified.16
MARKET SURVEY DATA

The approach with the greatest emphasis on external comparisons (market survey data) is
achieved by directly basing pay on market surveys that cover as many key jobs as possi-
ble. For example, the rate of pay for job A in Table 11.5 would be $3,070; for job B,
$3,370; and for job C, $4,491. For nonkey jobs (jobs D, E, H, M, and O), however, pay
survey information is not available, and we must proceed differently. Basically, we
develop a market pay policy line based on the key jobs (for which there are both job evalu- Pay Policy Line
ation and market pay survey data available). As Figure 11.1 shows, the data can be plot- Equation that describes
ted with a line of best fit estimated. This line can be generated using a statistical procedure the relationship
between a job’s pay
(regression analysis). Regressing the data from the “Survey Composite” column in and its job evaluation
Table 11.4 on the data from the “Job Evaluation” column in Table 11.4 (using only rows points.
without missing data) yields the equation
−$1,058 + $36.30 × job evaluation points
In other words, the predicted monthly salary (based on fitting a line to the key job
data) is obtained by plugging the number of job evaluation points into this equation.
Thus, for example, job M, a nonkey job, would have a predicted monthly salary of
−$1058 + $36.30 × 315 = $10,378.
Table 11.5
Pay Midpoints under Different Approaches
KEY JOB (1) (2) (3)

JOB JOB? JOB TITLE EVALUATION SURVEY + POLICY PAY POLICY GRADES
A y Computer tech 110 $3,070 $2,936 $3,480

B y Engineering tech I 115 3,370 3,117 3,480
C y Programmer analyst 155 4,491 4,570 5,296
D n Industrial engineer 165 4,933 4,933 5,296
E n Compensation analyst 170 5,114 5,114 5,296
F y Accountant 190 5,507 5,840 5,296
G y Systems analyst 210 6,614 6,566 7,110
H n Director of personnel 225 7,110 7,110 7,110
I y Software engineer 245 7,717 7,837 7,110
J y Systems analyst—senior 255 7,828 8,200 8,926
K y Accounting manager 270 9,274 8,744 8,926
L y Electrical engineer—senior 275 8,419 8,926 8,926
M n Accounting director 315 10,378 10,378 10,741
N y Director of engineering 320 11,000 10,560 10,741
O n Chief scientist 330 10,922 10,922 10,741
SOURCES: Adapted from S. Rynes, B. Gerhart, G. T. Milkovich, and J. Boudreau, Current Compensation Professional Institute (Scottsdale, AZ: Ameri-
can Compensation Association, 1988); G. T. Milkovich and B. Gerhart, Cases in Compensation, Version 11.1e (2013). Reprinted with permission.
As Figure 11.1 also indicates, it is not necessary to fit a straight line to the job eval-
uation and pay survey data. In some cases, a pay structure that provides increasing
monetary rewards to higher-level jobs may be more consistent with the organization’s
goals or with the external market. For example, nonlinearity may be more appropriate
Figure 11.1 $14,000

Pay Policy Lines, Predicted salary for
Linear and Natural 12,000 nonkey job M = $11,384
Logarithmic N
Functions
10,000
Predicted salary for K
Monthly salary
nonkey job M = $10,377 L

8,000 I
J
G
6,000
C F
4,000 B
A
2,000 Linear Job evaluation points
Natural logarithmic for nonkey job M = 315
0
40 80 120 160 200 240 280 320 360
Job evaluation points
if higher-level jobs are especially valuable to organizations and the talent to perform
such jobs is rare. The curvilinear function in Figure 11.1 is obtained in the same way as
above, except that the salary survey data are first transformed using the natural logarithm
(and then the equation result is transformed back, using for example the EXP function in
Excel). The resulting equation is:
Natural logarithm of pay = $7.446 + (0.006 × job evaluation points)
Pay Policy Line

A second pay-setting approach that combines information from external and internal
comparisons is to use the pay policy line to derive pay rates for both key and nonkey jobs.
This approach differs from the first approach in that actual market rates are no longer used
for key jobs. This introduces a greater degree of internal consistency into the structure
because the pay of all the jobs is directly linked to the number of job evaluation points.
Pay Grades
A third approach is to group jobs into a smaller number of pay classes, pay ranges, or
pay grades. Table 11.6 (see also Table 11.5, last column), for example, demonstrates one Pay Grades
possibility: a five-grade structure. Each job within a grade would have the same rate Jobs of similar worth
or content grouped
range (i.e., would be assigned the same midpoint, minimum, and maximum). The advan-
together for pay admin-
tage of this approach is that the administrative burden of setting separate rates of pay for istration purposes.
hundreds (even thousands) of different jobs is reduced. It also permits greater flexibility
in moving employees from job to job without raising concerns about, for example, going
from a job having 230 job evaluation points to a job with 215 job evaluation points.
What might look like a demotion in a completely job-based system is often a nonissue in
a grade-based system. Note that the range spread (the distance between the minimum Range Spread
and maximum) is larger at higher levels, in recognition of the fact that performance dif- The distance between
ferences are likely to have more impact on the organization at higher job levels. (See the minimum and maxi-
mum amounts in a pay
Figure 11.2.)
grade.
The disadvantage of using grades is that some jobs will be underpaid and others over-
paid. For example, job C and job F both fall within the same grade (Pay Grade 2). The
midpoint for job C under a grade system is $5,296 per month, or about $700 to $800 or
so more than under the two alternative pay-setting approaches in Table 11.5. Obviously,
this will contribute to higher labor costs and potential difficulties in competing in the
Table 11.6
Sample Pay Grade Structure
JOB EVALUATION POINTS RANGE MONTHLY PAY RATE RANGE

PAY GRADE MINIMUM MAXIMUM MINIMUM MIDPOINT MAXIMUM
1 100 150 $2,784 $3,480 $4,176

2 150 200 4,237 5,296 6,354
3 200 250 5,688 7,110 8,533
4 250 300 7,141 8,926 10,710
5 300 350 8,592 10,741 12,906
Figure 11.2 $14,000

Raw
Sample Pay Grade Policy
Structure 12,000
N
10,000
K
Monthly salary
L
8,000 I
J
G
6,000
C F
4,000 B
A
2,000
0
110 130 150 170 190 210 230 250 270 290 310 330 350
Job evaluation points
product market. Unless there is an expected return to this increased cost, the approach
is questionable. Job F, on the other hand, is paid roughly $200 to $500 less per month
under the grades system than it would be otherwise. Therefore, the company may find it
more difficult to compete in the labor market.
CONFLICTS BETWEEN MARKET PAY SURVEYS AND JOB EVALUATION

LO 11-3 An examination of Table 11.5 suggests that the relative worth of jobs is quite similar
Explain the importance overall, whether based on job evaluation or pay survey data. However, some inconsisten-
of competitive labor cies typically arise, and these are usually indicated by jobs whose average survey pay
market and product
market forces in com-
is significantly below or above the pay policy line. The closest case in Table 11.5 is
pensation decisions. job L, for which the average pay falls significantly below the policy line. One possible
explanation is that a relatively plentiful supply of people in the labor market are capable
of performing this job, so the pay needed to attract and retain them is lower than would
be expected given the job evaluation points. Another kind of inconsistency occurs when
market surveys show that a job is paid higher than the policy line (like job K). Again,
this may reflect relative supply and demand, in this case driving pay higher.
How are conflicts between external and internal equity resolved, and what are the
consequences? The example of the vice presidents of marketing and information tech-
nology may help illustrate the type of choice faced. The marketing VP job may receive
the same number of job evaluation points, but market survey data may indicate that it
typically pays less than the information technology VP job, perhaps because of tighter
supply for the latter. Does the organization pay based on the market survey (external
comparison) or on the job evaluation points (internal comparison)?
Emphasizing the internal comparison would suggest paying the two VPs the same. In
doing so, however, either the VP of marketing would be “overpaid” or the VP of infor-
mation technology would be “underpaid.” The former drives up labor costs (product
market problems); the latter may make it difficult to attract and retain a quality VP of
information technology (labor market problems).
Another consideration has to do with the strategy of the organization. In some orga-
nizations (like Pepsi and Nike) the marketing function is critical to success. Thus, even
though the market for marketing VPs is lower than that for information technology VPs,
an organization may choose to be a pay leader for the marketing position (pay at the
90th percentile, for example) but only meet the market for the information technology
position (perhaps pay at the 50th percentile). In other words, designing a pay structure
requires careful consideration of which positions are most central to dealing with critical
environmental challenges and opportunities in reaching the organization’s goals.17
What about emphasizing external comparisons? Two potential problems arise. First,
the marketing VP may be dissatisfied because she expects a job of similar rank and
responsibility to that of the information technology VP to be paid similarly. Second, it
becomes difficult to rotate people through different VP positions (for training and devel-
opment) because going to the marketing VP position might appear as a demotion to the
VP of information technology.
There is no one right solution to such dilemmas. Each organization must decide
which objectives are most essential and choose the appropriate strategy. However, there
has been a shift over time such that most organizations now emphasize external compari-
sons/market pricing, perhaps because of increasing competitive pressures over time.18
MONITORING COMPENSATION COSTS

Pay structure influences compensation costs in a number of ways. Most obviously, the
pay level at which the structure is pegged influences these costs. However, this is only
part of the story. The pay structure represents the organization’s intended policy, but
actual practice may not coincide with it. Take, for example, the pay grade structure pre-
sented earlier. The midpoint for grade 1 is $3,480, and the midpoint for grade 2 is $5,296.
Now, consider the data on a group example of individual employees in Table 11.7. One
frequently used index of the correspondence between actual and intended pay is the
compa-ratio, computed as follows: Compa-Ratio
An index of the cor-
Grade compa-ratio = Actual average pay for grade/Pay midpoint for grade respondence between
actual and intended
The compa-ratio directly assesses the degree to which actual pay is consistent with the pay.
pay policy. A compa-ratio less than 1.00 suggests that actual pay is lagging behind the pol-
icy, whereas a compa-ratio greater than 1.00 indicates that pay (and costs) exceeds that of
the policy. Although there may be good reasons for compa-ratios to differ from 1.00, man-
agers should also consider whether the pay structure is allowing costs to get out of control.
Table 11.7
EMPLOYEE
Compa-Ratios for
EMPLOYEE JOB PAY MIDPOINT COMPA-RATIOS
Two Grades
Grade 1
1 Engineering tech I $3,690 $3,480 1.06
2 Computer tech 3,306 3,480 .95
3 Engineering tech I 4,037 3,480 1.16
4 Engineering tech I 3,862 3,480 1.11
Mean 1.07
Grade 2
5 Programmer analyst 6,250 5,296 1.18
6 Accountant 6,037 5,296 1.14
7 Accountant 5,878 5,296 1.11
Mean 1.15
GLOBALIZATION, GEOGRAPHIC REGION, AND PAY STRUCTURES

As Figure 11.3 shows, market pay structures can differ substantially across countries both
in terms of their level and in terms of the relative worth of jobs. Compared with cities
in China, India, and Mexico the labor markets in U.S. and German cities provide much
Geographic location
is an important
factor for Human
Resources to
consider when
establishing a pay
structure. Living in
New York City is
more expensive than
other places, and
employers need to
factor in living costs
when deciding upon
salaries in order
to hire a strong
workforce.
CREDIT: © Grant V Faint/Getty Images/RF
Figure 11.3
Net Earnings (After Taxes and Social Security Contributions) in Selected Occupations, Six World Cities
$142,500
$160,000
$140,000
$120,000
$87,211
$72,099
$100,000
$80,000
$47,000
$45,202
$36,324
$60,000
$19,107
$16,200
$14,581
$40,000
$8,856
$6,197
$5,045
$20,000
0
Beijing Copenhagen Mexico City Mumbai Munich New York City
Department Manager, Industrial Sector, Metalworking Industry

Skilled Worker, Industrial Sector, Metalworking Industry
SOURCE: UBS, “Prices and Earnings 2015: A Comparison of Purchasing Power around the Globe,” September 2015, Zurich,
Switzerland.
lower levels of pay overall and also different payoffs to skill, education, and advance-
ment. These differences create a dilemma for global companies. For example, should
a German manager posted to Beijing be paid according to the standard in Germany or
China? If the Germany standard is used, a sense of inequity is likely to exist among peers
in Beijing. If the China market standard is used, it may be all but impossible to find a
German engineer willing to accept an assignment in Beijing. Typically, expatriate pay
and benefits (like housing allowance and tax equalization) continue to be linked more
closely to the home country. However, this link appears to be slowly weakening and now
depends more on the nature and length of the assignment.19
Within the United States, Runzheimer International reports that most companies
have either a formal or an informal policy that provides for pay differentials based on
geographic location.20 These differentials are intended to prevent inequitable treatment
of employees who work in more expensive parts of the country. For example, according
to Salary.com the cost of living index for New York City is roughly 83% higher than
in Madison, Wisconsin. Therefore, an employee receiving annual pay of $50,000 in
Madison would require annual pay of $91,409 in New York City to retain the same pur-
chasing power. The most common company approach is to move an employee higher
in the pay structure to compensate for higher living costs. However, the drawback of
this approach is that it may be difficult to adjust the salary downward if costs in that
location fall or the employee moves to a lower-cost area. Thus, some percentage of the
companies choose to pay an ongoing supplement that changes or disappears in the event
of such changes.
EVIDENCE-BASED HR
Walmart is legendary for its attention to (some would say obsession with) cost control
so that it can pass lower prices on to customers, making it difficult for other retailers
to compete. The question, however, is whether this type of aggressive cost control
makes sense when it comes to wages or is this a situation where “you get what you
pay for”? Is it possible that a firm that pays its workers better can also do better?
Costco pays higher wages, covers more of its employees with health insurance,
requires them to pay smaller health insurance premiums, and contributes more to
their retirement plans.
Major retailers in some cases experience 100% turnover each year, and when the
associated costs (hiring, orienting, training, replacing) are considered, it can add up.
One retailer with 50,000 employees found the annual turnover cost was more than
$150 million per year. Thus, “saving money” by paying lower wages was maybe
instead costing the company. At Walmart, some see a vicious cycle where low wages
cut costs, but also harm service and customer satisfaction, ultimately harming profits.
In the American Customer Satisfaction Index, Walmart is 15th and last in its category
(department and discount stores). By contrast, Costco is first out of 20 in its category
(specialty retail stores).
The Container Store, which sells shelving systems, storage containers, and other
products to help organize the house and garage, pays front-line workers about
$50,000 per year, even more than Costco pays workers with several years of experi-
ence (around $40,000 per year) and significantly more than Walmart pays such work-
ers (around $25,000 per year). (Starting pay is much lower.) CEO and Container Store
CONTINUED
founder Kip Tindall explains their high wage this way: “One great person can easily
do the business productivity of three good people,” and that it is necessary to pay well
“particularly if you are trying to attract and keep really good people.”
QUESTIONS
1. What is the potential return on investment (ROI) to paying higher wages? Be specific
about what objectives might be most positively affected by higher wages.
2. Under what conditions would high wages most likely generate a positive ROI?
3. Should Walmart pay wages more like those paid by Costco and the Container Store?
Should Costco and the Container Store pay more like Walmart? Explain.
SOURCES: H. Tabuchi, “Walmart Lifts Its Wage Floor to $9 an Hour,” The New York Times, February 20, 2015,
p. A1; R. Feintzeig, “Container Store Bets on $50,000 Retail Worker,” The Wall Street Journal, October 15, 2014,
p. B6; C. DeRose and N. Tichy, “Are You Spending More by Paying Your Employees Less?” Forbes, April 29,
2013; W. F. Cascio, “The High Cost of Low Wages,” Harvard Business Review, December 2006, p. 23.
The Importance of Process:

Participation and Communication
LO 11-4 Compensation management has been criticized for following the simplistic belief that
Discuss the significance “if the right technology can be developed, the right answers will be found.”21 In reality,
of process issues
however, any given pay decision is rarely obvious to the diverse groups that make up
such as communica-
tion in compensation organizations, regardless of the decision’s technical merit or basis in theory. Of course,
management. it is important when changing pay practices to decide which program or combination of
programs makes most sense, but how such decisions are made and how they are com-
municated also matter.22
PARTICIPATION
Employee participation in compensation decision making can take many forms. For
example, employees may serve on task forces charged with recommending and designing
a pay program. They may also be asked to help communicate and explain its rationale.
This is particularly true in the case of job evaluation as well as many of the programs
discussed in the next chapter. To date, for what are perhaps obvious reasons, employee
participation in pay level decisions remains fairly rare.
It is important to distinguish between participation by those affected by policies and
those who must actually implement the policies. Managers are in the latter group (and
often in the former group at the same time). As in other areas of human resource man-
agement, line managers are typically responsible for making policies work. Their inti-
mate involvement in any change to existing pay practices is, of course, necessary.
COMMUNICATION
A dramatic example of the importance of communication was found in a study of how
an organization communicated pay cuts to its employees and the effects on theft rates
and perceived equity.23 Two organization units received 15% across-the-board pay cuts.
A third unit received no pay cut and served as a control group. The reasons for the pay
cuts were communicated in different ways to the two pay-cut groups. In the “adequate
explanation” pay-cut group, management provided a significant amount of information

to explain its reasons for the pay cut and also expressed significant remorse. In contrast,
the “inadequate explanation” group received much less information and no indication of
remorse. The control group received no pay cut (and thus no explanation).
The control group and the two pay-cut groups began with the same theft rates and
equity perceptions. After the pay cut, the theft rate was 54% higher in the “adequate
explanation” group than in the control group. But in the “inadequate explanation” condi-
tion, the theft rate was 141% higher than in the control group. In this case communica-
tion had a large, independent effect on employees’ attitudes and behaviors.
Communication is likely to have other important effects. We know, for example, as
emphasized by equity theory that not only actual pay but the comparison standard influ-
ences employee attitudes.24 Under two-tier wage plans, employees doing the same jobs
are paid two different rates, depending on when they were hired. Moreover, the lower-
paid employees do not necessarily move into the higher-paying tier. Common sense
might suggest that the lower-paid employees would be less satisfied, but this is not nec-
essarily true. In fact, a study by Peter Cappelli and Peter Sherer found that the lower-paid
employees were more satisfied on average.25 Apparently, those in the lower tier used dif-
ferent (lower) comparison standards than those in the higher tier. The lower-tier employ-
ees compared their jobs with unemployment or lower-paying jobs they had managed to
avoid. As a result, they were more satisfied, despite being paid less money for the same
work. This finding does not mean that two-tier wage plans are likely to be embraced by
an organization’s workforce. It does, however, support equity theory through its focus on
the way employees compare their pay with other jobs and the need for managers to take
this into consideration. Employees increasingly have access to salary survey informa-
tion, which is likely to result in more comparisons and thus a greater need for effective
communication.
Managers play the most crucial communication role because of their day-to-day inter-
actions with their employees.26 Therefore, they must be prepared to explain why the pay
structure is designed as it is and to judge whether employee concerns about the struc-
ture need to be addressed with changes to the structure. One common issue is deciding
when a job needs to be reclassified because of substantial changes in its content. If an
employee takes on more responsibility, she will often ask the manager for assistance in
making the case for increased pay for the job.
Challenges
PROBLEMS WITH JOB-BASED PAY STRUCTURES
The approach taken in this chapter, that of defining pay structures in terms of jobs and LO 11-5
their associated responsibilities, remains the most widely used in practice. However, job- Describe new develop-
ments in the design of
based pay structures have a number of potential limitations.27 First, they may encour-
pay structures.
age bureaucracy. The job description sets out specific tasks and activities for which
the incumbent is responsible and, by implication, those for which the incumbent is not
responsible. Although this facilitates performance evaluation and control by the man-
ager, it can also encourage a lack of flexibility and a lack of initiative on the part of
employees: “Why should I do that? It’s not in my job description.” Second, the struc-
ture’s hierarchical nature reinforces a top-down decision making and information flow
as well as status differentials, which do not lend themselves to taking advantage of the
skills and knowledge of those closest to production. Third, the bureaucracy required to
generate and update job descriptions and job evaluations can become a barrier to change
Table 11.8
TRADITIONAL STRUCTURE BANDED STRUCTURE
Example of Pay
Bands GRADE TITLE BAND TITLE
10 Senior Engineer 5 Senior Engineer

8 Engineer II 4 Engineer
6 Engineer I
because wholesale changes to job descriptions can involve a tremendous amount of time
and cost. Fourth, the job-based pay structure may not reward desired behaviors, particu-
larly in a rapidly changing environment where the knowledge, skills, and abilities needed
yesterday may not be very helpful today and tomorrow. Fifth, the emphasis on job lev-
els and status differentials encourages promotion-seeking behavior but may discourage
lateral employee movement because employees are reluctant to accept jobs that are not
promotions or that appear to be steps down.
RESPONSES TO PROBLEMS WITH JOB-BASED PAY STRUCTURES

Delayering and Banding
In response to the problems caused by job-based pay structures, some organizations have
Delayering implemented delayering, or reducing the number of job levels to achieve more flexibility
Reducing the number in job assignments and in assigning merit increases. Pratt and Whitney, for example,
of job levels within an
changed from 11 pay grades and 3,000 job descriptions for entry-level through middle-
organization.
management positions to 6 pay grades and several hundred job descriptions.28 These
broader groupings of jobs are also known as broad bands. Table 11.8 shows how band-
ing might work for a small sample of jobs.
IBM greatly reduced the bureaucratic nature of the system, going from 5,000 job
titles and 24 salary grades to a simpler 1,200 jobs and 10 bands. Within their broad
bands, managers were given more discretion to reward high performers and to choose
pay levels that were competitive in the market for talent.
One possible disadvantage of delayering and banding is a reduced opportunity for
promotion. Therefore, organizations need to consider what they will offer employees
instead. In addition, to the extent that there are separate ranges within bands, the new
structure may not represent as dramatic a change as it might appear. These distinc-
tions can easily become just as entrenched as they were under the old system. Broad
bands, with their greater spread between pay minimums and maximums, can also lead
to weaker budgetary control and rising labor costs. Alternatively, the greater spread can
permit managers to better recognize high performers with high pay. It can also permit
the organization to reward employees for learning.
Paying the Person: Pay for Skill, Knowledge, and Competency

A second, related response to job-based pay structure problems has been to move away
from linking pay to jobs and toward building structures based on individual character-
istics such as skill or knowledge.29 Competency-based pay is similar but usually refers
to a plan that covers exempt employees (such as managers). The basic idea is that if you
want employees to learn more skills and become more flexible in the jobs they per-
form, you should pay them to do it. (See Chapter 7 for a discussion of the implications
of skill-based pay systems on training.) According to Gerald Ledford, however, it is
“a fundamental departure” because employees are now “paid for the skills they are capa-
ble of using, not for the job they are performing at a particular point in time.”30
Skill-based pay systems seem to fit well with the increased breadth and depth of skill Skill-Based Pay
that changing technology continues to bring.31 Indeed, research demonstrates that work- Pay based on the skills
force flexibility is significantly increased under skill-based pay.32 For example, in a pro- employees acquire and
are capable of using.
duction environment, workers might be expected not only to operate machines but also
to take responsibility for maintenance and troubleshooting, quality control, even modify-
ing computer programs.33 Toyota concluded years ago that “none of the specialists [e.g.,
quality inspectors, many managers, and foremen] beyond the assembly worker was actu-
ally adding any value to the car. What’s more . . . assembly workers could probably do
most of the functions of specialists much better because of their direct acquaintance with
conditions on the line.”34
In other words, an important potential advantage of skill-based pay is its contribution
to increased worker flexibility, which in turn facilitates the decentralization of decision
making to those who are most knowledgeable. It also provides the opportunity for leaner
staffing levels because employee turnover or absenteeism can now be covered by current
employees who are multiskilled.35 In addition, multiskilled employees are important in
cases where different products require different manufacturing processes or where sup-
ply shortages or other problems call for adaptive or flexible responses—characteristics
typical, for example, of many newer so-called advanced manufacturing environments
(like flexible manufacturing and just-in-time systems).36 More generally, it has been sug-
gested that skill-based plans also contribute to a climate of learning and adaptability
and give employees a broader view of how the organization functions. Both changes
should contribute to better use of employees’ know-how and ideas. Consistent with the
advantages just noted, a field study found that a change to a skill-based plan led to better
quality and lower labor costs in a manufacturing plant.37
Of course, skill-based and competency-based approaches also have potential disad-
vantages.38 First, although the plan will likely enhance skill acquisition, the organization
may find it a challenge to use the new skills effectively. Without careful planning, it may
find itself with large new labor costs but little payoff. In other words, if skills change,
work design must change as quickly to take full advantage. Second, if pay growth is
based entirely on skills, problems may arise if employees “top out” by acquiring all
the skills too quickly, leaving no room for further pay growth. (Of course, this problem
can also afflict job-based systems.) Third, and somewhat ironically, skill-based plans
may generate a large bureaucracy—usually a criticism of job-based systems. Training
programs need to be developed. Skills must be described, measured, and assigned mon-
etary values. Certification tests must be developed to determine whether an employee
has acquired a certain skill. Finally, as if the challenges in obtaining market rates under
a job-based system were not enough, there is almost no body of knowledge regarding
how to price combinations of skills (versus jobs) in the marketplace. Obtaining compari-
son data from other organizations will be difficult until skill-based plans become more
widely used.
CAN THE U.S. LABOR FORCE COMPETE?

We often hear that U.S. labor costs are simply too high to allow U.S. companies to com- LO 11-6
Explain where the
pete effectively with companies in other countries. The average hourly labor costs (cash
United States stands
and benefits) for manufacturing production workers in the United States and in other from an international
advanced industrialized and newly industrialized countries are given in Table 11.9 in perspective on pay
U.S. dollars. issues.
Table 11.9
1985 1990 1995 2000 2005 2010 2013
Average Hourly
Labor Cost (Cash
and Benefits) for Industrialized
Production Workers Canada $10.95 $15.95 $16.10 $16.04 $26.81 $34.60 $36.33
in Manufacturing by Czech Republic 2.83 7.28 11.61 12.17
Country and Year Germanya 9.57 21.53 30.26 23.38 38.18 43.83 48.98
Japan 6.43 12.64 23.82 22.27 25.56 31.75 29.13
United States 13.01 14.91 17.19 19.76 29.74 34.81 36.34
Newly industrialized
Brazil 4.38 5.05 11.08 10.69
China 0.62b 2.00c 3.38
Korea, Republic of 1.25 3.82 7.29 8.19 15.13 17.73 21.96
Mexico 1.60 1.80 1.51 2.08 5.36 6.14 6.83
Taiwan 1.49 3.90 5.85 7.30 7.93 8.37 9.37
a West Germany for 1985 and 1990 data.

b 2006.
c Most recent Conference Board data was $3.07 (in 2012) for China. The 2013 estimate was obtained by inflating the
Conference Board estimates based on data from the National Bureau of Statistics of China.
SOURCES: Data from 1985–2010 are from the Bureau of Labor Statistics, U.S. Department of Labor, “International
Comparisons of Hourly Compensation Costs in Manufacturing,” various years. Data from 2013 are from the Confer-
ence Board, “International Comparisons of Hourly Compensation Costs in Manufacturing, 2013,” December 2014.
As we have seen in Chapter 5 and the current chapter, companies, including Apple,
continue to monitor labor costs and other factors in deciding where to locate production.
Based solely on a cost approach, it would perhaps make sense to try to shift many types
of production from a country like Germany to other countries, particularly the newly
industrialized countries. Would this be a good idea? Not necessarily. There are several
factors to consider.
Instability of Country Differences in Labor Costs

First, note that relative labor costs are very unstable over time. For example, in 1985,
U.S. labor costs were (13.01/9.57) or 36% greater than those of (West) Germany. But by
1990, the situation was reversed, with (West) German labor costs exceeding those of the
United States by (21.53/14.91), or 44%, and remaining higher. Did German employers
suddenly become more generous while U.S. employers clamped down on pay growth?
Not exactly. Because all our figures are expressed in U.S. dollars, currency exchange
rates influence such comparisons, and these exchange rates often fluctuate significantly
from year to year. For example, in 1985, when German labor costs were 74% of those
in the United States, the U.S. dollar was worth 2.94 German marks. But in 1990 the
U.S. dollar was worth 1.62 German marks. If the exchange rate in 1990 were still 1 to
2.94, the average German hourly wage in U.S. dollars would have been $11.80, or about
80% of the U.S. average rather than the actual $21.53, or 146% of the U.S. average.
In any event, relative to countries like Germany, U.S. labor costs are now a bargain;
this explains, in part, decisions by German companies like BMW, Mercedes-Benz, and
Volkswagen to locate production facilities in South Carolina, Alabama, and Tennessee,
respectively, where labor costs are lower than Germany’s by a substantial amount. Prox-
imity to the large U.S. market and currency exchange hedging are other factors. More
recently, German automakers (and those from other countries) have been building new
North American plants in Mexico for these reasons and for Mexico’s low labor costs.
(See the “Competing through Globalization” box.)
Manufacturing and Labor Costs
Toyota recently announced countries). Moving to the other DISCUSSION
plans to build a new automobile side of the world, China has even QUESTIONS
assembly plant for the Corolla in lower labor costs than Mexico 1. If a car takes
Mexico (in the state of Guana- and the United States. In manu- 20 hours to assemble in both
juato). In fact, almost all recently facturing overall, China’s hourly Mexico and the United States,
announced new automobile labor costs are estimated to be how much per hour can be
assembly plants in North America about $3.38, compared to $6.82 saved by assembling the car
will be built in Mexico. One major in Mexico and $36.34 in the in Mexico versus the United
reason is that wages and overall United States. Despite these low States? (Ignore for now, of
labor costs are lower in Mexico labor costs, some companies that course, the cost of building
than in the United States. The used to manufacture in China the new plant and other asso-
Center for Automotive Research have now decided that it is too ciated costs.)
reports that the average hourly expensive, given that as recently 2. Why do you think that the
labor cost (wages and benefits) in as 2005, hourly labor costs in Japanese toy company men-
the automobile industry (includ- China were less than $1 ($0.62) tioned above entered into a
ing both automakers and auto and given that hourly labor costs joint venture agreement with
parts companies) is $7.79 in are much lower in other parts a Lao company rather than
Mexico, compared to $37.38 in of Asia. For example, Japanese building a wholly owned plant
the United States. Labor costs companies are building new as the Japanese company
differences are even larger if only plants in Laos, Cambodia, and Toyota plans to do in its new
automakers are compared, with Vietnam. The managing director Mexico plant?
the Big Three and Toyota having at the Japanese-Lao joint ven- SOURCES: B. Woodall, “U.S. Autoworkers
hourly labor costs of $48 to $58 ture that makes children’s toys Face Threat as Car Makers Drawn to Mexico,”
versus perhaps $10 in Mexico. stated that their production costs, Reuters, March 25, 2015, www.reuters.com;
B. Woodall, “U.S. Auto Labor Cost Study
Even adjusting for productivity which are heavily influenced by Shows Impact of Two-Tier Wage System,”
differences leaves a substantial labor costs, are “a third of that in Reuters, March 23, 2015, www.reuters.com;
advantage to Mexico in labor China.” In addition to labor costs, W. Chomchuen and M. Obe, “Japan Inc. Goes
Deeper into Southeast Asia,” The Wall Street
costs. Mexico is also close to the Japan is believed to see invest- Journal, September 30, 2014, p. B8; B. Snavely,
large U.S. product market and ments in these countries as a way “Free Trade, Lower Wages Drive Mexico’s
has a trade agreement with the also to spread its influence in that Automaking Boom,” Detroit Free Press,
March 2, 2014, http://archive.freep.com.
United States (and many other part of Asia as China has done.
Skill Levels
Second, the quality and productivity of national labor forces can vary dramatically. This
is an especially important consideration in comparisons between labor costs in industri-
alized countries like the United States and developing countries like Mexico. For exam-
ple, the high school graduation rate in the United States is 77% versus 44% in Mexico.39
Thus, lower labor costs may reflect the lower average skill level of the workforce; certain
types of skilled labor may be less available in low–labor-cost countries. On the other
hand, any given company needs only enough skilled employees for its own operations.
Some companies have found that low labor costs do not necessarily preclude high quality.
As we have seen, many automakers have chosen Mexico for new plants to serve mar-
kets in North America. In Europe, countries such as Poland, Slovakia, and the Czech
Republic have many skilled workers and lower labor costs than countries like Germany,
which has resulted in the expansion of production there and/or a bargaining chip when
seeking more productive work rules at home.
479
Productivity
Third, and most directly relevant, are data on comparative productivity and unit
labor costs, essentially meaning labor cost per hour divided by productivity per
hour worked. One indicator of productivity is gross domestic product (or total out-
put of the economy) per person. On this measure, the United States fares well. (See
Figure 11.4.) The combination of lower labor costs and higher productivity translates,
at least on average, into lower unit labor costs in the United States than in Japan and
western Europe.
Considerations Other Than Labor Cost

Fourth, any consideration of where to locate production cannot be based on labor cost
considerations alone. For example, although the average hourly labor cost in Coun-
try A may be $15 versus $10 in Country B, if labor costs are 30% of total operating
costs and nonlabor operating costs are roughly the same, then the total operating costs
might be $65 (50 + 15) in Country A and $60 (50 + 10) in Country B. Although labor
costs in Country B are 33% less, total operating costs are only 7.7% less. This may
not be enough to compensate for differences in skills and productivity, customer wait
time, transportation costs, taxes, and so on. Further, the direct labor component of
many products, particularly high-tech products (such as electronic components), may
often be 5% or less. Therefore, the effect on product price-competitiveness may be less
significant.40
Figure 11.4
$52,986
Gross Domestic
Product (GDP) per $55,000
Person, Adjusted for
$43,108
Purchasing Power 50,000

Differences,
45,000
U.S. dollars, 2013
$36,069
40,000
$33,062
$29,028
35,000
30,000
25,000
$16,856
20,000
$9,565
15,000
10,000
5,000
0
es
an
lic
co
na
an
re
ub
at
i
p
hi
ex
Ko
m
Ja
St
C
p
M
er
Re
of
d
G
te
lic
h
ni
c
ub
ze
U
C
Re
SOURCE: OECD, http://stats.oecd.org.

INTEGRITY IN ACTION
European Retailers Propose Higher Wages for Workers in Cambodia
Cambodia’s $5.5 billion garment that paying Cambodian workers workers
industry accounts for about better so that they can be less improve
80% of its exports. Until 2014, impoverished risks losing even their lives? What are the risks?
the industry wage had been those jobs to other countries 2. Did Zara and H & M do the
$80 per month. In November that have lower wages and thus right thing by saying that they
2014, it was increased to $128 can perhaps offer lower prices to would support paying higher
per month. In what has been foreign retail store buyers. Some prices for garments to support
described as “unprecedented” evidence, however, suggests higher wages for garment
and as “recognition of the role that foreign retailers can appeal workers? What else might
they play,” several European better to their customer base by they be able to do?
retail store companies, including providing evidence that treat- 3. Do you think there would be
Hennes & Mauritz AB (“H & M”) ment of workers in their supplier a point at which Cambodian
and Zara parent Inditex, wrote to factories meets some minimum wage increases would lead
the Prime Minister of Cambodia set of standards. For example, Zara and H & M to buy gar-
pledging to pay more to own- Sri Lanka has a labor standard ments elsewhere?
ers of local Cambodian supplier called “Garments without Guilt,” 4. Can treating workers better in
factories so that they could in and factories that meet these the low-cost garment industry
turn pay their workers more. standards can market them- be good for business? Explain.
However, there is a concern that selves as having met the stan- SOURCES: M. Jayasinghe, “The Operational
the success in helping achieve dards, which may allow them to and Signaling Benefits of Voluntary Labor Code
higher pay for Cambodian charge higher prices, and there Adoption: Reconceptualizing the Scope of
Human Resource Management in Emerging
workers could affect where the is some evidence that such fac- Economies,” Academy of Management Journal,
broader retail clothing industry tories are also more efficient. forthcoming. C. Larson, Bloomberg Business,
decides to source its garments February 5, 2015; T. Wright, “Stores Propose
Higher Wages in Asia,” The Wall Street Journal,
from. For example, the minimum DISCUSSION QUESTIONS October 15, 2014, p. B8; J. Hookway and S. Narin,
wage is $68 per month in Ban- 1. Will the increased minimum “Cambodia Sets Minimum Wage Below Union
gladesh. So, there is a concern wage for Cambodian garment Demands,” The Wall Street Journal, November
12, 2014.
Thus, the decision on where to locate production depends on labor costs but also
other factors. Being close to where customers are matters a great deal. Product develop-
ment speed may be greater when manufacturing is physically close to the design group.
Quick response to customers (like making a custom replacement product) is difficult
when production facilities are on the other side of the world. Inventory levels can be
dramatically reduced through the use of manufacturing methods like just-in-time pro-
duction, but suppliers need to be in close physical proximity.
On the other hand, some firms are aggressively offshoring jobs (including profes-
sional or knowledge worker jobs) primarily to reduce labor costs. For example, finan-
cial services firms like Goldman Sachs and Citigroup now have significant numbers of
employees in India doing statistical and research work at much lower pay levels.41 As
another example, IBM began to move thousands of programmer jobs overseas to coun-
tries like China where the hourly cost at the time was $12.50 an hour versus $56 an hour
in the United States, potentially saving more than $100 million per year.42 In some cases,
companies using low-cost labor overseas have decided that those workers are paid too
little and have decided to pay more than would be necessary to simply attract and retain
enough workers. See the “Integrity in Action” box.
481
EXECUTIVE PAY
LO 11-7 The issue of executive pay has been given widespread attention in the press. In a sense, the
Explain the reasons for topic has received more coverage than it deserves because there are very few top execu-
the controversy over
tives and their compensation often accounts for a small share of an organization’s total
executive pay.
labor costs. On the other hand, top executives have a disproportionate ability to influence
organization performance, so decisions about their compensation are critical. They can
also be symbolic. During the Global Financial Crisis of several years ago the U.S. govern-
ment, as part of the Troubled Asset Relief Program (TARP), decided it was appropriate to
further regulate executive pay in firms receiving government “bailout” money. Top execu-
tives also help set the tone or culture of the organization. If, for example, the top executive’s
pay seems unrelated to the organization’s performance, with pay staying high even when
business is poor, employees may not understand why some of their own pay is at risk and
fluctuates (not only up, but also down), depending on how the organization is performing.
How much do executives make? Table 11.10 provides some data. Long-term compen-
sation, typically in the form of stock plans, is the major component of CEO pay, which
means that CEO pay varies with the performance of the stock market (see the “change in
S&P 500” column). Table 11.11 shows that some CEOs are paid well above the averages
shown in Table 11.10.
Table 11.10
Realized CEO Compensation
CEO PAY
VALUE OF
STOCK
VALUE OF GRANTS ANNUAL ANNUAL
STOCK AND CHANGE CHANGE CEO PAY/
SALARY OPTIONS OTHER TOTAL IN CEO IN S&P WORKER WORKER
YEAR PLUS BONUS EXERCISED PAY*** PAY PAY 500 PAY* PAY**
2013 $4.1 million $6.4 million $6.4 million $16.9 million — 32% $35,555 475
2012 $3.5 million $3.2 million $3.8 million $10.5 million 11% 16% $34,519 304
2010 $3.0 million $3.0 million $2.5 million $8.5 million −29% 15% $33,119 258
2009 $3.0 million $3.3 million $5.8 million $12.1 million −14% 26% $32,093 377
2008 $3.6 million $3.6 million $6.9 million $14.1 million −18% −37% $31,617 446
2005 $3.7 million $2.1 million $6.6 million $12.4 million — — $28,305 438
*Establishment survey data on earnings of production and nonsupervisory workers on private nonfarm payrolls, U.S. Bureau of Labor Statistics,
“Establishment Data: Employment and Earnings.”
**Ratio of CEO pay to hourly employee pay.
***In most cases, the value of stock grants accounts for most of pay in this category.
Note: Median total pay in 2013 was $9.9 million. That would yield a CEO pay/Worker pay ratio of 278.
SOURCES: Through 2012, CEO pay data from Forbes magazine. Through 1999, Forbes data pertain to the 800 largest companies. Beginning with
year 2000, data pertain to the 500 largest U.S. companies. Note: 2013 CEO pay data based on 200 Standard & Poor’s 500 companies that filed
proxies with the Securities and Exchange Commission between January 1 and March 27, 2014. Original data from S&P Capital IQ; USA Today research
as reported by B. Hansen and M. Hannan, “Millions by Millions, CEO Pay Goes Up,” USA Today, April 4, 2014, www.usatoday.com.
Table 11.11
TOTAL COMPENSATION
Highest-Paid CEOs
Satya Nadella, Microsoft $84.3 million

Lawrence J. Ellison, Oracle Corp. $67.3 million
Jon Feltheimer, Lions Gate Entertainment $63.6 million
Steven M. Mollenkopf, Qualcomm Inc. $60.7 million
SOURCE: AFL-CIO, “Executive Paywatch: 100 Highest Paid CEOs, 2014,” www.aflcio.org, accessed May 30, 2015.
Table 11.12
CEO Pay and Worker Pay (U.S. Dollars) and CEO/Worker Ratio, 2012, Selected Countries
COUNTRY COMPANIES INCLUDED CEO PAY WORKER PAY CEO/WORKER RATIO
USA S & P 500 $12,259,894 $34,645 354

Germany DAX (30 companies) 5,912,781 40,223 147
United Kingdom FTSE 100 3,758,412 44,743 84
Japan Nikkei 225 2,354,581 35,143 67
SOURCE: www.aflcio.org/Corporate-Watch/CEO-Pay-and-You/CEO-to-Worker-Pay-Gap-in-the-United-States/Pay-Gaps-in-the-World, accessed May 13, 2013.
As Table 11.12 shows, U.S. top executives are also the highest paid in the world. The
fact that the differential between top-executive pay and that of an average manufactur-
ing worker is so much higher in the United States than in some other countries has been
described as creating a “trust gap”—that is, in employees’ minds, a “frame of mind that
mistrusts senior management’s intentions, doubts its competence, and resents its self-
congratulatory pay.” The issue becomes more salient when many of the same companies
with high executive pay simultaneously engage in layoffs or other forms of employment
reduction. Employees might ask, “If the company needs to cut costs, why not cut execu-
tive pay rather than our jobs?”43 The issue is one of perceived fairness. One study, in
fact, reported that business units with higher pay differentials between executives and
rank-and-file employees had lower customer satisfaction, which was speculated to result
from employees’ perceptions of inequity coming through in customer relations.44 Per-
haps more important than how much top executives are paid is how they are paid (i.e.,
whether performance-based). This is an issue we return to in the next chapter.
Government Regulation of
Employee Compensation
We discuss equal employment opportunity, as well as minimum wage, overtime, and pre-
vailing wage laws below. We additionally discuss regulation of executive compensation in
Chapter 12.
EQUAL EMPLOYMENT OPPORTUNITY
Equal employment opportunity (EEO) regulation (such as Title VII of the Civil Rights Act) LO 11-8
Describe the regu-
prohibits sex- and race-based differences in employment outcomes such as pay, unless jus- latory framework
tified by business necessity (like pay differences stemming from differences in job perfor- for employee
mance). In addition to regulatory pressures, organizations must deal with changing labor compensation.
market and demographic realities. At least two trends are directly relevant in discussing
EEO. First, women have gone from 33% of all employees in 1960 to 46% in 2014. Second,
between 1960 and 2014, Whites have gone from 90% to 80% of all employees. White men
now account for 43% of all U.S. employment and that percentage will probably continue
to decline, making attention to EEO issues in compensation even more important.
Is there equality of treatment in pay determination? Typically, the popular press
focuses on raw earnings ratios. For example, among full-time workers, the ratio of
female-to-male weekly median earnings is .82, the ratio of Black-to-White earnings is
.78, and the ratio of Hispanic–Latino-to-White earnings is .72.45 These percentages have
generally risen over the last two to three decades, but significant race and sex differ-
ences in pay clearly remain.46 In contrast, Asian Americans earn 17% more than Whites.
Among executives, women appear to have lower pay than men partly due to women
being less likely to receive performance-based (e.g., stock and bonus-related) pay.47
The usefulness of raw percentages is limited, however, because some portion of earn-
ings differences arises from differences in legitimate factors: education, labor market
experience, and occupation. Adjusting for such factors reduces earnings differences
based on race and sex, but significant differences remain. With few exceptions, such
adjustments rarely account for more than half of the earnings differential.48
What aspects of pay determination are responsible for such differences? In the case of
women, it is suggested that their work is undervalued. Another explanation rests on the
“crowding” hypothesis, which argues that women were historically restricted to entering
a small number of occupations. As a result, the supply of workers far exceeded demand,
resulting in lower pay for such occupations. If so, market surveys would only perpetuate
the situation.
Comparable Worth Comparable worth (or pay equity) is a public policy that advocates remedies for any
A public policy that undervaluation of women’s jobs. The idea is to obtain equal pay, not just for jobs of equal
advocates remedies
content (already mandated by the Equal Pay Act of 1963) but for jobs of equal value or
for any undervaluation
of women’s jobs (also worth, on the basis of Title VII of the Civil Rights Act. Typically, job evaluation is used
called pay equity). to measure worth. Table 11.13, which is based on Washington State data from one of
the first comparable worth cases years ago, sought to compare measures of worth based
on internal comparisons (job evaluation) and external comparisons (market surveys).49
Disagreements between the two measures are apparent. Internal comparisons suggest
that women’s jobs are underpaid, whereas external comparisons are less supportive of
Table 11.13
Job Evaluation Points, Monthly Prevailing Market Pay Rates, and Proportion of Incumbents in Job Who Are Female
JOB MARKET PAY AS

EVALUATION MARKET PERCENTAGE OF PERCENT
BENCHMARK JOB TITLE POINTS PAY PREDICTED PAY FEMALE IN JOB
Warehouse worker 97 $1,286 109.1% 15.4%

Truck driver 97 1,493 126.6 13.6
Licensed practical nurse 173 1,030 75.3 89.5
Maintenance carpenter 197 1,707 118.9 2.3
Civil engineer 287 1,885 116.0 0.0
Registered nurse 348 1,368 76.3 92.2
Senior computer systems analyst 384 2,080 113.1 17.8
Note Predicted salary is based on regression of prevailing market rate on job evaluation points $2.43 × Job evaluation points + 936.19, r = 0.77.
this argument. For example, although the licensed practical nurse job receives 173 job
evaluation points and the truck driver position receives 97 points, the market rate (and
thus the state of Washington employer rate) for the truck driver position is $1,493 per
month versus only $1,030 per month for the nurse. The truck driver is paid 26.6% more
than the pay policy line would predict, whereas the nurse is paid only 75.3% of the pay
policy line prediction. Based on job evaluation points, the value of the nurse is 78.3%
(173/97 – 1) higher, not 31.0% (1 – $1,030/$1,493) lower as is seen in the market pay.
One potential problem with using job evaluation to establish worth independent of the
market is that job evaluation procedures were never designed for this purpose.50 Rather,
as demonstrated earlier, their major use is in helping to capture the market pay policy
and then applying that to nonkey jobs for which market data are not available. In other
words, job evaluation has typically been used to help apply the market pay policy, quite
the opposite of replacing the market in pay setting.
As with any regulation, there are also concerns that EEO regulation obstructs market
forces, which, according to economic theory, provide the most efficient means of pric-
ing and allocating people to jobs. In theory, moving away from a reliance on market
forces would result in some jobs being paid too much and others too little, leading to
an oversupply of workers for the former and an undersupply for the latter. In addition,
some empirical evidence suggests that a comparable worth policy would not have much
impact on the relative earnings of women in the private sector.51 One limitation of such
a policy is that it targets single employers, ignoring that men and women tend to work
for different employers.52 To the extent that segregation by employer contributes to
pay differences between men and women, comparable worth would not be effective.
In other words, to the extent that sex-based pay differences are the result of men and
women working in different organizations with different pay levels, such policies will
have little impact.
Perhaps most important, despite potential problems with market rates, the courts have
consistently ruled that using the going market rates of pay is an acceptable defense in
comparable worth litigation suits.53 The rationale is that organizations face competitive
labor and product markets. Paying less or more than the market rate will put the organi-
zation at a competitive disadvantage. Thus there is no comparable worth legal mandate
in the U.S. private sector.
On the other hand, by the early 1990s, almost one-half of the states had begun or
completed comparable worth adjustments to public-sector employees’ pay. In addi-
tion, in 1988 the Canadian province of Ontario mandated comparable worth in both
the private and public sectors. Further, although comparable worth is not mandated in
the U.S. private sector, the Department of Labor (Office of Federal Contracts Compli-
ance), which enforces Executive Order 11246, put into place enforcement standards
and guidelines in 2006 that prohibit race or sex-based “systemic compensation dis-
crimination,” which it defines as a situation “where there are statistically significant
compensation disparities (as established by a regression analysis) between similarly
situated employees, after taking into account the legitimate factors which influence
compensation, such as: education, prior work experience, performance, productivity,
and time in the job.”54 Further, passage of the 2009 Lilly Ledbetter Fair Pay Act means
that employers may face claims in situations where a discriminatory decision (e.g., too
small of a pay raise) was made many years earlier, but the effect (lower pay) continues
into the more current period.
Some work has focused on pinpointing where women’s pay falls behind that of men.
One finding is that the pay gap is wider where bonus and incentive payments (not just
base salary) are examined. Other evidence indicates that women lose ground at the time
they are hired and actually do better once they are employed for some time.55 One inter-
pretation is that when actual job performance (rather than the limited general qualifica-
tion information available on applicants) is used in decisions, women may be less likely
to encounter unequal treatment. If so, more attention needs to be devoted to ensuring
fair treatment of applicants and new employees.56 On the other hand, a “glass ceiling”
is believed to exist in some organizations that allows women (and minorities) to come
within sight of the top echelons of management, but not advance to them.
It is likely, however, that organizations will differ in terms of where women’s earnings
disadvantages arise. For example, advancement opportunities for women and other pro-
tected groups may be hindered by unequal access to the “old boy” or informal network.
This, in turn, may be reflected in lower rates of pay. Mentoring programs have been sug-
gested as one means of improving access. Indeed, one study found that mentoring was
successful, having a significant positive effect on the pay of both men and women, with
women receiving a greater payoff in percentage terms than men.57
MINIMUM WAGE, OVERTIME, AND PREVAILING WAGE LAWS

Fair Labor The 1938 Fair Labor Standards Act (FLSA) establishes a minimum wage for jobs, which
Standards Act new stands at $7.25 per hour. State laws may specify higher minimum wages. The FLSA
(FLSA) also permits a subminimum training wage that is approximately 85% of the minimum
The 1938 law that
established the mini-
wage, which employers are permitted to pay most employees under the age of 20 for a
mum wage and over- period of up to 90 days.
time pay. The FLSA also requires that employees be paid at a rate of one and a half times their
hourly rate for each hour of overtime worked beyond 40 hours in a week. The hourly rate
Minimum Wage includes not only the base wage but also other components such as bonuses and piece-
The lowest amount rate payments. The FLSA requires overtime pay for any hours beyond 40 in a week that
that employers are an employer “suffers or permits” the employee to perform, regardless of whether the
legally allowed to pay;
work is done at the workplace or whether the employer explicitly asked or expected the
the 1990 amendment
of the Fair Labor Stan- employee to do it. If the employer knows the employee is working overtime but neither
dards Act permits a moves to stop it nor pays time and a half, a violation of the FLSA may have occurred. A
sub-minimum wage to department store was the target of a lawsuit that claimed employees were “encouraged”
workers under the age to, among other things, write thank-you notes to customers outside of scheduled work
of 20 for a period of up
hours but were not compensated for this work. Although the company denied encour-
to 90 days.
aging this off-the-clock work, it reached an out-of-court settlement to pay between
$15 million and $30 million in back pay (plus legal fees of $7.5 million) to approximately
85,000 sales representatives it employed over a three-year period.58 As the “Competing
through Technology” box shows, companies are wrestling with how to create a sustain-
able relationship with their workers in the era of the sharing economy.
Executive, professional, administrative, outside sales, and certain “computer
Exempt employees” occupations are exempt from FLSA coverage. Nonexempt occupations
Employees who are are covered and include most hourly jobs. Exempt status depends on job responsibili-
not covered by the Fair ties and salary. All exemptions (except for outside sales) require that an employee be
Labor Standards Act.
Exempt employees are
paid no less than $455 per week. Recently, the Wage and Hour Division has proposed
not eligible for overtime increasing this salary “test” to $970 per week, which would greatly increase the num-
pay. ber of U.S. employees who are nonexempt (i.e., covered by FLSA overtime provi-
sions). Note also that the President has already issued an executive order to change the
salary test amount and the only question that remains is whether the final salary test
amount will be $970 exactly or something quite close to it.59 The job responsibility
criteria vary. For example, the executive exemption is based on whether two or more
people are supervised, whether there is authority to hire and fire (or whether particular
Sharing Economy Exposes Gaps in Employment Law
Technology has helped cre- who are self-employed) be paid Zirtual reports
ate a sharing economy. With a minimum wage and overtime that employee
a touch of your smartphone, pay. Several sharing economy workers now stay longer with
you can hail a car from Uber or companies have faced FLSA- Zirtual. It says that although
schedule a housekeeper from based lawsuits, especially by many workers initially like the
Handybook to clean your home workers contending they should flexibility of being a contractor,
or fix something in it. Such com- be treated as employees and many eventually decide they
panies often rely on workers that they ended up being paid need the security of a guaran-
they describe as micro- less than the minimum wage. teed paycheck and wage that
entrepreneurs, who have the Although Uber’s own study they can live on.
flexibility to do only the jobs reported that its drivers make
they want and when they want. an average of $19/hour, that is DISCUSSION QUESTIONS
Some workers find this model before expenses. Drivers making 1. Why don’t all companies fol-
to be liberating. However, less per hour may not reach the low Zirtual’s lead in using
technology has also exposed (federal) minimum wage of $7.25/ employees rather than inde-
gaps in employment law and hour, given that they supply their pendent contractors? What
raised challenges for workers own vehicles and thus pay for are the advantages and dis-
and companies. Because these expenses, including depreciation advantages of this approach?
workers are often indepen- of their vehicles. 2. Should employment laws be
dent contractors, rather than One company, Zirtual, which revised to better cover work-
employees, they are not cov- provides “remote personal assis- ers in the sharing economy?
ered by standard employment tants,” has responded to this Who would benefit? Would
laws, such as the Fair Labor technology-related challenge anyone lose?
Standards Act (FLSA). by switching from using inde- SOURCE: Lauren Weber and Rachel Emma
As discussed in this chapter, pendent contractors to using Silverman, “On-Demand Workers: ‘We Are Not
the FLSA requires that employees employees, who are guaranteed Robots,’” The Wall Street Journal, January 28,
2015, p. B1.
(but not independent contractors, a wage of at least $11/hour.
weight is given to the employee’s recommendations), and whether the employee’s

primary duty is managing the enterprise, recognized department, or subdivision of
the enterprise. The Wage and Hour Division, Employment Standards Administration
(www.dol.gov/esa), U.S. Department of Labor, and its local offices can provide fur-
ther information on these definitions. (The exemptions do not apply to police, fire-
fighters, paramedics, and first responders.)
Two pieces of legislation—the 1931 Davis-Bacon Act and the 1936 Walsh-Healy
Public Contracts Act—require federal contractors to pay employees no less than the pre-
vailing wages in the area. Davis-Bacon covers construction contractors receiving federal
money of more than $2,000. Typically, prevailing wages have been based on relevant
union contracts, partly because only 30% of the local labor force is required to be used in
establishing the prevailing rate. Walsh-Healy covers all government contractors receiv-
ing $10,000 or more in federal funds.
Finally, as we see in the Competing through Technology Box, employers must take
care in deciding whether a person working on their premises is classified as an employee
or independent contractor. We address this issue in Chapter 13.
487
A LOOK BACK
We began this chapter with examples of companies that have recently increased
their pay levels. Although controlling compensation costs is important, it is espe-
cially important for some of these companies (e.g., Walmart) to allow them to com-
pete on price in their product markets. They also felt they needed to pay more to
compete in their labor markets, which have become more competitive in recent
years as the economy has recovered and grown. Not doing so would make it
more difficult to recruit and retain the quality of workforce needed. In at least
one case (Aetna), a major increase in pay level was implemented because it was
deemed necessary to raise workforce quality to support an upcoming change in
business strategy. We also saw how companies (e.g., automakers) continue to
use relative labor cost as an important decision in where they locate production
plants. Thus, pay level and pay structure decisions influence the success of strat-
egy execution by influencing not only labor costs but also workforce quality, as
well as employee perceptions of equity. Different pay structures can also vary in
the degree to which they provide flexibility and incentives for employees to learn
and be productive.
QUESTIONS
1. What types of changes have the companies discussed in this chapter made
to their pay levels and pay structures to support execution of their business
strategies?
2. Would other companies seeking to better align their pay structures with
their business strategies benefit from imitating the changes made at these
companies?
SUMMARY
In this chapter we have discussed the nature of the pay struc- and job structure components of the pay structure, which
ture and its component parts, the pay level, and the job struc- influence employee social comparisons. Pay surveys also
ture. Equity theory suggests that social comparisons are an permit organizations to benchmark their labor costs against
important influence on how employees evaluate their pay. other organizations. Globalization is increasing the need for
Employees make external comparisons between their pay organizations to be competitive in both their labor costs and
and the pay they believe is received by employees in other productivity.
organizations. Such comparisons may have consequences The nature of pay structures is undergoing a funda-
for employee attitudes and retention. Employees also make mental change in many organizations. One change is
internal comparisons between what they receive and what the move to fewer pay levels to reduce labor costs and
they perceive others within the organization are paid. These bureaucracy. Second, some employers are shifting from
types of comparisons may have consequences for internal paying employees for narrow jobs to giving them broader
movement, cooperation, and attitudes (like organization responsibilities and paying them to learn the necessary
commitment). Such comparisons play an important role skills.
in the controversy over executive pay, as illustrated by the Finally, a theme that runs through this chapter and the
focus of critics on the ratio of executive pay to that of lower- next is the importance of process in managing employee
paid workers. compensation. How a new program is designed, decided on,
Pay benchmarking surveys and job evaluation are two implemented, and communicated is perhaps just as impor-
administrative tools widely used in managing the pay level tant as its core characteristics.
KEY TERMS
Pay structure, 458 Nonkey jobs, 465 Delayering, 476
Pay level, 458 Job evaluation, 465 Skill-based pay, 477
Job structure, 458 Compensable factors, 465 Comparable worth, 484
Efficiency wage theory, 463 Pay policy line, 467 Fair Labor Standards Act
Benchmarking, 463 Pay grades, 469 (FLSA), 486
Rate ranges, 465 Range spread, 469 Minimum wage, 486
Key jobs, 465 Compa-ratio, 471 Exempt, 486
1. You have been asked to evaluate whether your organiza- 3. If major changes of the type mentioned in Question 2 are
tion’s current pay structure makes sense in view of what to be made, what types of so-called process issues need
competing organizations are paying. How would you to be considered? Of what relevance is equity theory
determine what organizations to compare your organiza- in helping to understand how employees might react to
tion with? Why might your organization’s pay structure changes in the pay structure?
differ from those in competing organizations? What are 4. Are executive pay levels unreasonable? Why or why not?
the potential consequences of having a pay structure that 5. Your company plans to build a new manufacturing plant
is out of line relative to those of your competitors? but is undecided where to locate it. What factors would
2. Top management has decided that the organization is too you consider in choosing in which country (or state) to
bureaucratic and has too many layers of jobs to compete build the plant?
effectively. You have been asked to suggest innovative 6. You have been asked to evaluate whether a company’s
alternatives to the traditional “job-based” approach to pay structure is fair to women and minorities. How would
employee compensation and to list the advantages and you go about answering this question?
disadvantages of these new approaches.
Consider your current job or a job you had in the past. For _____ 13. Information the company gives about pay issues
each of the following pay characteristics, indicate your level of concern to me
of satisfaction by using the following scale: 1 = very dis- _____ 14. Pay of other jobs in the company
satisfied; 2 = somewhat dissatisfied; 3 = neither satisfied _____ 15. Consistency of the company’s pay policies
nor dissatisfied; 4 = somewhat satisfied; 5 = very satisfied. _____ 16. How my raises are determined
_____ 17. Differences in pay among jobs in the company
_____ 1. My take-home pay _____ 18. The way the company administers pay
_____ 2. My current pay These 18 items measure four dimensions of pay satisfac-
_____ 3. My overall level of pay tion. Find your total score for each set of item numbers to
_____ 4. Size of my current salary measure your satisfaction with each dimension.
_____ 5. My benefit package Pay Level
_____ 6. Amount the company pays toward my benefits Total of items 1, 2, 3, 4, 9, 11: _____
_____ 7. The value of my benefits Benefits
_____ 8. The number of benefits I receive Total of items 5, 6, 7, 8: _____
_____ 9. My most recent raise Pay Structure and Administration
_____ 10. Influence my manager has over my pay Total of items 12, 13, 14, 15, 17, 18: _____
_____ 11. The raises I have typically received in the past Pay Raises
_____ 12. The company’s pay structure Total of items 10, 11, 16: _____
Considering the principles discussed in this chapter, SOURCE: Based on H. G. Heneman III and D. P. Schwab, “Pay Satisfaction:
Its Multidimensional Nature and Measurement,” International Journal of
how could your company improve (or how could it have
Psychology 20 (1985), pp. 129–41.
improved) your satisfaction on each dimension?
EXERCISING STRATEGY
U.S. Automakers Manufacture Parts Overseas to Contain Costs
U.S. automobile production has mounted a major comeback, hourly wage to $12.25. She tries to work as much overtime
but many of the parts used to assemble those cars increas- as she can to make ends meet, but the more overtime she
ingly come from other countries. In 2014, a record $138 works, the more day care she has to pay for. Thomas DiDo-
billion in car parts were imported, equivalent to $12,135 of nato, the chief human resources officer at Lear, says that the
content in every vehicle built. That compares to $31.7 billion company pays competitive market wages. Indeed, he notes
in parts imported in 1990 and $89 billion in parts imported that “if our employees couldn’t make ends meet, they would
in 2008. Why are more and more parts imported? Because demonstrate their dissatisfaction with their feet” by leaving
parts can be made cheaper overseas. Mexico accounted for for a better job elsewhere. But, he notes, instead, employee
the largest single share (34%), followed by China (13%). To turnover at Lear is only 2%.
compete and survive, U.S. parts manufacturers have shifted
QUESTIONS
production overseas. For example, Detroit-based American
1. As a consumer, what effect does the use of more foreign
Axle has plants in low-wage countries such as Mexico, Bra-
parts have when you look to purchase a new car?
zil, Poland, China, and Thailand. American workers in the
2. How does globalization in the car parts industry affect
parts industry have seen their own wages fall by an inflation-
U.S. workers? What about workers in parts plants in low-
adjusted 23% from a decade earlier to $19.91 today in the
wage countries?
face of this low-wage competition. (Wages at U.S. assem-
3. Do you agree with Thomas DiDonato that if workers
bly plants also declined during the same period by 22% to
could not make ends meet, they would leave Lear in
$27.83.) At one of American Axle’s plants, wages start at
greater numbers? Why or why not?
$10 per hour, roughly what Walmart recently announced it
4. Should Lear and other automakers pay more? Why or
will raise its starting wage to. At the Lear Corporation parts
why not?
plant in Selma, Alabama, Denise Barnett works in a plant
that supplies seats for a nearby Hyundai car assembly plant. SOURCE: J. R. Hagerty and J. Bennett, “Wages Drop as Foreign Parts Invade
Just recently, she received a 92% pay increase to bring her American Cars,” The Wall Street Journal, March 24, 2015, p. A1.
MANAGING PEOPLE
Reporting the Ratio of Executive Pay to Worker Pay: Is it Worth the Trouble?
Section 953(b) of the 2010 Dodd-Frank Wall Street Bloomberg computed the ratio to be 1,795 ($59.3 million for
Reform and Consumer Protection Act requires covered since departed CEO Ron Johnson versus an average salary
companies to report the ratio of annual total compensation of $29,668 for the average department store worker).
of the chief executive officer (or any equivalent position) The AFL-CIO and other supporters of the rule hope it
to the median of the annual total compensation of all other will also encourage Boards to consider whether worker pay,
employees. which has grown more slowly than inflation (and as indicated
Supporters of the rule, such as the AFL-CIO labor above, much more slowly than CEO pay), should be higher.
organization, argue that reporting the ratio will help rein The AFL-CIO also argues that research shows that larger
in what it sees as exorbitant (and growing) levels of execu- pay differentials between CEOs and rank and file workers
tive pay, especially when compared to what has happened lead to poorer firm performance due to perceptions of ineq-
to worker pay. According to a recent analysis of 248 public uity and the negative effects that has on worker morale and
company CEOs by the Wall Street Journal and Hay Group, productivity. There is also a feeling that when CEOs get paid
recent median CEO year pay stood at over $10 million. A as much as they do, too much credit goes to them for a firm’s
separate analysis of the S&P 500 firms by the AFL-CIO success and not enough to other employees.
reported that the ratio of CEO pay to typical U.S. worker Many companies see things differently. David
pay rose from 42 in 1980 to 380 last year. At J.C. Penney, Hirschmann, head of the U.S. Chamber of Commerce’s
Center for Capital Markets, says the ratio is not meaningful After waiting several years to issue a proposed rule and then
or helpful to investors and will instead be used as “a politi- providing time for groups (like those above) to comment, the
cal tool to attack companies.” Companies argue that with a U.S. Securities and Exchange Commission (SEC) finally issued
global workforce and different payroll systems in different a final rule in August 2015. Rule details are provided in SEC
countries, computing the ratio is much more difficult than it press release 2015-160 available at its website, www.sec.gov.
would seem. For example, Accenture, a consulting firm has
246,000 employees in 120 countries and a variety of payroll QUESTIONS
systems (and definitions of pay in different countries). Jill 1. Do you believe it is an undue burden on companies to
Smart, head of human resources at Accenture, says that the compute and report the ratio of chief executive compen-
work required to compute the ratio of CEO to worker pay sation to employee compensation?
would be “quite incredible.” 2. Do you believe reporting this ratio will result in changes
Other companies, however, are already doing it and that benefit companies, employees, or society? Explain.
have done so for years. They say it is not that difficult or SOURCES: U.S. Securities and Exchange Commission. SEC Adopts Rule
costly. Whole Foods, for example, put in place a cap (now for Pay Ratio Disclosure. Press Release 2015-160. Washington D.C., Aug. 5,
19x) on the ratio of executive to front-line worker pay 2015. http://www.sec.gov/news/pressrelease/2015-160.html; G. Morgenson,
about a decade ago. Mark Ehrnstein, a vice president there, “Despite Federal Regulation, C.E.O–Worker Pay Gap Data Remains Hidden,”
The New York Times, April 10, 2015, www.nytimes.com; Leslie Kwoh, “Firms
says that it does not take months, but rather a few days, Resist New Pay-Equity Rules,” Wall Street Journal, June 26, 2012; Elliot Blair
and that it does not cost “millions of dollars” to calculate Smith and Phil Kuntz, “CEO Pay 1,795-to-1 Multiple of Wages Skirts U.S.
the ratio. Law,” www.bloomberg.com, April 29, 2013, accessed May 9, 2013.
Changing the Pay Level at Eight Crossings
Based in Sacramento, California, Eight Crossings provides they worked and how complex the jobs they took, each tran-
medical transcription services for physicians, lawyers, hos- scriber earned between $20,000 and $70,000 a year.
pitals, and authors. Its employees also answer phones, edit In looking for ways to trim expenses, Maher considered that
documents, and transcribe legal documents. The company’s part of most documents included sections of boilerplate text.
employees work either at the service center in Sacramento These are generated automatically by transcribers’ software but
or in their homes, where they receive audio or text files via were included in the number of lines for which the transcrib-
the Internet. In this way, Eight Crossings employees can ers were paid. Maher concluded these amounted to a 5% bonus
work in their specialty as needed without tying up a doctor’s paid for each assignment. Maher decided he could cut tran-
or attorney’s office space. scribers’ pay by 5% and in effect still pay them the same rate for
Initially, the ease of sending files electronically was an what they were actually transcribing (but without the “bonus”).
advantage that enabled Eight Crossings to grow at a tremen- That pay cut would bring pay levels at Eight Crossings
dous pace. But it has also opened up the company to competi- down to the market rate. Would that mean employees would
tion from similar services provided from low-wage locations leave for greener pastures? Maher guessed not, considering
such as India. In addition, as voice recognition software has that his company was receiving résumés from experienced
improved, automation could take over some of the processes transcribers looking for work.
that have been handled by skilled, experienced transcribers. Maher’s next challenge was how to communicate the pay
In that situation, Eight Crossings CEO Patrick Maher felt cut to employees working in 22 locations, many working
the pressure when clients began to ask him for a lower rate. from home and communicating with the office electroni-
Most of the costs of running Eight Crossings are related to cally. He began by discussing the situation with the compa-
labor. Overhead and materials are minimal for this type of ny’s eight supervisors, who check the transcribers’ work for
work. Consequently, for Maher to offer his clients a better quality. This prepared them to address employees’ concerns.
price, he would have to cut what he paid employees or stop Next, he sent an e-mail to the transcribers, explaining the
earning a profit. reasons for the change and inviting questions.
The pay level at Eight Crossings had been about 5% about Maher’s fears about the pay cut were not realized.
the average for the industry. Maher believed that this pay Employees expressed understanding of the move and appre-
strategy gave his company an advantage in recruiting and ciation for his commitment to continue sending work to U.S.
keeping the best transcribers. Pay was calculated per line of workers. And because Eight Crossings is paying the market
text at a rate that varied according to the complexity of the rate, moving to another company would not offer employees
material being transcribed. Depending on how many hours an advantage in terms of pay.
QUESTIONS 3. How would you evaluate the company’s method of com-

1. How did the change in pay level at Eight Crossings municating the change in pay level? What improvements
affect its ability to attract and retain a high-quality to that process can you suggest?
workforce? SOURCES: Darren Dahl, “Special Financial Report: Employee
2. Do you think the company’s pay structure was better Compensation,” Inc., July 2009, www.inc.com; Eight Crossings, corporate
suited to its objectives before or after the reduction in pay website, www.eightcrossings.com, accessed May 30, 2015, and “Company
level? Why? Profile: No. 609, Eight Crossings,” Inc. 500/5000 (2000), www.inc.com.
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17. J. P. Pfeffer and A. Davis-Blake, “Understanding Organizational 28. P. R. Eyers, “Realignment Ties Pay to Performance,” Personnel
Wage Structures: A Resource Dependence Approach,” Academy Journal, January 1993, p. 74.
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18. M. Bidwell, F. Briscoe, I. Fernandez-Mateo, and A. Sterling, tion and Benefits Review, July–August 1995, p. 55; Heneman
“The Employment Relationship and Inequality: How and Why et al., “The Changing Nature of Work”; G. Ledford, “Factors
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in Organizations,” Academy of Management Annals 7, no. 1 datWork Journal, First Quarter (2008), pp. 6–18; J. Canavan,
(2013), pp. 61–121; G. E. Ledford, “The Changing Landscape “Overcoming the Challenge of Aligning Skill-based Pay Levels
of Employee Rewards: Observations and Prescriptions,” Orga- to the External Market,” WorldatWork Journal, First Quarter
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Newman, and Gerhart, Compensation, 11th ed. You Pay for Skills, Will They Learn? Skill Change and Main-
19. C. M. Solomon, “Global Compensation: Learn the ABCs,” Per- tenance Under a Skill-Based Pay System,” Journal of Manage-
sonnel Journal, July 1995, p. 70; and R. A. Swaak, “ Expatri- ment 34 (2008), pp. 721–43.
ate Management: The Search for Best Practices,” Compensation 30. Ledford, “3 Cases.”
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20. 1997–1998 Survey of Geographic Pay Differential Policies and 32. Atul Mitra, Nina Gupta, and Jason D. Shaw. “A Comparative
Practices (Rochester, WI: Runzeimer International). Examination of Traditional and Skill-Based Pay Plans.” Journal
21. E. E. Lawler III, Pay and Organizational Development (Read- of Managerial Psychology 26 (2011): 278–296.
ing, MA: Addison-Wesley, 1981). 33. T. D. Wall, J. M. Corbett, R. Martin, C. W. Clegg, and P. R. Jack-
22. R. Folger and M. A. Konovsky, “Effects of Procedural and Dis- son, “Advanced Manufacturing Technology, Work Design, and
tributive Justice on Reactions to Pay Raise Decisions,” Academy Performance: A Change Study,” Journal of Applied Psychology
of Management Journal 32 (1989), pp. 115–30; H. G. Heneman 75 (1990), pp. 691–97.
III and T. A. Judge, “Compensation Attitudes,” in S. L. Rynes 34. James P. Womack, Daniel T. Jones, Daniel Roos, and Donna
and B. Gerhart, eds., Compensation in Organizations (San Fran- S. Carpenter, The Machine That Changed the World: Based
cisco: Jossey-Bass, 2002), pp. 61–103; J. Greenberg, “Deter- on the Massachusetts Institute of Technology 5-Million Dollar
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Journal of Applied Psychology 71 (1986), pp. 340–42; and son Assoc., 1990), p. 56.
35. Lawler, Strategic Pay. G. G. Cain, “The Economic Analysis of Labor-Market Dis-
36. Ibid.; Gerhart and Milkovich, “Employee Compensation.” crimination: A Survey,” in Handbook of Labor Economics, ed.
37. B. C. Murray and B. Gerhart, “An Empirical Analysis of a Skill- O. Ashenfelter and R. Layard (New York: North-Holland, 1986),
Based Pay Program and Plant Performance Outcomes,” Acad- pp. 694–785; F. D. Blau and L. M. Kahn, “The Gender Pay Gap:
emy of Management Journal 41, no. 1 (1998), pp. 68–78. Have Women Gone as Far as They Can?” Academy of Manage-
38. Ibid.; N. Gupta, D. Jenkins, and W. Curington, “Paying for ment Perspectives, February 2007, pp. 7–23.
Knowledge: Myths and Realities,” National Productivity 49. Helen Remick, “The Comparable Worth Debate,” Public Per-
Review, Spring 1986, pp. 107–23; J. D. Shaw, N. Gupta, A. sonnel Management, Winter 1981.
Mitra, and G. E. Ledford, “Success and Survival of Skill-Based 50. D. P. Schwab, “Job Evaluation and Pay-Setting: Concepts and
Pay Plans,” Journal of Management 31 (2005), pp. 28–49. Practices,” in Comparable Worth: Issues and Alternatives, ed.
39. Education at a Glance—OECD Indicators 2010, www.OECD.org. E. R. Livemash (Washington, DC: Equal Employment Advisory
40. M. Hayes, “Precious Connection: Companies Thinking about Council, 1980).
Using Offshore Outsourcing Need to Consider More than Just 51. B. Gerhart and N. El Cheikh, “Earnings and Percentage
Cost Savings,” Information Week Online, www.information- Female: A Longitudinal Study,” Industrial Relations 30 (1991),
week.com (October 20, 2003); Harold L. Sirkin et al., “Made pp. 62–78; R. S. Smith, “Comparable Worth: Limited Coverage
in America Again,” Boston Consulting Group, August 2011; and the Exacerbation of Inequality,” Industrial and Labor Rela-
K. Chu, “Not Made in China,” Wall Street Journal, May 1, tions Review 61 (1988), pp. 227–39.
2013; Y. Zhang, “China Begins to Lose Edge as World’s Factory 52. W. T. Bielby and J. N. Baron, “Men and Women at Work: Sex
Floor,” Wall Street Journal, January 17, 2013; A. Fox, “Amer- Segregation and Statistical Discrimination,” American Journal
ica, Inc.: More U.S. Manufacturers Are Making a U-turn on Off- of Sociology 91 (1986), pp. 759–99.
shoring,” HR Magazine, May 2013, pp. 45–48. 53. Rynes and Milkovich, “Wage Surveys”; and G. T. Milkovich,
41. Heather Timmons, “Cost-Cutting in New York, but a Boom in J. M. Newman, and B. Gerhart, Compensation, 10th ed. (New
India,” New York Times, August 12, 2008, p. C1. Reprinted with York: McGraw-Hill/Irwin, 2010).
permission of PARS International. 54. U.S. Department of Labor website, at www.dol.gov/esa/regs/
42. William Bulkeley, “IBM Documents Give Rare Look at Sensi- compliance/ofccp/faqs/comstrds.htm.
tive Plans on ‘Offshoring,’” The Wall Street Journal, January 55. Gerhart, “Gender Differences in Current and Starting Salaries”;
19, 2004; David Wessel, “Big U.S. Firms Shift Hiring Abroad,” B. Gerhart and G. T. Milkovich, “Salaries, Salary Growth, and
The Wall Street Journal, April 19, 2011. Promotions of Men and Women in a Large, Private Firm,” in
43. A. Farnham, “The Trust Gap,” Fortune, December 4, 1989, Pay Equity: Empirical Inquiries, ed. R. Michael, H. Hartmann,
pp. 56ff; and Scott McCartney, “AMR Unions Express Fury,” and B. O’Farrell (Washington, DC: National Academy Press,
The Wall Street Journal, April 17, 2003; AFL-CIO, “Dodd- 1989); K. W. Chauvin and R. A. Ash, “Gender Earnings Dif-
Frank Section 953(b): Why CEO-to-Worker Pay Ratios Matter ferentials in Total Pay, Base Pay, and Contingent Pay,” Indus-
For Investors,” www.aflcio.org/content/download/1090/9807/ trial and Labor Relations Review 47 (1994), pp. 634–49; M. M.
version/1/file/Why-CEO-to-Worker-Pay-Ratios-Matter-For- Elvira and M. E. Graham, “Not Just a Formality: Pay System
Investors.pdf, accessed May 16, 2013. Formalization and Sex-Related Earnings Effects,” Organization
44. D. M. Cowherd and D. I. Levine, “Product Quality and Pay Science 13 (2002), pp. 601–17.
Equity between Lower-Level Employees and Top Management: 56. Gerhart, “Gender Differences in Current and Starting Salaries”;
An Investigation of Distributive Justice Theory,” Administrative B. Gerhart and S. Rynes, “Determinants and Consequences of
Science Quarterly 37 (1992), pp. 302–20. Salary Negotiations by Graduating Male and Female MBAs,”
45. U.S. Bureau of Labor Statistics, “Highlights of Women’s Earn- Journal of Applied Psychology 76 (1991), pp. 256–62.
ings in 2013,” Report 1015, December 2014. 57. G. F. Dreher and R. A. Ash, “A Comparative Study of Mentor-
46. Ibid. ing among Men and Women in Managerial, Professional, and
47. C. Kulich, G. Trojanowski, M. K. Ryan, S. A. Haslam, and L. D. Technical Positions,” Journal of Applied Psychology 75 (1990),
R. Renneboog, “Who Gets the Carrot and Who Gets the Stick? pp. 539–46.
Evidence of Gender Disparities in Executive Remuneration,” 58. G. A. Patterson, “Nordstrom Inc. Sets Back-Pay Accord on
Strategic Management Journal 32 (2011), pp. 301–21; and Suit Alleging ‘Off-the-Clock’ Work,” The Wall Street Journal,
F. Munôz-Bullón, “Gender-Level Differences among High- January 12, 1993, p. A2; for additional information on overtime
Level Executives,” Industrial Relations 49 (2010), pp. 346–70. legal issues, see A. Weintraub and J. Kerstetter, “Revenge of the
48. B. Gerhart, “Gender Differences in Current and Starting Sala- Overworked Nerds,” BusinessWeek Online, www.businessweek.
ries: The Role of Performance, College Major, and Job Title,” com (December 8, 2003).
Industrial and Labor Relations Review 43 (1990), pp. 418–33; 59. http://www.dol.gov/whd/overtime/NPRM2015/factsheet.htm.
Recognizing Employee
Contributions with Pay
12
C H A P T E R
LEARNING OBJECTIVES
LO 12-1 Discuss how pay influences individual employees, and describe three
theories that explain the effect of compensation on individuals. page 498
LO 12-2 Describe the fundamental pay programs for recognizing employees’

contributions to the organization’s success. page 503
LO 12-3 List the advantages and disadvantages of the pay programs. page 505
LO 12-4 Describe how organizations combine incentive
plans in a balanced scorecard. page 517
LO 12-5 Discuss issues related to performance-based pay for executives. page 518

LO 12-6 Explain the importance of process issues such as
communication in compensation management. page 521
LO 12-7 List the major factors to consider in matching the pay

strategy to the organization’s strategy. page 524
496
>>>
Employers Raise Pay, But Keep an Eye on Fixed Costs
According to the Employment Cost Index, U.S. Three U.S. automakers have moved to better control
Bureau of Labor Statistics, employer costs for wages fixed labor costs by using profit-sharing payments,
and benefits grew at the fastest rate in 6 years—but which are similar to bonuses, but often depend more
that was still just 2.2%. Aon Hewitt reports, based on company performance and less on individual
on a survey of larger companies, that merit pay performance, in lieu of base pay increases in recent
increases are expected to average 3.0% in 2015, years. Another way that employers are keeping fixed
larger than in recent years. The growth in pay costs under control is by maintaining strict control
reflects the tightening of labor markets that we dis- on the hiring of full-time employees, instead often
cussed in Chapter 11. Aon Hewitt also found that in relying on temporary workers or independent con-
many of the companies it surveyed, merit bonuses, tractors. When asked what the explanation was for
which unlike traditional merit salary/wage increases, employers keeping tight control on hiring and on
do not become part of base salary, will be a much traditional merit increases, Jim Link, chief human
larger percentage of salary in 2015: as much as 12.7% resources officer at Randstad, an employee staffing
in the companies that use them and for the employ- company referred to “lessons learned from a tough
ees they use them for. Ken Abosch of Aon Hewitt recession.”
explains that “organizations are still very fixated on
SOURCES: Dorin Levin, “Automakers, Labor Union Face a Long, Hot
productivity and cost containment.” Using bonuses, Summer of Contract Talks,” Fortune, April 7, 2015, www.fortune.com;
a form of variable pay, makes cost containment Annie Baxter, “Wages and Benefits See Highest Bump in Six Years,”
Market Watch, January 30, 2015, www.marketplace.org; Jena McGregor,
more possible in future years if business turns down- “The Likelihood of Getting a Raise in 2015,” The Washington Post,
ward. In contrast, Barry Gerhart of the University of January 9, 2015, www.washingtonpost.com; Rachel Feinsteig, “Bonuses
Trickle Down,” The Wall Street Journal, January 1, 2015, www.wsj.com;
Wisconsin–Madison notes, “If you put the money Dan Gorenstein, “Why You’ve Been Getting Bonuses, Not Raises, Lately,”
into salary, it’s there forever. If you give out money Marketplace, August 29, 2014, www.marketplace.org; Damian Paletta,
“Temp Jobs Surge as Firms Contain Expenses,” The Wall Street Journal,
in terms of a bonus, people get it that year and have April 7, 2014, www.wsj.com; and Tracy Samilton, “Profit-Sharing Checks
to re-earn it the following year.” In this vein, the Big Replace Autoworkers Raises,” NPR, January 30, 2013, www.npr.com.
Introduction
As the chapter opening illustrates, organizations must pay competitive salaries and ben-
efits to compete in the labor market, which has tightened recently with unemployment
rates dropping. At the same time, however, organizations must control labor costs (which
influence product price) to compete in the product market. Employers have also learned
to be especially careful about taking on fixed labor costs.
The preceding chapter discussed setting pay for jobs. In this chapter we focus on set-
ting pay for individual employees. We examine how to use pay to recognize and reward
employees’ contributions to the organization’s success. Employees’ pay does not depend
solely on the jobs they hold. Instead, differences in performance (individual, group, or
organization), seniority, skills, and so forth are used as a basis for differentiating pay
among employees.1 In some cases, large amounts of compensation can be at stake.
497
498 CHAPTER 12 Recognizing Employee Contributions with Pay
Several key questions arise in evaluating different pay programs for recognizing con-
tributions. First, what are the costs of the program? Second, what is the expected return
(in terms of influences on attitudes and behaviors) from such investments? Third, does
the program fit with the organization’s human resource strategy and its overall business
strategy? Fourth, what might go wrong with the plan in terms of unintended conse-
quences? For example, will the plan encourage managers and employees to pay more
attention to some objectives (e.g., short-term sales) than to some others (e.g., customer
service, long-term customer satisfaction, and long-term sales)?
Organizations have a relatively large degree of discretion in deciding how to pay, espe-
cially compared with the pay level decisions discussed in the previous chapter. The same
organizational pay level (or “compensation pie”) can be distributed (shared) among employ-
ees in many ways. Whether each employee’s share is based on individual performance,
profits, seniority, or other factors (the “how” to pay decision), the size of the pie (and thus
the cost to the organization, the “how much” to pay decision) can remain the same.
Regardless of cost differences, different pay programs can have very different conse-
quences for productivity and return on investment. Indeed, a study of 150 organizations
found not only that the largest differences between organizations had to do with how
(rather than how much) they paid, but that these differences also resulted in different
levels of profitability.2
How Does Pay Influence Individual

Employees?
LO 12-1 Pay plans are typically used to energize, direct, sustain, or control the behavior of current
Discuss how pay employees. We refer to the effect of pay plans on current employees as an incentive effect.
influences individual (Later, we will introduce the concept of a sorting effect, which is how pay influences
employees, and
employee behaviors by how pay shapes the composition of the workforce.) Equity theory,
describe three theories
that explain the effect described in the previous chapter, is relevant here as well. Most employees compare their
of compensation on own pay with that of others, especially those in the same job. Perceptions of inequity may
individuals. cause employees to take actions to restore equity. Unfortunately, some of these actions
(like quitting, reduced effort, or lack of cooperation) may not help the organization.
Incentive Effect Three additional theories also help explain compensation’s effects: reinforcement,
The effect a pay plan expectancy, and agency theories.
has on the behaviors of
current employees.
REINFORCEMENT THEORY
E. L. Thorndike’s Law of Effect states that a response followed by a reward is more
likely to recur in the future. The implication for compensation management is that high
employee performance followed by a monetary reward will make future high perfor-
mance more likely. By the same token, high performance not followed by a reward will
make it less likely in the future. The theory emphasizes the importance of a person’s
actual experience of a reward.
EXPECTANCY THEORY
Expectancy Theory Although expectancy theory also focuses on the link between rewards and behaviors, it
The theory that says
motivation is a function
emphasizes expected (rather than experienced) rewards. In other words, it focuses on the
of valence, instrumen- effects of incentives. Behaviors (job performance) can be described as a function of abil-
tality, and expectancy. ity and motivation. In turn, motivation is hypothesized to be a function of expectancy,
CHAPTER 12 Recognizing Employee Contributions with Pay 499
instrumentality, and valence perceptions. Compensation systems differ according to

their impact on these motivational components. Generally speaking, the main influence
of compensation is on instrumentality: the perceived link between behaviors and pay.
Valence of pay outcomes should remain the same under different pay systems. Expec-
tancy perceptions (the perceived link between effort and performance) often have more
to do with employee selection, job design and training than pay systems. A possible
exception would be skill-based pay, which directly influences employee training and
thus expectancy perceptions.
Intrinsic and Extrinsic Motivation

Although expectancy theory implies that linking an increased amount of rewards to
performance will increase motivation and performance, some authors have used cogni-
tive evaluation theory to question this assumption, arguing that monetary rewards may
increase extrinsic motivation but decrease intrinsic motivation. Extrinsic motivation
depends on rewards (such as pay and benefits) controlled by an external source, whereas
intrinsic motivation depends on rewards that flow naturally from work itself (like per-
forming interesting work).3 In other words, the concern would be that paying a child to
read books may diminish the child’s natural interest (intrinsic motivation) in reading,
and the child may in the future be less likely to read books unless there are monetary
incentives. Although monetary incentives may reduce intrinsic motivation in some set-
tings (such as education), the evidence suggests that such effects are small and probably
not very relevant to most work settings, where monetary payment is the norm.4 A meta-
analytic review of field research found that intrinsic motivation was actually higher, not
lower, when extrinsic incentives were in place. One reason that extrinsic incentives may
not have an adverse effect on intrinsic motivation in the workplace is the sorting process
(discussed shortly) in the labor market, which matches people, over time, to jobs that fit
their preferences, including reward preferences (e.g., for intrinsic and/or extrinsic moti-
vators).5 Further, evidence indicates that incentive pay has significant positive effects on
performance, which is a function of both intrinsic and extrinsic motivation.6 Therefore,
while it is important to keep in mind that money is not the only effective way to motivate
behavior and that monetary rewards will not always be the answer to motivation prob-
lems, it does not appear that monetary rewards run much risk of compromising intrinsic
motivation in most work settings. The “Competing through Technology” box provides
an example of how monetary and nonmonetary rewards often go hand in hand.
AGENCY THEORY
This theory focuses on the divergent interests and goals of the organization’s stakehold-
ers and the ways that employee compensation can be used to align these interests and Principal
In agency theory, a
goals. We cover agency theory in some depth because it provides especially relevant person (e.g., an owner)
implications for compensation design. who seeks to direct
An important characteristic of the modern corporation is the separation of ownership another person’s
from management (or control). Unlike the early stages of capitalism, where owner and behavior.
manager were often the same, today, with some important exceptions (mostly smaller
companies), most stockholders are far removed from the day-to-day operation of compa- Agent
nies. Although this separation has important advantages (like mobility of financial capi- In agency theory, a per-
son (e.g., a manager)
tal and diversification of investment risk), it also creates agency costs—the interests of who is expected to act
the principals (owners) and their agents (managers) may no longer converge. What is on behalf of a principal
best for the agent, or manager, may not be best for the owner. (e.g., an owner).
Recruiting and Retaining Engineering Talent in China
China’s economy has grown at a development centers, where, at a move into top
rapid pace, making it now the sec- minimum, such tailoring of cars to research and
ond largest economy in the world. Chinese consumers takes place. development managerial roles
Wages and salaries have risen as Ford’s Nanjing product devel- in Chinese companies. Providing
has consumption. For example, opment center employed 300 such opportunities for promo-
the number of automobiles sold in people in 2007. Ford (like other tion and higher pay will likely be
China, as well as their price points, companies) is investing hundreds increasingly important in attract-
continues to increase. Accord- of millions of dollars there in an ing/retaining the right number and
ingly, foreign automakers increas- effort to increase employment to quality of engineers needed to
ingly produce and sell cars and 2,000 people by 2018. Mr. Ma, a reach the goal of building a high
increasingly expensive, higher Ford engineer from China, says level of engineering and product
end cars in China. Of course, in his current job, he and his team development capability in China.
consumers in China have some “mostly modifies existing Ford
preferences that differ from other technology to fit Chinese market
1. Why are foreign automakers
parts of the world. For example, requirements.” However, he has
increasing their research and
Ford just introduced its Ford Tau- higher aspirations. He hopes
development presence in
rus to China for the first time. But that in the near future, Ford will
China?
Ford announced that because give his group the opportunity
2. How do you think the growth
second-row passengers are so to design new parts to be used
and evolution of China’s
important in China, “where the globally by Ford. To keep the best
economy have influenced the
owner of the premium vehicle is engineers, Ford and other com-
aspirations of employees in
often a passenger rather than the panies are starting to realize that
China? What about engineers
driver,” the second row of the Tau- they will need to not only be more
specifically?
rus “has been designed with an competitive on pay and provide
3. What are the advantages and
emphasis on comfort.” Specifically, the opportunity to work in a lead-
disadvantages foreign com-
the rear seat has more legroom ing global company, but also pro-
panies have in recruiting and
and hip room than it would other- vide these sorts of career growth
retaining Chinese engineers?
wise. Another design attribute tai- opportunities as China evolves to
How might the employment
lored to the Chinese consumer is have a larger role in global prod-
“deal” offered by foreign com-
“more than 25 intelligent storage uct development.
panies need to change to be
spaces,” which include not just A related challenge for Ford
able to compete for this talent?
regular cupholders, but ones that and other foreign companies is to
can “securely hold different-sized take steps to avoid the perception SOURCES: J. R. Healey, “Ford Shows Redone
Taurus for China, not U.S.,” USA Today, April
tea bottles.” that the top jobs are not open to 19, 2015, www.usatoday.com; C. Hetzner,
One challenge faced by Ford local Chinese and to demonstrate “Mercedes Increases Emphasis on China in Bid
and other foreign automobile that they will instead have more to Pass BMW, Audi,” Automotive News Europe,
January 13, 2015; Colum Murphy, “In China,
producers is the need to recruit opportunities to work on higher Engineers Are Hard to Keep,” The Wall Street
engineers for their research and level technical challenges and/or Journal, July 2, 2014, p. B1.
Agency costs can arise from two factors. First, principals and agents may have differ-
ent goals (goal incongruence). Second, principals may have less than perfect informa-
tion on the degree to which the agent is pursuing and achieving the principal’s goals
(information asymmetry).
Consider three examples of agency costs that can occur in managerial compensation.7
First, although shareholders seek to maximize their wealth, management may spend
500
money on things such as perquisites (corporate jets, for example) or “empire building”
(making acquisitions that do not add value to the company but may enhance the man-
ager’s prestige or pay). Second, managers and shareholders may differ in their attitudes
toward risk. Shareholders can diversify their investments (and thus their risks) more eas-
ily than managers (whose only major source of income may be their jobs), so managers
are typically more averse to risk. They may be less likely to pursue projects or acquisi-
tions with high potential payoff. It also suggests a preference on the part of managers
for relatively little risk in their pay (high emphasis on base salary, low emphasis on
uncertain bonuses or incentives). Indeed, research shows that managerial compensation
in manager-controlled firms is more often designed in this manner.8 Third, decision-
making horizons may differ. For example, if managers change companies more than
owners change ownership, managers may be more likely to maximize short-run perfor-
mance (and pay), perhaps at the expense of long-term success.
Agency theory is also of value in the analysis and design of nonmanagers’ compensa-
tion. In this case, interests may diverge between managers (now in the role of principals)
and their employees (who take on the role of agents).
In designing either managerial or nonmanagerial compensation, the key question is,
How can such agency costs be minimized? Agency theory says that the principal must
choose a contracting scheme that helps align the interests of the agent with the princi-
pal’s own interests (that is, it reduces agency costs). These contracts can be classified as
either behavior-oriented (such as merit pay) or outcome-oriented (stock options, profit
sharing, commissions, and so on).9
At first blush, outcome-oriented contracts seem to be the obvious solution. If profits
are high, compensation goes up. If profits drop, compensation goes down. The interests
of “the company” and employees are aligned. An important drawback, however, is that
such contracts also increase the agent’s risk. And because agents are averse to risk, they
may require higher pay (a compensating wage differential) to make up for it.10 Thus, there
is a trade-off between risk and incentives that must be considered. Outcome-oriented
contracts are, for example, typically a major component of executive compensation.11
Behavior-based contracts, on the other hand, do not transfer risk to the agent and thus
do not require a compensating wage differential. However, the principal must be able to
overcome the information asymmetry issue. To do so the principal must either invest in
monitoring (e.g., add more supervisors) and information or else revert, at least in part, to
structuring the contract so that pay is linked at least partly to outcomes.12
Which type of contract should an organization use? It depends partly on the following
factors:13
∙ Risk aversion. Risk aversion among agents makes outcome-oriented contracts less
likely.
∙ Outcome uncertainty. Profit is an example of an outcome. Agents are less willing to
have their pay linked to profits to the extent that there is a risk of low profits. They
would therefore prefer a behavior-oriented contract.
∙ Job programmability. As jobs become less programmable (less routine), outcome-
oriented contracts become more likely because monitoring becomes more difficult.14
∙ Measurable job outcomes. When outcomes are more measurable, outcome-oriented
contracts are more likely.15
∙ Ability to pay. Outcome-oriented contracts contribute to higher compensation costs
because of the risk premium.
∙ Tradition. A tradition or custom of using (or not using) outcome-oriented contracts
will make such contracts more (or less) likely.
In summary, the reinforcement, expectancy, and agency theories all focus on the fact
that behavior–reward contingencies can shape behaviors. However, agency theory is
of particular value in compensation management because of its emphasis on the risk–
reward trade-off, an issue that needs close attention when companies consider variable
pay plans, which can carry significant risk.
How Do Pay Sorting Effects

Influence Labor Force Composition?
Traditionally, using pay to recognize employee contributions has been thought of as a
way to influence the behaviors and attitudes of current employees, whereas pay level and
benefits have been seen as a way to influence so-called membership behaviors: decisions
about whether to join or remain with the organization. However, it is now recognized
that individual pay programs may also affect the nature and composition of an organiza-
tion’s workforce.16 For example, it is possible that an organization that links pay to per-
formance may attract more high performers than an organization that does not link the
two. There may be a similar effect with respect to job retention.17 This effect on work-
Sorting Effect force composition is sometimes referred to as a sorting effect.
The effect a pay plan Continuing the analysis, different pay systems appear to attract people with different
has on the composi- personality traits and values.18 Organizations that link pay to individual performance
tion of the current
workforce (the types of
may be more likely to attract individualistic and risk-oriented employees, whereas orga-
employees attracted nizations relying more heavily on team rewards are more likely to attract team-oriented
and retained). employees. The implication is that the design of compensation programs needs to be
carefully coordinated with the organization and human resource strategy. Increasingly,
both in the United States and abroad, employers are seeking to establish stronger links
between pay and performance.
Pay for Performance Programs

DIFFERENTIATION IN PERFORMANCE AND PAY
Many organizations seek to use pay to differentiate between employees (i.e., create pay
dispersion) based on their performance, especially in jobs (e.g., higher job levels) where
the consequences of good versus average versus poor performance become more impor-
tant to organization performance.19 Some evidence suggests that high performers can
generate a disproportionate amount of value.20 If so, paying high performers an amount
they feel is equitable (see Chapter 11) to motivate them (i.e., achieve positive incentive
effects), as well as attract and retain them (i.e., achieve positive sorting effects) becomes
increasingly important. Conventional wisdom sometimes says that differentiation among
individuals is ill-advised in certain contexts (e.g., teams, collectivistic cultures, where
creativity/innovation are critical), but the evidence does not support such simple claims
and, indeed, differentiation/pay for individual performance can be important for success
in these contexts also.21 What we can say is that employees will pay close attention to
why different employees get paid differently and how fair those differences are, and their
perceptions of fairness will drive their behaviors.22
DIFFERENTIATION STRENGTH/INCENTIVE INTENSITY: PROMISE AND PERIL

A key decision in designing pay for performance plans concerns incentive intensity,
the strength of the relationship between performance and pay (i.e., how strongly we
differentiate in performance and pay). For example, if I increase (decrease) my perfor-

mance by 20%, by what percent will my pay increase (decrease)? The larger the change
in pay, the stronger the incentive intensity. For jobs (sales, executives, stock brokers,
investment bankers, investment portfolio managers, loan officers) where objective,
results-based measures of performance are available, incentive intensity tends to be
higher, compared to jobs (e.g., staff jobs in human resources, accounting) where more
subjective, behavior-based (e.g., performance ratings) must be used. It is generally more
of a challenge to credibly link big differences in pay to subjective measures. An impor-
tant principle is that the stronger the incentive intensity, the stronger the motivation, but
also the greater the chance that there will be unintended, undesirable consequences. We
can link the pay of an automobile repair shop manager to sales and that will likely drive
higher sales. Although we hope that higher sales result from efficiency and innovation in
customer service, we have to recognize there is a risk that higher sales may be driven by
fixing things on customers’ cars that do not need fixing. Likewise, paying mortgage loan
officers based on the mortgage revenue they create can generate more revenue, hope-
fully again through outstanding customer service, but the risk is that loans will be given
to people who cannot afford them, which can come back to be a problem for the bank
in the future. We can pay teachers partly based on how well their students perform on
standardized tests. But we need to have safeguards in anticipation of the possibility that
at least some teachers will look for ways to increase scores through means other than bet-
ter teaching. If a financial institution’s top executives believe the government will decide
they are “too big to fail,” they may be likely to take larger investment risks (“excessive
risk taking” to the government that subsequently decides it must bail out the firm if the
risks go bad and to the shareholders who lose if bankruptcy ensues). This is especially
a risk if the executive does not have the same downside risk faced by shareholders. We
will see other risks of pay for performance in this chapter as well and also steps (e.g.,
caps on bonuses, clawback provisions, balanced scorecards) companies and regulators
have taken to avoid such risks. When one hears stories of what sometimes goes wrong
with pay for performance, it is tempting to choose a weaker incentive intensity to avoid
such problems. That may be wise in some cases. However, one must be careful not to
weaken incentive intensity too much, else the reward for high performance can become
too weak to motivate employees. And if a competitor provides a pay for performance
environment with stronger incentive intensity, your strong performers may decide to
work there instead (i.e., a negative sorting result). So, there is also a risk to weakening
incentive intensity/pay for performance too much.
TYPES OF PAY FOR PERFORMANCE: AN OVERVIEW LO 12-2

Table 12.1 provides an overview of the programs for recognizing employee contribu- Describe the funda-
mental pay programs
tions. Each program shares a focus on paying for performance. The programs differ for recognizing employ-
according to three design features: (1) payment method, (2) frequency of payout, and ees’ contributions
(3) ways of measuring performance. In a perhaps more speculative vein, the table also to the organization’s
suggests the potential consequences of such programs for (1) performance motivation of success.
employees, (2) attraction of employees, (3) organization culture, and (4) costs. Finally,
there are two contingencies that may influence whether each pay program fits the situa-
tion: (1) management style and (2) type of work. We now discuss the different programs
and some of their potential consequences in more depth.
In compensating employees, an organization does not have to choose one program
over another. Instead, a combination of programs is often the best solution. For example,
one program may foster teamwork and cooperation but not enough individual initiative.
Table 12.1
Programs for Recognizing Employee Contributions
MERIT INCENTIVE PROFIT GAIN

PAY PAY SHARING OWNERSHIP SHARING SKILL-BASED
Design features
Payment Changes in Bonus Bonus Equity Bonus Change in
method base pay changes base pay
Frequency of Annually Weekly Semiannually When stock Monthly or When skill
payout or annually sold quarterly or com-
petency
acquired
Performance Supervisor’s Individual out- Company Company Production or Skill or
measures appraisal of put, productiv- profit stock returns controllable competency
individual ity, sales costs of stand- acquisition
performance alone work of individuals
unit
Consequences
Performance Relationship Clear per- Stronger in Stronger in Stronger in Encourages
motivation between formance– smaller firms smaller firms smaller units learning
pay and per- reward
formance connection
varies
Attraction Over time Pays higher Helps with all Can help Helps with all Attracts
pays better performers employees if lock in employees if learning-
performers more plan pays out employees plan pays out oriented
more employees
Culture Individual Individual Knowledge Sense of Supports coop- Learning
competition competition of busi- owner- eration, prob- and flexible
ness and ship and lem solving organization
cooperation cooperation
Costs Requires well- Setting and Relates costs Relates costs Setting and Training and
developed maintaining to ability to to ability to maintaining certification
performance acceptable pay pay acceptable
appraisal standards standards
system
Contingencies
Management Some par- Control Fits Fits Fits Fits
style ticipation participation participation participation participation
desirable
Type of work Individual Stable, indi- All types All types All types Significant
unless group vidual, easily skill depth or
appraisals measurable breadth
done
SOURCE: Adapted and modified from E. E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits,
ed. L. R. Gomez-Mejia (Washington, DC: Bureau of National Affairs, 1989).
Another may do the opposite. Used in conjunction, a balance may be attained. Such
balancing of objectives, combined with careful alignment with the organization and
human resource strategy, may help increase the probability that a pay-for-performance
program has its intended effects and reduce the probability of unintended consequences
and problems.23 The balanced scorecard, which we discuss in this chapter, is an example LO 12-3
of a structured approach to balancing objectives. The fundamental principle is that we List the advantages and
care about financial results, but we also care about HOW they are achieved and also disadvantages of the
pay programs.
how nonfinancial measures can be used, tracked, and influenced to achieve better future
financial results. So, it also helps avoid too much short-term focus.24
Merit Pay
In traditional merit pay programs, annual base pay increases are usually linked to perfor- Merit Pay
mance appraisal ratings. (See Chapter 8.) Some type of merit pay program exists in Traditional form of pay
almost all organizations (although evidence on merit pay effectiveness is surprisingly in which base pay is
increased permanently.
scarce).25 In some cases, employers have moved toward a form of merit pay that relies on
bonuses rather than increases to base pay. One reason for the widespread use of merit
Merit Bonus
pay, or merit bonuses, a form of variable pay, is its ability to define and reward a broad Merit pay paid in
range of performance dimensions. (See Table 12.2 for an example.) Indeed, given the the form of a bonus,
pervasiveness of merit pay programs, we devote a good deal of attention to them here. instead of a salary
increase.
Basic Features. Many merit pay programs work off of a merit increase grid. As
Table 12.3 indicates, the size and frequency of pay increases are determined by two fac- Merit Increase Grid
tors. The first factor is the individual’s performance rating (better performers receive A grid that combines
higher pay). The second factor is position in range (that is, an individual’s compa-ratio). an employee’s per-
So, for example, an employee with a performance rating that exceeds expectations and a formance rating with
the employee’s posi-
compa-ratio of 120 would receive a pay increase of roughly 3%. By comparison, an
tion in a pay range to
employee with a performance rating of exceeds expectations and a compa-ratio of 85 determine the size and
would receive an increase of around 7%. (Note that the general magnitude of increases in frequency of his or her
such a table is influenced by inflation rates.) One reason for factoring in the compa-ratio pay increases.
Table 12.2
1. Exercises good business judgment Performance
2. Inspires enthusiasm, energy, understanding, loyalty for company goals Dimensions for
3. Attracts, grows, and retains outstanding talent Lower to Midlevel
4. Shows initiative Managers, Arrow
5. Has position-specific knowledge Electronics
6. Delivers results
7. Builds internal good will
SOURCE: R. Riphahn (2011), Evidence on Incentive Effects of Subjective Performance Evaluations,”

Industrial and Labor Relations Review, 64.
Table 12.3
RECOMMENDED SALARY INCREASES BY PERFORMANCE
Merit Increase Grid
RATING AND COMPA-RATIO
COMPA-RATIOa
80% TO 90% 91% TO 110% 111% TO 120%
Performance rating
Exceeds expectations 7% 5% 3%
Meets expectations 4% 3% 2%
Below expectations 2% 0% 0%
aEmployee salary/midpoint of their salary range.

Table 12.4
PERFORMANCE RATING COMPA-RATIO TARGET
Performance Ratings
and Compa-Ratio
Targets Exceeds expectations 111–120
Meets expectations 91–110
Below expectations Below 91
is to control compensation costs and maintain the integrity of the pay structure. If a per-
son with a compa-ratio of 120 received a merit increase of 7%, she would soon exceed
the pay range maximum. Not factoring in the compa-ratio would also result in uncon-
trolled growth of compensation costs for employees who continue to perform the same
job year after year. Instead, some organizations think in terms of assessing where the
employee’s pay is now and where it should be, given a particular performance level.
Consider Table 12.4. An employee who consistently performs at the highest level is tar-
geted to be paid at 111 to 120% of the market (that is, a compa-ratio of 111 to 120). To
the extent that the employee is far from that pay level, larger and more frequent pay
increases are necessary to move the employee to the correct position. On the other hand,
if the employee is already at that pay level, smaller pay increases will be needed. The
main objective in the latter case would be to provide pay increases that are sufficient to
maintain the employee at the targeted compa-ratio.
In controlling compensation costs, another factor that requires close attention is the
distribution of performance ratings. (See Chapter 8.) In many organizations, 60% to 70%
of employees fall into the top two (out of four to five) performance rating categories.26
This means tremendous growth in compensation costs because most employees will
eventually be above the midpoint of the pay range, resulting in compa-ratios well over
100. To avoid this, some organizations provide guidelines regarding the percentage of
employees who should fall into each performance category, usually limiting the percent-
age that can be placed in the top two categories. These guidelines are enforced differ-
ently, ranging from true guidelines to strict forced-distribution requirements.27
In general, merit pay programs have the following characteristics. First, they identify
individual differences in performance, which are assumed to reflect differences in abil-
ity or motivation. By implication, system constraints on performance are not seen as
significant. Second, the majority of information on individual performance is collected
from the immediate supervisor. Peer and subordinate ratings are rare, and where they
exist, they tend to receive less weight than supervisory ratings.28 Third, there is a policy
of linking pay increases to performance appraisal results.29 Fourth, the feedback under
such systems tends to occur infrequently, often once per year at the formal performance
review session. Fifth, the flow of feedback tends to be largely unidirectional, from super-
visor to subordinate.
Criticisms of Traditional Merit Pay Programs. Criticisms of this process have been
raised. For example, W. Edwards Deming, a leader of the total quality management
movement, argued that it is unfair to rate individual performance because “apparent dif-
ferences between people arise almost entirely from the system that they work in, not
from the people themselves.”30 Examples of system factors include co-workers, the job,
materials, equipment, customers, management, supervision, and environmental condi-
tions. These are believed to be largely outside the worker’s control, instead falling under
management’s responsibility. Deming argued that the performance rating is essentially
“the result of a lottery.”31 Although that may be true for some jobs, for others (attorneys,
consultants, investment bankers, athletes, salespeople, managers), there can be major

differences in individual performance.32
Deming also argued that the individual focus of merit pay discourages teamwork:
“Everyone propels himself forward, or tries to, for his own good, on his own life pre-
server. The organization is the loser.”33 As an example, if people in the purchasing depart-
ment are evaluated based on the number of contracts negotiated, they may have little
interest in materials quality, even though manufacturing is having quality problems.
Deming’s solution was to eliminate the link between individual performance and pay.
This approach reflects a desire to move away from recognizing individual contributions.
What are the consequences of such a move? It is possible that fewer employees with
individual-achievement orientations would be attracted to and remain with the organi-
zation. One study of job retention found that the relationship between pay growth and
individual performance over time was weaker at higher performance levels. As a con-
sequence, the organization lost a disproportionate share of its top performers.34 In other
words, too little emphasis on individual performance may leave the organization with
average and poor performers.35
Thus, although Deming’s concerns about too much emphasis on individual per-
formance are well taken, one must be careful not to replace one set of problems with
another. Instead, there needs to be an appropriate balance between individual and group
objectives. At the very least, ranking and forced-distribution performance-rating systems
need to be considered with caution, lest they contribute to behavior that is too individu-
alistic and competitive.
Another criticism of merit pay programs is the way they measure performance. If the
performance measure is not perceived as being fair and accurate, the entire merit pay
program can break down. One potential impediment to accuracy is the almost exclu-
sive reliance on the supervisor for providing performance ratings, even though peers,
subordinates, and customers (internal and external) often have information on a per-
son’s performance that is as good as or better than that of the supervisor. A 360-degree
performance feedback approach (discussed in Chapter 9) gathers feedback from each
of these sources. To date, however, organizations have mainly used such data for devel-
opment purposes and have been reluctant to use these multisource data for making pay
decisions.36
In general, process issues, including communication, expectation setting, and cred-
ibility/fairness, are important in administering merit pay and pay-for-performance in
general.37 In any situation where rewards are distributed, employees appear to assess
fairness along two dimensions: distributive (based on how much they receive) and pro-
cedural (what process was used to decide how much).38 Some of the most important
aspects of procedural fairness, or justice, appear in Table 12.5. These items suggest that
employees desire clear and consistent performance standards, as well as opportunities
to provide input, discuss their performance, and appeal any decision they believe to be
incorrect.
Perhaps the most basic criticism is that merit pay does not really exist. High perform-
ers, it is argued, are not paid significantly more than mediocre or even poor performers in
most cases.39 For example, consider the data in Table 12.6 from a WorldatWork survey.
It shows that high performers received an average merit increase of 4.8%, compared
to 2.6% for average performers. On a salary of $50,000 per year, that is a difference of
$1,100 per year, or $21.15 per week (before taxes). Critics of merit pay point out that
this difference is probably not significant enough to influence employee behaviors or
attitudes. Indeed, as Table 12.7 indicates, the majority of employees do not believe there
is much payoff to higher levels of performance in their organizations.
Table 12.5
Aspects of Indicate the extent to which your supervisor did each of the following:
Procedural Justice in 1. Was honest and ethical in dealing with you.
Pay Raise Decisions 2. Gave you an opportunity to express your side.
3. Used consistent standards in evaluating your performance.
4. Considered your views regarding your performance.
5. Gave you feedback that helped you learn how well you were doing.
6. Was completely candid and frank with you.
7. Showed a real interest in trying to be fair.
8. Became thoroughly familiar with your performance.
9. Took into account factors beyond your control.
10. Got input from you before a recommendation.
11. Made clear what was expected of you.
Indicate how much of an opportunity existed, after the last raise decision, for you to
do each of the following things:
12. Make an appeal about the size of a raise.
13. Express your feelings to your supervisor about the salary decision.
14. Discuss, with your supervisor, how your performance was evaluated.
15. Develop, with your supervisor, an action plan for future performance.
SOURCE: From R. Folger and M. A. Konovsky “Effects of Procedural and Distributive Justice on Reactions to Pay Raise
Decisions,” Academy of Management Journal, Volume 32, 1989, p. 115. Reproduced with permission of Academy of
Management via Copyright Clearance Center.
Table 12.6
PERCENT OF AVERAGE BASE
Distribution of
WORKFORCE PAY INCREASE
Performance Rating
and Average Base
Pay Increase as Highest-rated 8% 4.8%
a Function of Next Highest-rated 28% 3.7%
Performance Middle-rated 57% 2.6%
(United States) Low-rated 7% 0.9%
Lowest-rated 2% 0.1%
Note: Based on companies with a five-point rating scale.

SOURCE: Mercer, 2014/2015 US Compensation Planning Survey, www.mercer.com.
Table 12.7
% WHO AGREE
Pay and
Performance,
Employee When I do a good job, my performance is rewarded. 40%
Perceptions My organization does an adequate job of matching pay to 46%
performance.
SOURCE: Mercer, “What’s WorkingTM Survey, United States.”
In fact, however, small differences in pay can accumulate into large differences over
time. Consistently receiving 4.8% increases (versus 2.6%) over 30 years with a starting
salary of $50,000 would translate into a career salary advantage (before taxes) of roughly
$1,000,000 (net present value of roughly $600,000, assuming a discount rate of 2.5%).40
Whether employees think in these terms is open to question. But even if they do not, noth-
ing prevents an organization from explaining to employees that what may appear to be
small differences in pay can add up to large differences over time.
Table 12.8
HOURLY UNION SALARIED Merit Bonus as a
NONEXEMPT NONEXEMPT SALARIED EXEMPT Percentage of Salary,
by Employee Group
6.1% 6.7% 12.7%
SOURCE: Company website, “New Aon Hewitt Survey Shows 2014 Variable Pay Spending Spikes to Record-High
Level,” http://aon.mediaroom.com, accessed May 3, 2015.
Of course, the accumulation effect just described can also be seen as a drawback if
it contributes to an entitlement mentality. Here the concern is that a big merit increase
given early in an employee’s career remains part of base salary “forever.” It does not
have to be re-earned each year, and the cost to the organization grows over time, perhaps
more than either the employee’s performance or the organization’s profitability would
always warrant. Merit bonuses (payouts that do not become part of base salary, a form
of variable pay), are thus increasingly used by organizations in lieu of or in addition
to merit increases. In fact, merit bonuses (see Table 12.8), in the companies that use
them and for the employee groups they use them for, are now larger than traditional pay
increases. Preliminary evidence suggests that merit bonuses may have a larger positive
impact (compared to traditional merit increases) on future performance.41 If that result
proves to be robust across organizations, it, together with the merit bonus advantage
in terms of controlling fixed costs, likely goes far toward explaining the greater use of
merit bonuses.
The payoff to high performance that comes from merit bonuses adds to the payoff
from merit increases. Finally, high performing employees are also more likely to be
promoted (into higher paying jobs) and are also more likely to have higher paying oppor-
tunities at alternative employers. All these factors can be communicated to employees
to help them see the payoff to high performance.42 And the higher the performance, the
more likely it is one can keep the job (and salary).43
Individual Incentives
Like merit pay, individual incentives reward individual performance, but with two
important differences. First, payments are not rolled into base pay. They must be con-
tinuously earned and re-earned. Second, performance is usually measured as physical
output (such as number of water faucets produced) rather than by subjective ratings.
Individual incentives have the potential to significantly increase performance. Locke and
his colleagues found that monetary incentives increased production output by a median
of 30%—more than any other motivational device studied.44
Nevertheless, individual incentives, at least in their purest form, are relatively rare
for a variety of reasons.45 Most jobs (like those of many managers and professionals)
have, strictly speaking, no physical output measure. Instead, they involve what might be
described as “knowledge work.” There may or may not be alternative objective measures
of performance available (e.g., financial and/or operational) which are needed to use
individual incentives. The balanced scorecard gives a good flavor of what objective per-
formance outcomes for managers often look like when they are available. Even in jobs
where physical output measures are available, potential administrative problems (such as
setting and maintaining acceptable standards) often prove intractable.46 Third, individual
incentives may do such a good job of motivating employees that they do whatever they
get paid for and nothing else. (For example, one Dilbert cartoon showed employees cel-
ebrating when told they would be paid for every software error they found and fixed. The
implication was that they would deliberately write errors into the software and then fix
them to earn as much money as possible.) Fourth, as the name implies, individual incen-
tives, again if used in their purest/simplest form, typically do not fit well with a team
approach. Fifth, they may be inconsistent with the goals of acquiring multiple skills and
proactive problem solving. Learning new skills often requires employees to slow or stop
production. If the employees are paid based on production volume, they may not want to
slow down or stop. Sixth, some incentive plans, if not carefully designed, reward output
volume at the expense of quality or customer service.
Therefore, although individual incentives carry potential advantages, they are not
likely to contribute to a flexible, proactive, quality-conscious problem-solving work-
force unless they can be designed to avoid the potential pitfalls listed above. Incorpo-
rating a broader range of objectives beyond physical output alone is one common step
toward that end.
Profit Sharing and Ownership

Profit Sharing. At the other end of the individual–group continuum are profit sharing
Profit Sharing and stock ownership plans. Under profit sharing, payments are based on a measure of
A compensation plan organization performance (profits), and the payments do not become part of the base sal-
in which payments are ary. Profit sharing has two potential advantages. First, it may encourage employees to
based on a measure
of organization perfor-
think more like owners, taking a broad view of what needs to be done to make the orga-
mance (profits) and do nization more effective. Thus, the sort of narrow self-interest encouraged by individual
not become part of the incentive plans (and perhaps also by merit pay) is presumably less of an issue. Instead,
employees’ base salary. increased cooperation and citizenship are expected. Second, because payments do not
become part of base pay, but instead are variable pay, labor costs are automatically
reduced during difficult economic times, and wealth is shared during good times. Con-
sequently, organizations may not need to rely on layoffs as much to reduce costs during
tough times.47 The “Competing through Sustainability” box describes what General
Motors did with its recent profit sharing plan payouts to strengthen its long-term rela-
tionship with its employees.
Does profit sharing contribute to better organization performance? The evidence is
not clear. Although there is consistent support for a correlation between profit sharing
payments and profits, questions have been raised about the direction of causality.48 For
example, Ford, Chrysler, and GM all have profit sharing plans in their contracts with
the United Auto Workers (UAW). (See Table 12.9 for provisions of the GM–UAW
plan.) Years ago, under an older profit sharing plan, the average profit sharing pay-
ment at Ford one year was $4,000 per worker versus an average of $550 per worker
at GM and $8,000 at Chrysler. Given that the profit sharing plans used were very
similar, it seems unlikely that the profit sharing plans (through their effects on worker
motivation) caused Ford and Chrysler to be more profitable. Rather, it would appear
that profits were higher at Ford for other reasons (e.g., better cars), resulting in higher
profit sharing payments.
This example also helps illustrate the fundamental drawback of profit sharing. Why
should automobile workers at GM receive profit sharing payments that are only 1/15
the size received by those doing the same type of work at Chrysler? Is it because Chrys-
ler UAW members performed 15 times better than their counterparts at GM that year?
Probably not. Rather, workers are likely to view top management decisions regarding
GM’s Payout Strengthens Relationship with Workers
After spending nearly $3 billion penalized for GM’s mistakes in DISCUSSION
to compensate victims and recall monitoring and acting on safety QUESTIONS
almost 30 million vehicles to problems, GM decided to pay 1. Did GM make the correct
address faulty ignition switches workers an average of $9,000 decision or should it have
in some of its cars, General in profit-sharing, correspond- returned more money to its
Motors’ (GM) profits last year fell ing to the $9 billion profit figure, shareholders?
to $6.6 billion. Without the cost of even though under its contract, 2. What was the rationale GM
the recalls, the company’s profits it could have used the $6.6 bil- used to make a profit-sharing
would have been $9 billion. The lion figure. New UAW president payment that was $2,000 per
profit-sharing plan in its contract Dennis Williams took the action worker greater than the con-
with the United Auto Workers in that spirit, stating that GM’s tract required? How would you
(UAW) pays out roughly $1,000 action reflected the “strong, go about assessing the return
in profit sharing to workers for stable environment” that GM and on investment that GM is likely
each $1 billion in GM profits. In the UAW had created together. to receive from its decision?
the interest of supporting a posi- GM’s action and the goodwill it SOURCES: B. Vlasic, “Despite Recalls, GM
tive and sustainable relationship created may also prove helpful Pays Workers Big Bonus,” The New York
Times, February 5, 2015, p. A1; J. D. Stoll,
with its blue-collar workers, and in its upcoming contract negotia- “UAW’s Ranks Press to Close Pay Gap,” The
deciding that they should not be tions with the UAW. Wall Street Journal, March 23, 2015, p. B2.
products, engineering, pricing, and marketing as more important. As a result, with the
exception of top (and perhaps some middle) managers or plans that cover a small num-
ber of employees (i.e., in small companies), most employees are unlikely to see a strong
connection between what they do and what they earn under profit sharing. This means
that performance motivation is likely to change very little under profit sharing. Consis-
tent with expectancy theory, motivation depends on a strong link between behaviors and
valued consequences such as pay (instrumentality perceptions).
Another factor that reduces the motivational impact of profit sharing plans is that
most plans are of the deferred type. Roughly 16% of full-time employees in medium-
size and large private establishments participate in profit sharing plans, but only 1% of
employees overall (about 6% of those in profit sharing plans) are in cash plans where
profits are paid to employees during the current time period.49
Not only may profit sharing fail to increase performance motivation, but employees
may also react very negatively when they learn that such plans do not pay out during
business downturns.50 First, they may not feel they are to blame because they have been
performing their jobs well. Other factors are beyond their control, so why should they be
penalized? Second, what seems like a small amount of at-risk pay for a manager earning
$80,000 per year can be very painful to someone earning $15,000 or $20,000.
Consider the case of the Du Pont Fibers Division, which had a plan that linked a por-
tion of employees’ pay to division profits.51 After the plan’s implementation, employees’
base salary was about 4% lower than similar employees in other divisions unless 100%
of the profit goal (a 4% increase over the previous year’s profits) was reached. Thus,
there was what might be called downside risk. However, there was also considerable
upside opportunity: if 100% of the profit goal was exceeded, employees would earn
511
Table 12.9 PROFITS MAXIMUM PROFITS MAXIMUM

Profit Sharing in the
$BILLIONS $PAYOUT $BILLIONS $PAYOUT
General Motors—
United Auto Workers
Contract – < 1.25 0 6.50 < 6.75 6,500
1.25 < 1.50 1,250 6.75 < 7.00 6,750
1.50 < 1.75 1,500 7.00 < 7.25 7,000
1.75 < 2.00 1,750 7.25 < 7.50 7,250
2.00 < 2.25 2,000 7.50 < 7.75 7,500
2.25 < 2.50 2,250 7.75 < 8.00 7,750
2.50 < 2.75 2,500 8.00 < 8.25 8,000
2.75 < 3.00 2,750 8.25 < 8.50 8,250
3.00 < 3.25 3,000 8.50 < 8.75 8,500
3.25 < 3.50 3,250 8.75 < 9.00 8,750
3.50 < 3.75 3,500 9.00 < 9.25 9,000
3.75 < 4.00 3,750 9.25 < 9.50 9,250
4.00 < 4.25 4,000 9.50 < 9.75 9,500
4.25 < 4.50 4,250 9.75 < 10.00 9,750
4.50 < 4.75 4,500 10.00 < 10.25 10,000
4.75 < 5.00 4,750 10.25 < 10.50 10,250
5.00 < 5.25 5,000 10.50 < 10.75 10,500
5.25 < 5.50 5,250 10.75 < 11.00 10,750
5.50 < 5.75 5,500 11.00 < 11.25 11,000
5.75 < 6.00 5,750 11.25 < 11.50 11,250
6.00 < 6.25 6,000 11.50 < 11.75 11,500
6.25 < 6.50 6,250 11.75 < 12.00 11,750
> = 12.0 12,000
Note: Employees working 1850 or more hours per year receive the maximum payout. Those working fewer hours
receive a prorated payout based on their hours worked. Profits are defined as operating income (earnings before
interest and taxes) for North America (only).
SOURCE: From www.uaw.org/content/new-lump-sum-payments-profit-sharing-quality-bonus.
more than similar employees in other divisions. For example, if the division reached
150% of the profit goal (6% growth in profits), employees would receive 12% more than
comparable employees in other divisions.
Initially, the plan worked fine. The profit goal was exceeded, and employees earned
slightly more than employees in other divisions. In the following year, however, profits
were down 26%, and the profit goal was not met. Employees received no profit shar-
ing bonus; instead, they earned 4% less than comparable employees in other divisions.
Profit sharing was no longer seen as a very good idea. Du Pont management responded
to employee concerns by eliminating the plan and returning to a system of fixed base
salaries with no variable (or risk) component. This outcome is perhaps not surprising
from an agency theory perspective, which suggests that employees must somehow be
compensated to assume increased risk.
One solution some organizations choose is to design plans that have upside but not
downside risk. In such cases, when a profit sharing plan is introduced, base pay is not
reduced. Thus, when profits are high, employees share in the gain, but when profits are
low, they are not penalized. Such plans largely eliminate what is purported to be a major
advantage of profit sharing: reducing labor costs during business downturns. During
business upturns, labor costs will increase. Given that the performance benefits of such
plans are not assured, an organization runs the risk under such plans of increasing its
labor costs with little return on its investment.
In summary, although profit sharing may be useful as one component of a compensa-
tion system (to enhance identification with broad organizational goals), it may need to
be complemented with other pay programs that more closely link pay to outcomes that
individuals or teams can control (or “own”), particularly in larger companies. In addi-
tion, profit sharing runs the risk of contributing to employee dissatisfaction or higher
EVIDENCE-BASED HR
Craig Durosko’s remodeling company, Sun Design, was on the way to losing money.
So, he turned to someone he thought could help—his employees. Sun Design now
shares financial information (revenues and expenses, historical and projected) with its
50 employees, who gather each month for coffee, donuts, and a financial update. After
revenues dropped to $6.4 million, they rebounded three years later to $8.7 million. A
key reason is that, armed with new shared information, employees helped identify
ways to reduce costs and increase revenues. More than 20 employees provided spe-
cific, detailed suggestions for how to do this.
The management approach, called open-book management, involves teaching
employees to understand financial concepts and statements, asking them to become
involved in developing and implementing cost reduction and revenue enhancement
ideas, and rewarding them when they do.
A few years ago, Tasty Catering began to use open book management. Each week,
its 49 full-time employees meet for lunch and review the previous week’s profit and
loss statement. Every employee takes responsibility for improving profits. Some ideas
are simple. Keeping better maintenance logs for delivery trucks decreased repair costs
by $16,000 per year. Charting gas prices by day and having drivers fill their tanks on
the lower-cost days saved $20,000 per year. Paying more attention to recycling in the
kitchen has allowed the company to stop paying another company to haul waste away,
and instead Tasty now sells its recyclables each month, making about $3,600 per year.
Salespeople are more careful as well. They are more selective about taking on events
where they can make the most money. The net effect of these and other changes has
been a rise in sales of 7% to $7 million and a much larger increase in profits of 75%.
Importantly, when profits rise, employees share in them through a profit-sharing pro-
gram. A Tasty manager notes that there were initial challenges. He says one mistake
was initially limiting the meetings to only management. Also, he noted that it was
necessary to teach employees how to read a profit and loss statement.
Many know open-book management from the book The Great Game of Business,
written by Jack Stack about his experience at Springfield Remanufacturing (SRC).
SRC purchased a failing division of International Harvester for $9 million, which
rebuilt engines. The 119 employees learned to read financial statements, work as a
team to improve costs and revenues, and earn cash bonuses for their successes. Cur-
rently, SRC employees are eligible for quarterly bonuses that depend on reaching a set
of targets. Hourly workers can receive bonuses of up to 13% of their base pay, while
salaried employees can receive bonuses of up to 18% of their base pay. Today, SRC
has over 1,000 employees and $400 million in revenues.
The key to open-book management is sharing data to make evidence-based
decisions. But a survey by Robert Half Associates reports that only 7% of private
CONTINUED
companies share financial information with all workers. Why? Many companies fear
that information will fall into the hands of their competitors. Another concern is that
some companies may not be prepared to give workers information that may lead them
to question how management does certain things. (But of course, such questioning is
just what may be needed for the company to improve.)
At Central States Manufacturing, located in Lowell, Arkansas, all new employees
must take a Finance 101 course, as well as courses on steel basics, customer service,
the company’s values and mission, and its employee stock ownership plan. The com-
pany provides financial data, including very detailed measures. For example, Ladena
Lambert, the Director of Human Resources, gives the example of scrap. “When they
see that the amount of scrap they put out in one week costs about the same as we pay
a person, it’s no longer just 200 feet of scrap a day.” She says they start thinking in
terms of dollars.
SOURCES: L. Bertagnoli, “Getting Employees in the Profit Game: Tasty Catering Opens Its Books to Get All
Involved in Cost Cuts,” Crain’s Chicago Business, August 11, 2014, p. 4; D. Meinert, “An Open Book,” HR
Magazine, April 2013.
labor costs, depending on how it is designed. However, moving beyond concerns about
its motivation impact, profit sharing does have the major advantage of making labor
costs more variable, a major advantage when sales and profits decline.
Ownership. Recent data show that in the neighborhood of 20 million Americans own
stock in their company.52 Employee ownership is similar to profit sharing in some key
respects, such as encouraging employees to focus on the success of the organization as
a whole. In fact, with ownership, this focus may be even stronger. Like profit sharing,
ownership may be less motivational the larger the organization. And because employees
may not realize any financial gain until they actually sell their stock (typically upon
leaving the organization), the link between pay and performance may be even less obvi-
ous than under profit sharing. Thus, from a reinforcement theory standpoint (with its
emphasis on actually experiencing rewards), the effect on performance motivation may
be limited.
Stock Options One way of achieving employee ownership is through stock options, which give
An employee owner- employees the opportunity to buy stock at a fixed price. Say the employees receive
ship plan that gives options to purchase stock at $10 per share in 2016, and the stock price reaches $30 per
employees the oppor-
tunity to buy the
share in 2021. They have the option of purchasing stock (“exercising” their stock options)
company’s stock at a at $10 per share in 2021, thus making a tidy return on investment if the shares are then
previously fixed price. sold. If the stock price goes down to $8 per share in the year 2021, however, there will be
no financial gain. Therefore, employees are encouraged to act in ways that will benefit
the organization.
For many years, stock options had typically been reserved for executives in larger,
established companies. More recently, there was a trend toward pushing eligibil-
ity farther down in the organization.53 In fact, many companies, including PepsiCo,
Merck, McDonald’s, Walmart, and Procter & Gamble, began granting stock options
to employees at all levels. Among start-up companies like these in the technology sec-
tor, these broad-based stock option programs have long been popular and companies
like Microsoft and Cisco Systems attribute much of their growth and success to these
option plans. Some studies suggest that organization performance is higher when a
large percentage of top and midlevel managers are eligible for long-term incentives
such as stock options, which is consistent with agency theory’s focus on the problem
of encouraging managers to think like owners.54 However, it is not clear whether these
findings would hold up for lower-level employees, particularly in larger companies,
who may see much less opportunity to influence overall organization performance.
Another issue with options is whether executives and employees place sufficient value
on them, given their cost.55
The Golden Age of stock options has faded some. Investors have long questioned the
historically favorable tax treatment of employee stock options. In 2004, the Financial
Accounting Standards Board (FASB) issued SFAS 123R, a landmark change, requiring
companies to expense options on their financial statements, which reduces reported net
income, dramatically in some cases. Microsoft decided to eliminate stock options in
favor of actual stock grants. This is partly in response to the new accounting standards
and partly in recognition of the fact that Microsoft’s stock price is not likely to grow as
rapidly as it once did, making options less effective in recruiting, retaining, and moti-
vating its employees. It appears that many companies are cutting back on stock options
overall, and especially for nonexecutive employees.
Those companies that continue to use broad-based stock options have encountered
difficulties in keeping employees motivated during years when there has been a steep
decline in stock prices. For example, in 2009 Google’s stock price dropped to $306,
down from $741 in 2007, putting many employee stock options “underwater” (i.e.,
the stock price was under the option/exercise price), meaning that employees were
not able to make any gain from exercising their options. Google’s answer to this situ-
ation was an option exchange where employees turned in their underwater options in
return for options having an exercise price equal to the current (lower) stock price. The
hope was that employee motivation and retention would be reinvigorated.56 As another
example of the challenge in using stock-based compensation, one estimate was that
(nonexecutive) employees of Facebook and of Zynga experienced declines in the value
of their company stock and stock options of $7.2 billion and $1.4 billion, respectively,
after initial public offerings of stock.57 (Now, some years later, it seems like things
have worked out OK for them!)
Employee stock ownership plans (ESOPs), under which employers give employees Employee Stock
stock in the company, are the most common form of employee ownership, with the Ownership Plan
number of employees in such plans increasing from 4 million in 1980 to about 13.5 (ESOP)
An employee owner-
million in 2015 in the United States.58 Including non-ESOP stock option, stock pur- ship plan that gives
chase, and stock-based retirement plans, it is estimated that about 28 million U.S. employers certain tax
employees own some of their companies, controlling about 8% of U.S. corporate and financial advan-
equity. In Japan, 91% of companies listed on Japanese stock markets have an ESOP, tages when stock is
and these companies appear to have higher average productivity than non-ESOP com- granted to employees.
panies.59 ESOPs raise a number of unique issues. On the negative side, they can carry
significant risk for employees. An ESOP must, by law, invest at least 51% of assets in
its company’s stock, resulting in less diversification of investment risk (in some cases,
no diversification). Consequently, when employees buy out companies in poor finan-
cial condition to save their jobs, or when the ESOP is used to fund pensions, employ-
ees risk serious financial difficulties if the company does poorly.60 This is not just a
concern for employees, because, as agency theory suggests, employees may require
higher pay to offset increased risks of this sort.
ESOPs can be attractive to organizations because they have tax and financing advan-
tages and can serve as a takeover defense (under the assumption that employee owners
will be “friendly” to management). ESOPs give employees the right to vote their securi-
ties (if registered on a national exchange).61 As such, some degree of participation in a
select number of decisions is mandatory, but overall participation in decision making

appears to vary significantly across organizations with ESOPs. Some studies suggest
that the positive effects of ownership are larger in cases where employees have greater
participation,62 perhaps because the “employee–owner comes to psychologically experi-
ence his/her ownership in the organization.”63
Gainsharing, Group Incentives, and Team Awards

Gainsharing Gainsharing. Gainsharing programs offer a means of sharing productivity gains with
A form of compensa- employees. Although sometimes confused with profit sharing plans, gainsharing differs
tion based on group in two key respects. First, instead of using an organization-level performance measure
or plant performance
(rather than organiza-
(profits), the programs measure group or plant performance, which is likely to be seen as
tionwide profits) that more controllable by employees. Second, payouts are distributed more frequently and
does not become part not deferred. In a sense, gainsharing programs represent an effort to combine the best
of the employee’s base features of organization-oriented plans like profit sharing and individual-oriented plans
salary. like merit pay and individual incentives. Like profit sharing, gainsharing encourages
pursuit of broader goals than individual-oriented plans do. But, unlike profit sharing,
gainsharing can motivate employees much as individual plans do because of the more
controllable nature of the performance measure and the frequency of payouts. Studies
indicate that gainsharing improves performance.64
One type of gainsharing, the Scanlon plan (developed in the 1930s by Joseph N.
Scanlon, president of a local union at Empire Steel and Tin Plant in Mansfield, Ohio),
provides a monetary bonus to employees (and the organization) if the ratio of labor
costs to the sales value of production is kept below a certain standard. Table 12.10
shows a modified (i.e., costs in addition to labor are included) Scanlon plan. Because
actual costs ($850,000) were less than allowable costs ($907,500) in the first and sec-
ond periods, there is a gain of $57,500. The organization receives 45% of the savings,
and the employees receive the other 55%, although part of the employees’ share is
set aside in the event that actual costs exceed the standard in upcoming months (as
Table 12.10 shows did occur).
Gainsharing plans like the Scanlon plan and pay-for-performance plans in general
often encompass more than just a monetary component. There is often a strong empha-
sis on taking advantage of employee know-how to improve the production process
through problem-solving teams and suggestion systems.65 A number of recommenda-
tions have been made about the organization conditions that should be in place for
gainsharing to succeed. Commonly mentioned factors include (1) management com-
mitment, (2) a need to change or a strong commitment to continuous improvement,
(3) management’s acceptance and encouragement of employee input, (4) high levels
of cooperation and interaction, (5) employment security, (6) information sharing on
productivity and costs, (7) goal setting, (8) commitment of all involved parties to the
process of change and improvement, and (9) agreement on a performance standard
and calculation that is understandable, seen as fair, and closely related to managerial
objectives.66
Group Incentives and Team Awards. Whereas gainsharing plans are often plant-
wide, group incentives and team awards typically pertain to a smaller work group.67
Group incentives (like individual incentives) tend to measure performance in terms of
physical output, whereas team award plans may use a broader range of performance
measures (like cost savings, successful completion of product design, or meeting
Table 12.10
AVERAGE OF AVERAGE OF
Example of
1ST AND 2ND 2ND AND 3RD
Gainsharing
ITEMS PERIODS PERIODS
(Modified Scanlon
Plan) Report
1. Sales in dollars $1,000,000 $1,000,000
2. Inventory change and work in process 100,000 100,000
3. Sales value of production 1,100,000 1,100,000
4. Allowable costs (82.5% × 3 above) 907,500 907,500
5. Actual costs 850,000 917,500
6. Gain (4–5 above) 57,500 –10,000
7. Employee share (55% of 6 above) 31,625 –5,500
8. Monthly reserve (20% of 7 above) 6,325 –5,500
*If no bonus, 100% of 7 above
9. Bonus to be distributed (7–8) 25,300 0
10. Company share (45% of 6 above) 25,875 –4,500
11. Participating payroll 132,000 132,000
12. Bonus percentage (9/11) 19.2% 0.0%
13. Monthly reserve (8 above) 6,325 –5,500
14. Reserve at the end of last period 0 6,325
15. Year-end reserve to date 6,325 825
SOURCE: From Gainsharing and Goalsharing: Aligning Pay and Strategic Goals, by K. Mericle and D. O. Kim. Reproduced
with permission of Greenwood Publishing Group via Copyright Clearance Center.
deadlines). As with individual incentive plans, these plans have a number of potential
drawbacks. Competition between individuals may be reduced, but it may be replaced
by competition between groups or teams. Also, consistent with our earlier discussion
of pay effects on workforce composition, any plan that does not adequately recog-
nize differences in individual performance risks demotivating top performers or losing
them. Finally, as with any incentive plan, a standard-setting process must be developed
that is seen as fair by employees, and these standards must not exclude important
dimensions such as quality.
Balanced Scorecard
As the preceding discussion indicates, every pay program has advantages and disadvan- LO 12-4
tages. Therefore, rather than choosing one program, some companies find it useful to Describe how organiza-
design a mix of pay programs, one that has just the right chemistry for the situation at tions combine incentive
plans in a balanced
hand. Relying exclusively on merit pay or individual incentives may result in high levels
scorecard.
of work motivation but unacceptable levels of individualistic and competitive behavior
and too little concern for broader plant or organization goals. Relying too heavily on
profit sharing and gainsharing plans may increase cooperation and concern for the wel-
fare of the entire plant or organization, but it may reduce individual work motivation to
unacceptable levels. However, a particular mix of merit pay, gainsharing, and profit shar-
ing could contribute to acceptable performance on all these performance dimensions.
One approach that seeks to balance multiple objectives is the balanced scorecard (see
Chapter 1), which Kaplan and Norton describe as a way for companies to “track finan-
cial results while simultaneously monitoring progress in building the capabilities and
acquiring the intangible assets they would need for future growth.”68
Table 12.11
Illustration of Balanced Scorecard Incentive Concept
INCENTIVE SCHEDULE
PERFORMANCE TARGET ACTUAL INCENTIVE
MEASURE INCENTIVE PERFORMANCE % TARGET PERFORMANCE EARNED
Financial $100 20% + 150% 18% $100

16–20% 100%
employed 12–16% 50%
Below 12% 0%
Customer $ 40 1 in: 1 in 876 $ 20
1,000 + 150%
900–999 100%
800–899 50%
Below 800 0%
Internal $ 30 9% + 150% 11% $ 45
6–9% 100%
3–6% 50%
0–3% 0%
Learning and growth $ 30 Below 5% 150% 7% $ 30
5–8% 100%
turnover 8–12% 50%
Total $200 $195
SOURCE: From F. C. McKenzie and M. P. Shilling, “Avoiding Performance Traps: Ensuring Effective Incentive Design and Implementation,”
Compensation and Benefits Review, July–August 1998, pp. 57–65. Compensation and Benefits Review by American Management Association.
Reproduced with permission of Sage Publications, Inc. via Copyright Clearance Center.
Table 12.11 shows how a mix of measures might be used by a manufacturing firm

to motivate improvements in a balanced set of key business drivers. We will also see
shortly a scorecard used by Merck.
Managerial and Executive Pay

LO 12-5 Because of their significant ability to influence organization performance, top managers and
Discuss issues related executives are a strategically important group whose compensation warrants special atten-
to performance-based tion, including its competitiveness in the labor market.69 In the previous chapter we discussed
pay for executives.
how much this group is paid. Here we focus on the issue of how their pay is determined.
Business magazines such as Forbes and Bloomberg Businessweek often publish
lists of top executives who did the most for their pay and those who did the least. The
latter group has been the impetus for much of the attention to executive pay. The prob-
lem seems to be that in some companies, top executive pay is high every year, regard-
less of profitability or stock market performance. One study, for example, found that
CEO pay changes by $3.25 for every $1,000 change in shareholder wealth. Although
this relationship was interpreted to mean that “the compensation of top executives is
virtually independent of corporate performance,” later work demonstrates, to the con-
trary, that executive pay, in most companies, is significantly aligned with shareholder
return.”70
Table 12.12
PREDICTED RETURN ON ASSETS The Relationship
LONG-TERM INCENTIVE between Managerial
BONUS/BASE RATIO ELIGIBILITY % $a Pay and Organization
Return on Assets
10% 28% 5.2% $250 million
20 28 5.6 269 million
10 48 5.9 283 million
20 48 7.1 341 million
aBased on the assets of the average Fortune 500 company in 1990.

SOURCE: B. Gerhart and G. T. Milkovich, “Organizational Differences in Managerial Compensation and Financial
Performance,” Academy of Management Journal 33 (1990), pp. 663–91.
How can executive pay be linked to organization performance? From an agency

theory perspective, the goal of owners (shareholders) is to encourage the agents (man-
agers and executives) to act in the best interests of the owners. This may mean less
emphasis on noncontingent pay, such as base salary, and more emphasis on outcome-
oriented “contracts” that make some portion of executive pay contingent on the orga-
nization’s profitability or stock performance.71 Among midlevel and top managers, it
is common to use both short-term bonus and long-term incentive plans to encourage
the pursuit of both short- and long-term organization performance objectives. Indeed,
the bulk of executive compensation comes from restricted stock, stock options, and
other forms of long-term compensation. Putting pay “at risk” in this manner can be a
strong incentive. However, agency theory suggests that while too little pay at risk may
weaken the incentive effect, too much pay at risk can also be a problem if executives
take too big of risks with firm assets.72 The banking and mortgage industry problems
of late provide an example.
Organizations use such pay-for-performance plans, and what are their consequences?
Research suggests that organizations vary substantially in the extent to which they use
both long-term and short-term incentive programs. Further, greater use of such plans
among top and midlevel managers is associated with higher subsequent levels of prof-
itability. As Table 12.12 indicates, greater reliance on short-term bonuses and long-
term incentives (relative to base pay) resulted in substantial improvements in return on
assets.73 For top executives, aligning compensation with past shareholder return is asso-
ciated with his or her future shareholder returns.74
Earlier, we saw how the balanced scorecard approach could be applied to paying
manufacturing employees. It is also useful in designing executive pay. Table 12.13
shows how the choice of performance measures can be guided by a desire to balance
shareholder, customer, and employee objectives. Sears sees financial results as a lag-
ging indicator that tells the company how it has done in the past, whereas customer
and employee metrics like those in Table 12.13, used by Merck, are leading indicators
that tell the company how its financial results will be in the future. Importantly, Sears
conducted empirical research to validate these presumed linkages.75 Thus, Sears ties its
executive compensation to achievement of objectives to “(1) drive profitable growth,
(2) become customer-centric, (3) foster the development of a diverse, high-performance
culture, and (4) focus on productivity and returns.”76
As we saw in the Global Financial Crisis, a focus on only (aggressive) finan-
cial goals, without also considering how those goals are achieved, raises the danger
executives and others will take too great a risk and/or engage in unethical behavior to
Table 12.13
TARGET
Merck Performance
POINTS
(Balanced)
Scorecard, Chief Financial 60
Executive Officer Revenue vs. Plan
Earnings Per Share vs. Plan
Value of Growth (e.g., ROI vs. plan)
Customer 14
Merck Customer Service Level (% orders delivered on time)
Merck Trust & Value Customer Survey
Key Business Drivers 16
Cost Structure (operating expense vs. plan)
Revenue Growth in High Priority Areas
Culture (high performance, sustainable) 10
Employee Culture Survey
Total 100
SOURCE: Proxy Statement, Merck & Co., Inc., April 14, 2014, www.merck.com/finance/proxy/pr2014.pdf.
achieve those objectives, which can come back to do great harm to the company over
time. Citibank’s scorecard for its top 50 executives is weighted 70% toward financial
objectives (profitability, expense management, use of capital, risk) and 30% toward
nonfinancial (in the short-term) objectives (set strategic direction, strong risk and
controls management, strong personnel management, enhance relations with exter-
nal stakeholders, including shareholders). The highest possible performance score is
100%, while the lowest is minus 40%. The hope is that by linking pay incentives to
this broader set of performance objectives, not just to financial goals as in the past,
Citigroup will achieve better financial performance over time and achieve it in a less
risky manner. Nobody wants to go through another financial industry meltdown and
this is one part of the plan to avoid that. Similarly, but using more pointed language,
Barclays has told its employees to act with integrity or leave. (See the Integrity in
Action box.)
Finally, there is pressure from regulators and shareholders to better link pay and per-
formance. The U.S. Securities and Exchange Commission (SEC) requires companies
to report compensation levels for the five highest paid executives and the company’s
performance relative to that of competitors over a five-year period. In 2006, the SEC
put additional rules into effect that require better disclosure of the value of executive
perquisites and retirement benefits. In 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act was signed into law in the United States. Although its focus
is primarily on financial institutions, Dodd-Frank added Section 14A to the Securities
and Exchange, which added new requirements for public companies broadly.77 For
example, it requires that shareholders have a “say on pay,” meaning that they have the
right to a (nonbinding) vote on executive pay plans. Dodd-Frank also requires that
firms disclose the ratio of the pay of the top executive to that of rank and file employ-
ees. Companies, under pressure from regulators and investors, have also increasingly
adopted policies that allow them to “clawback” (i.e., “get back”) compensation paid
to executives who are later found to have increased their pay by engaging in behaviors
detrimental to companies and the economy.
INTEGRITY IN ACTION
Barclays Tells Employees: Behave Ethically or Leave
A few years ago, Barclays was The how part will be based on an not only
implicated in scandals, including evaluation of how well the follow- on results
rigging interest rates and selling ing five values were respected but on how those results are
insurance to mortgage borrowers in achieving results: respect, achieved? What do you think
that they did not need. The U.S. integrity, service, excellence, and will be the actual results of
Securities and Exchange Commis- stewardship. Jenkins had a clear the new system?
sion concluded that there were message for employees who 2. How serious of a concern do
cultural “deficiencies” at the bank. did not accept the new Barclays: you think it is that the new
Since then, its leadership has “Barclays is not the place for you.” pay system puts Barclays at
been replaced. Its new chief exec- U.S. recruiters suggested that risk of losing people who fit
utive, Antony Jenkins, announced these changes have caused some the old system better? Should
that the bank’s 140,000 employ- brokers to heed Jenkins’ advice Barclays take steps to retain
ees would not only need to sign and move to other firms and that those employees?
a new code of conduct, but also recruiting new brokers could also SOURCES: Corrie Driebusch, “Barclays Advis-
now be paid differently. Instead become more of a challenge. ers’ New Performance Metric: Their Behavior,”
of being paid only based on their The Wall Street Journal, February 13, 2014,
p. C1; “Barclays Boss Tells Staff ‘Sign Up’ to
production as in the past, they DISCUSSION QUESTIONS Ethics or Leave,” BBC News, January 17, 2013,
will now, as Jenkins puts it, be 1. What does Barclays hope www.bbc.com.
paid based “not just on what we to achieve by its new pay
deliver, but on how we deliver it.” system where pay is based
Regulators in a number of countries have also sought to limit the size of bonus pay-
ments in hopes of reducing the incentive to engage in behaviors such as excessive risk
taking, which have proved detrimental in the past. See the “Competing through Global-
ization” box for an example from Europe.
Large retirement fund investors such as TIAA-CREF and CalPERS have proposed
guidelines to better ensure that boards of directors act in shareholders’ best interests
when making executive pay decisions, rather than being beholden to management. Some
of the governance practices believed to be related to director independence from man-
agement (Dodd-Frank has similar provisions) are shown in Table 12.14. More detailed
analyses of board governance practices are available from Institutional Shareholder Ser-
vices.78 In addition, when a firm’s future is at risk, the board may well need to demon-
strate its independence from management by taking dramatic action, which may include
removing the chief executive.
Process and Context Issues

In Chapter 11 we discussed the importance of process issues such as communication and LO 12-6
employee participation. Earlier in the present chapter we discussed the importance of Explain the importance
fairness, both distributive and procedural. Significant differences in how such issues are of process issues
such as communica-
handled can be found both across and within organizations, suggesting that organiza-
tion in compensation
tions have considerable discretion in this aspect of compensation management.79 As management.
such, it represents another strategic opportunity to distinguish one’s organization from
the competition.
521
European Banks Cope with Bonus Caps
The European Banking Authority of the European Union. In the economies,
has released new guidelines that United Kingdom, Europe’s largest and good for
would no longer exempt smaller financial center, opposition to the consumers?
banks and some large asset codes is especially strong. The Explain. Discuss both poten-
managers from caps on bonuses. UK’s largest five banks already tial intended and unintended
These caps limit bonuses to no cut bonus pools by over 1 billion consequences.
more than 100% of fixed pay pounds last year. Banks in the UK 2. Should the United States
(i.e., salaries). The intent of these have been a frequent target of consider caps on bonuses in
caps is to reduce the incentive politicians with the Financial Times banks and related institutions?
for banks and bankers to take observing: “Competition between 3. What is the role of self-
unnecessary risks of the sort now the political parties over who regulation by banks in
seen as responsible for the Global can be toughest on bankers has responding to their risk-taking
Financial Crisis of a few years ago. intensified ahead of [the upcom- cultures? Consider the exam-
Banks, however, have noted that ing] election.” In the United States, ple of Barclays discussed in
such rules encourage banks to while there were restrictions on the “Integrity in Action” box in
pay higher salaries, which not only pay following the Global Financial this chapter.
increases their fixed costs (mak- Crisis, there is now no widespread SOURCES: Laura Noonan, “UK’s Top 5 Banks
ing them more prone to risk), but restriction on bonuses. However, Slash Bonus Pools by more than £1 Billion,”
also limits their ability to recognize, regulators in the United States are Financial Times, April 6, 2015, www.ft.com;
David Wighton, “Many More EU Firms Face
incentivize, and reward employ- aware of what Europe is doing. Caps on Bonuses,” The Wall Street Journal,
ees for strong performance. There March 5, 2015, p. C3; Ben Moshinsky, “Too-Big-
is also a fear that some banks DISCUSSION QUESTIONS to-Fail May Lead to U.S. Bank Pay Rules: Hoe-
nig,” Bloomberg Business, December 9, 2014,
could seek to avoid the caps 1. Are caps on bonuses good www.bloomberg.com.
by moving to countries outside for banks, good for European
EMPLOYEE PARTICIPATION IN DECISION MAKING

Consider employee participation in decision making and its potential consequences.
Involvement in the design and implementation of pay policies has been linked to higher
pay satisfaction and job satisfaction, presumably because employees have a better under-
standing of and greater commitment to the policy when they are involved.80
What about the effects on productivity? Agency theory provides some insight. The
delegation of decision making by a principal to an agent creates agency costs because
employees may not act in the best interests of top management. In addition, the more
agents there are, the higher the monitoring costs.81 Together, these suggest that delega-
tion of decision making can be very costly.
On the other hand, agency theory suggests that monitoring would be less costly and
more effective if performed by employees because they have knowledge about the work-
place and behavior of fellow employees that managers do not have. As such, the right
compensation system might encourage self-monitoring and peer monitoring.82
Researchers have suggested that two general factors are critical to encouraging such
monitoring: monetary incentives (outcome-oriented contracts in agency theory) and an
environment that fosters trust and cooperation. This environment, in turn, is a function of
employment security, group cohesiveness, and individual rights for employees—in other
words, respect for and commitment to employees.83
522
Table 12.14
Guidelines for Board of Directors Independence and Leadership
1. Majority of independent directors: At a minimum, a majority of the board consists of directors who are
independent. Boards should strive to obtain board composition made up of a substantial majority of inde-
pendent directors.
2. Independent executive session: Independent directors meet periodically (at least once a year) alone in
an executive session, without the CEO. The independent board chair or lead (or presiding) independent
director should preside over this meeting.
3. Independent director definition: Each company should disclose in its annual proxy statement the defini-
tion of “independence” relied upon by its board.
4. Independent board chairperson: The board should be chaired by an independent director. The CEO and
chair roles should only be combined in very limited circumstances; in these situations, the board should
provide a written statement in the proxy materials discussing why the combined role is in the best interest
of shareowners, and it should name a lead independent director to fulfill duties that are consistent with
those provided in other company material.
5. Examine separate chair/CEO positions: When selecting a new chief executive officer, boards should
reexamine the traditional combination of the “chief executive” and “chair” positions.
6. Board role of retiring CEO: Generally, a company’s retiring CEO should not continue to serve as a direc-
tor on the board and at the very least be prohibited from sitting on any of the board committees.
7. Board access to management: The board should have a process in place by which all directors can have
access to senior management.
8. Independent board committees: Committees who perform the audit, director nomination, and executive
compensation functions should consist entirely of independent directors.
9. Board oversight: The full board is responsible for the oversight function on behalf of shareowners. Should
the board decide to have other committees (e.g., executive committee) in addition to those required by
law, the duties and membership of such committees should be fully disclosed.
10. Board resources: The board, through its committees, should have access to adequate resources to pro-
vide independent counsel advice, or other tools that allow the board to effectively perform its duties on
behalf of shareowners.
SOURCE: “Global Principles of Accountable Corporate Governance,” The California Public Employees9 Retirement System, August 18, 2008.
In any case, a survey of organizations found that only 11% of employees always or
often participated in compensation design teams. Participation by managers was better,
but still the exception (32%).84
COMMUNICATION
Another important process issue is communication.85 Earlier, we spoke of its importance
in the administration of merit pay, both from the perspective of procedural fairness and
as a means of obtaining the maximum impact from a merit pay program.86 More gener-
ally, a change in any part of the compensation system is likely to give rise to employee
concerns. Rumors and assumptions based on poor or incomplete information are always
an issue in administering compensation, partly because of its importance to employee
economic security and well-being. Therefore, in making any changes, it is crucial to
determine how best to communicate reasons for the changes to employees. Some orga-
nizations rely on video messages from the chief executive officer to communicate the
rationale for major changes. Brochures and/or websites that include scenarios for typi-
cal employees are sometimes used, as are focus group sessions where small groups of
employees are interviewed to obtain feedback about concerns that can be addressed in
later communication programs. Ultimately, however, most pay-related communications
come through individual discussions with one’s supervisor, still ahead of the company
website, email, and discussions with the human resources department.87
PAY AND PROCESS: INTERTWINED EFFECTS

The preceding discussion treats process issues such as participation as factors that may
facilitate the success of pay programs. At least one commentator, however, has described
an even more important role for process factors in determining employee performance:
Worker participation apparently helps make alternative compensation plans . . . work better—
and also has beneficial effects of its own . . . . It appears that changing the way workers are
treated may boost productivity more than changing the way they are paid.88
This suggestion raises a broader question: How important are pay decisions, per se,
relative to other human resource practices? Although it may not be terribly useful to
attempt to disentangle closely intertwined programs, it is important to reinforce the
notion that human resource programs, even those as powerful as compensation systems,
do not work alone.
Consider gainsharing programs. As described earlier, pay is often only one compo-
nent of such programs. (See Table 12.10.) How important are the nonpay components?89
There is ample evidence that gainsharing programs that rely almost exclusively on the
monetary component can have substantial effects on productivity.90 On the other hand, a
study of an automotive parts plant found that adding a participation component (monthly
meetings with management to discuss the gainsharing plan and ways to increase pro-
ductivity) to a gainsharing pay incentive plan raised productivity. In a related study,
employees were asked about the factors that motivated them to engage in active par-
ticipation (such as suggestion systems). Employees reported that the desire to earn a
monetary bonus was much less important than a number of nonpay factors, particularly
the desire for influence and control in how their work was done.91 A third study reported
that productivity and profitability were both enhanced by the addition of employee par-
ticipation in decisions, beyond the improvement derived from monetary incentives such
as gainsharing.92
Organization Strategy and Compensation

Strategy: A Question of Fit
LO 12-7 Although much of our focus has been on the general, or average, effects of different pay
List the major factors to programs, it is also useful to think in terms of matching pay strategies to organization
consider in matching strategies.93 To take an example from medicine, using the same medical treatment
the pay strategy to the
regardless of the symptoms and diagnosis would be foolish. In choosing a pay strategy,
organization’s strategy.
one must consider how effectively it will further the organization’s overall business strat-
egy. Consider again the findings reported in Table 12.12. The average effect of moving
from a pay strategy with below-average variability in pay to one with above-average
variability is an increase in return on assets of almost two percentage points (from 5.2%
to 7.1%). But in some organizations, the increase could be smaller. In fact, greater vari-
ability in pay could contribute to a lower return on assets in some organizations. In other
organizations, greater variability in pay could contribute to increases in return on assets
of greater than two percentage points. Obviously, being able to tell where variable pay
works and where it does not could have substantial consequences.
In Chapter 2 we discussed directional business strategies, two of which were growth
(internal or external) and concentration (“sticking to the knitting”). How should
Table 12.15
ORGANIZATION STRATEGY
Matching Pay
PAY STRATEGY DIMENSIONS CONCENTRATION GROWTH Strategy and
Organization
Risk sharing (variable pay) Low High Strategy
Time orientation Short-term Long-term
Pay level (short run) Above market Below market
Pay level (long-run potential) Below market Above market
Benefits level Above market Below market
Centralization of pay decisions Centralized Decentralized
Pay unit of analysis Job Skills
SOURCES: Adapted from L. R. Gomez-Mejia and D. B. Balkin, Compensation, Organizational Strategy, and Firm
Performance (Cincinnati: South-Western, 1992), Appendix 4b; and L. R. Gomez-Mejia, P. Berrone, and
M. Franco-Santos. Compensation and Organizational Performance (Armonk, NY: M.E. Sharpe 2010), Appendix 3.2.
compensation strategies differ according to whether an organization follows a growth

strategy or a concentration strategy? Table 12.15 provides some suggested matches.
Basically, a growth strategy’s emphasis on innovation, risk taking, and new markets is
linked to a pay strategy that shares risk with employees but also gives them the opportu-
nity for high future earnings by having them share in whatever success the organization
has.94 This means relatively low levels of fixed compensation in the short run but the use
of bonuses and stock options, for example, that can pay off handsomely in the long run.
Stock options have been described as the pay program “that built Silicon Valley,” having
been used by companies such as Apple, Microsoft, and others.95 When such companies
become successful, everyone from top managers to secretaries can become millionaires
if they own stock. Growth organizations are also thought to benefit from a less bureau-
cratic orientation, in the sense of having more decentralization and flexibility in pay
decisions and in recognizing individual skills, rather than being constrained by job or
grade classification systems. On the other hand, concentration-oriented organizations
are thought to require a very different set of pay practices by virtue of their lower rate of
growth, more stable workforce, and greater need for consistency and standardization in
pay decisions. As noted earlier, Microsoft has eliminated stock options in favor of stock
grants to its employees, in part because it is not the growth company it once was.
A LOOK BACK
In this chapter, we discussed the potential advantages and disadvantages of dif-
ferent types of incentive or pay-for-performance plans. We also saw that these pay
plans can have both intended and unintended consequences. Designing a pay-for-
performance strategy typically seeks to balance the pros and cons of different plans
and reduce the chance of unintended consequences. To an important degree, pay
strategy will depend on the particular goals and strategy of the organization and its
units. For example, Microsoft determined that its pay strategy needed to be revised
(less emphasis on stock options, more on stock grants) to support a change in its
business strategy and to recognize the slower-paced growth of its stock price. At
the beginning of this chapter, we saw that many organizations are working to link
pay to performance and reduce fixed labor costs.
QUESTIONS
1. Does money motivate? Use the theories and examples discussed in this chap-
ter to address this question.
2. Think of a job that you have held. Design an incentive plan. What would be
the potential advantages and disadvantages of your plan? If your money was
invested in the company, would you adopt the plan?
SUMMARY
Our focus in this chapter has been on the design and admin- detrimental effects. Second, the importance of pay means
istration of programs that recognize employee contributions that employees care a great deal about the fairness of the
to the organization’s success. These programs vary as to pay process. A recurring theme is that pay programs must
whether they link pay to individual, group, or organization be explained and administered in such a way that employ-
performance. Often, it is not so much a choice of one pro- ees understand their underlying rationale and believe it
gram or the other as it is a choice between different combi- is fair.
nations of programs that seek to balance individual, group, The fact that organizations differ in their business and
and organization objectives. human resource strategies suggests that the most effective
Wages, bonuses, and other types of pay have an impor- compensation strategy may differ from one organization to
tant influence on an employee’s standard of living. This another. Although benchmarking programs against the com-
carries at least two important implications. First, pay petition is informative, what succeeds in some organizations
can be a powerful motivator. An effective pay strategy may not be a good idea for others. The balanced scorecard
can substantially promote an organization’s success; suggests the need for organizations to decide what their key
conversely, a poorly conceived pay strategy can have objectives are and use pay to support them.
KEY TERMS
Incentive effect, 498 Merit pay, 505 Stock options, 514
Expectancy theory, 498 Merit bonus, 505 Employee stock ownership plan
Principal, 499 Merit increase (ESOP), 515
Agent, 499 grid, 505 Gainsharing, 516
Sorting effect, 502 Profit sharing, 510
1. To compete more effectively, your organization is con- for gainsharing plans in hospitals, banks, insurance com-
sidering a profit sharing plan to increase employee effort panies, and so forth?
and to encourage employees to think like owners. What 3. Your organization has two business units. One unit is a long-
are the potential advantages and disadvantages of such a established manufacturer of a product that competes on price
plan? Would the profit sharing plan have the same impact and has not been subject to many technological innovations.
on all types of employees? Is the size of your organiza- The other business unit is just being started. It has no prod-
tion an important consideration? Why? What alternative ucts yet, but it is working on developing a new technology for
pay programs should be considered? testing the effects of drugs on people via simulation instead
2. Gainsharing plans have often been used in manufactur- of through lengthy clinical trials. Would you recommend that
ing settings but can also be applied in service organiza- the two business units have the same pay programs for recog-
tions. How could performance standards be developed nizing individual contributions? Why?
4. Throughout the chapter, we have seen many examples of make sense? What are the potential payoffs and pitfalls
companies making changes to how they pay for perfor- of their new pay strategies?
mance. Do you believe the changes at these companies
Pay is only one type of incentive that can motivate you to Work environment 1 2 3 4 5
perform well and contribute to your satisfaction at work. Level of independence in job 1 2 3 4 5
This survey will help you understand what motivates you Level of teamwork required for job 1 2 3 4 5
at work. Consider each aspect of work and rate its impor- Other (enter your own):
tance to you, using the following scale: 5 = very important,
________________________ 1 2 3 4 5
4 = somewhat important, 3 = neutral, 2 = somewhat unim-
________________________ 1 2 3 4 5
portant, 1 = very unimportant.
________________________ 1 2 3 4 5
Salary or wages 1 2 3 4 5
Which aspects of work received a score of 5? A score
Cash bonuses 1 2 3 4 5 of 4? These are the ones you believe motivate you to per-
Boss’s management style 1 2 3 4 5 form well and make you happy in your job. Which aspects
Location of workplace 1 2 3 4 5 of work received a score of 1 or 2? These are least likely to
Commute 1 2 3 4 5 motivate you. Is pay the only way to motivate you?
Job security 1 2 3 4 5 SOURCE: Based on the “Job Assessor” found at www.salarymonster.com,
Opportunity for advancement 1 2 3 4 5 accessed August 2002.
EXERCISING STRATEGY
Pay for Performance for Educators
The Chinese government wished to reduce the number example, 11 educators in Atlanta were recently convicted
of accidental deaths in the country. It set a target of 2.5% of racketeering for their roles in manipulating test scores.
of the population per year. Most of China’s provinces In one school, for example, it was reported that a principal
adopted policies that linked career advancement among wore gloves while changing student answers to help them
state officials in the provinces to meeting the 2.5% tar- and the school district obtain higher scores.
get. Eight years later, the accidental death rate was lower
by one-half. However, upon closer inspection, there were QUESTIONS
troubling facts. For example, a death could be kept from 1. Is it possible to successfully use pay for performance in
being coded as accidental if the victim did not die within education? What are the reasons to use it and what are
7 days. So, keeping the person alive for 8 days or more the potential pitfalls? How can the latter be avoided?
was a focus. This and other facts led researchers evaluat- 2. Refer to the Integrity in Action box in this chapter, which
ing the program to conclude that “manipulation” played describes Barclays’ new pay for performance system.
a major role, meaning that actual improvements in safety Also, refer to our discussion of measuring performance
were smaller than claimed. Similarly, in the United States, in terms of outcomes and/or behaviors. Apply these con-
Chicago Magazine alleges that the Chicago police depart- cepts and examples and suggest how pay for performance
ment reduces crime rates by re-classifying incidents as for educators might be better designed.
noncriminal. In education, many states now link educator
evaluations and pay to student scores on standardized tests. SOURCES: E. Porter, “Relying on Tests in Grading Teacher,” The New York
Although how well such systems work depends on their Times, March 25, 2015, p. B1; A. Blinder, “Atlanta Educators Are Convicted
design and execution, potential pitfalls clearly exist. For of Racketeering,” The New York Times, April 2, 2015, p. A12.
MANAGING PEOPLE
ESOPs: Who Benefits?
Mandy Cabot wants to make sure the shoemaking business Norman Stein, Drexel University, says employee owner-
that she and her husband built over the past 20 years remains ship under the ESOP model causes more harm than good.
in good hands after they’re gone. The 58-year-old co-founder Many of the plans are based on a bloated assessment of the
of Dansko, a West Grove, PA, company with more than $150 value of the businesses. Many workers who are participating
million in annual sales, says she fears that selling to a compet- in the plans are left holding overvalued shares, long after the
itor, or a private-equity firm, would result in layoffs or other original owner has cashed out: “I’m not against employees
cost-cutting measures. owning some stock in their employer, but not if it’s tied to a
So last February, the couple transferred ownership of the retirement plan,” he says. “It’s a troubling trend.”
business to its 180 employees. By “keeping it in the family” Separate studies by Harvard University and Rutgers, as
and giving workers a real stake in its future, Ms. Cabot says well as by the National Bureau of Economic Research, have
she hopes the company will keep going strong for years to found that businesses with shared-ownership plans fared
come. “This is our baby, but at some point we have to cease better during the recession than more traditionally struc-
being parents and become grandparents,” she adds. tured firms, including fewer layoffs, higher productivity and
Ms. Cabot, who launched Dansko in 1990 by selling shoes stronger employee loyalty.
from the back of a Volvo station wagon, says the tax benefits Dawn Huston, 31, started working at Dansko 11 years ago,
associated with employee stock ownership enabled the S cor- sorting shoes for delivery. Now a warehouse processor, she
poration to manage the long-term debt of buying out the cou- says the idea of owning a piece of the company made her ner-
ple’s ownership stake. But, she adds, “It’s not some tax dodge.” vous at first—though she wasn’t worried about her retirement
Known as employee stock-ownership plans, or ESOPs, the savings, since the company offers a separate 401(k) plan, she
move is being embraced by smaller firms, especially those adds. Over the past year, she’s begun referring to Dansko as
struggling to find buyers during the weak economy. Under typi- “our company.” “I feel like they consider us family and it feels
cal plans, an owner’s interest in a business is bought out, in part like a family,” she says of the switch to employee ownership.
or in whole—often through a bank loan—with the stock being Adele Connors, 60, co-founder of Adworkshop, a Lake
held in trust. Employees then cash in their shares as they retire. Placid, NY, marketing agency, says a move to employee owner-
Michael Keeling, president of the ESOP Association, ship “really changed the culture of our company” with workers
a Washington lobby group, argues, “A company’s success now being “more engaged.” Kelly Frady, 43, an account super-
isn’t just driven by the brilliance of the CEO, but also by its visor at Adworkshop, says the agency’s employee-ownership
employees, and more owners feel [their employees] deserve plan has fostered a team spirit among its staff. “Everyone knows
something more for that.” that you do well and your stock will rise,” she says. “It’s a driv-
This week, a bipartisan group of lawmakers introduced ing factor in making the company succeed in the long term.”
a bill to encourage employee-ownership plans. But critics of Kim Jordan, who co-founded the New Belgium Brew-
the plans say owners who are looking for an easy exit are sim- ing Co. with her husband in 1991, says employee ownership
ply spreading the risks of business ownership by convincing ensures that the company’s values and culture will remain
employees to gamble their retirement savings. Andrew Stumpff, intact—including its commitment to sustainable farming
University of Michigan, says it’s bad enough to risk your retire- and an environmentally friendly production process. In
ment savings in a single company. But it’s even worse if that December, she extended full ownership of the Fort Collins,
company is your employer, he says. “If the company fails, you CO, brewery to its 480 employees.
lose your savings and your job.” That risk is very real, he adds, “We’ve always tried to involve our people in the running of
citing Enron, WorldCom and Lehman Brothers as examples the business,” she says. The goal, she says, isn’t just to reward
of high-profile failures at shared-ownership companies, espe- employees, but also to foster innovation by creating a com-
cially Enron Corp. where workers lost their savings. pany culture where workers think more like entrepreneurs.
The real attraction for owners, opponents say, is generous tax
breaks that shelter capital gains and dividends tied to the plans. QUESTIONS
As of 2011, there were an estimated 10,900 employee- 1. Is an ESOP good for employees?
owned businesses across the country, a 12% increase from 2. Does an ESOP motivate employees “better”?
2007 and a record high dating back to the mid-1970s, when 3. What happens to employees’ retirement income if they are
the plans first appeared, according to the National Center at an ESOP company that runs into financial problems?
for Employee Ownership. Nearly all of the employee-owned What happens to the same employees, if instead, they work
businesses have fewer than 500 workers. Some 10 million at a non-ESOP company that runs into financial problems?
employees are currently enrolled in these plans, representing SOURCE: Angus Loten, “Founders Cash Out, but Do Workers Gain?” Wall
more than $860 billion in assets, the group estimates. Street Journal, April 17, 2013.
Employees Own Bob’s Red Mill
Headquartered in Portland, Oregon, Bob’s Red Mill Natu- company now runs a 15-acre production facility, operating
ral Foods sells a variety of whole-grain flours and mixes, in three shifts, six days a week.
specializing in gluten-free products. The “Bob” of the Why did Moore give his company to his employees on his
company’s name is Bob Moore, the founder and president. 81st birthday rather than selling it to one of the many parties
In 2010, more than 30 years after he started the business, who have expressed an interest in buying? For Moore, the
Moore called his 200 employees together and announced answer is all about his employees and their commitment to
that he was giving them the company. As a retirement plan the company. He told a reporter, “These people are far too
for them, he had set up an employee stock ownership plan, good at their jobs for me to just sell [the business].” Employ-
placing the company’s stock in a trust fund. All employees ees return the praise. For example, Bo Thomas, maintenance
who had been with the company at least three years were superintendent, said, “It just shows how much faith and trust
immediately fully vested in the plan. As employees retire, Bob has in us. For all of us, it’s more than just a job.”
they will receive cash for their shares.
Watching the company’s stock rise in their retirement QUESTIONS
plan is not the only financial incentive for employees of 1. Which types of incentive pay are described in this
Bob’s Red Mill. Fifteen years ago, the company established case? Are these based on individual, group, or company
a profit-sharing plan. Chief financial officer John Wagner performance?
gives employees a weekly sales update, which they can use 2. Would you expect the motivational impact of stock own-
to estimate profits and determine their share. ership or profit sharing to be different at a small company
The numbers have been mostly good during the past two like Bob’s Red Mill than in a large corporation? Explain.
decades. When Wagner joined the company in 1993, there 3. Suppose Bob’s Red Mill brought you in as a consultant
were just 28 employees generating sales of $3.2 million. to review the company’s total compensation. Explain
Under Wagner’s guidance, the company began participat- why you would or would not recommend that the com-
ing in trade shows, attracting the interest of health food pany add other forms of incentive pay, and identify any
stores, food distributors, and later on, supermarket chains. additional forms of compensation you would recommend
The company’s market expanded from a few states to cover for the company’s employees.
North America and some international markets. The com- SOURCES: Corporate website, “About Us,” www.bobsredmill.com, accessed
pany reports that its revenues have grown at rates between June 7, 2015; Karen E. Klein, “ESOPs on the Rise among Small Businesses,”
Bloomberg Businessweek, April 26, 2010, www.businessweek.com; Dana
20% and 30% in the years since 2004.
Tims, “Founder of Bob’s Red Mill Natural Foods Transfers Business to
Along the way, Moore and his employees have been Employees,” Oregon Live, February 16, 2010, http://blog.oregonlive.com; and
unwavering in their dedication to the company and its Christine Brozyna, “American Heart: Owner of Multi-Million Dollar Company
mission of providing foods that make America health- Hands Over Business to Employees,” ABC News, February 18, 2010, http://
ier. Ten years after the business started, a fire caused by abcnews.go.com.
arson destroyed the mill, but Moore had it rebuilt, and the
NOTES
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B. Gerhart, eds., Compensation in Organizations: Current Research sic Motivation, Performance, and Creativity in the Workplace:
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Journal 41 (1998), pp. 283–97. Pay and Multidimensional Sorting: Productivity, Preferences, and
11. A. J. Nyberg, I. S. Fulmer, B. Gerhart, and M. A. Carpenter, Gender,” American Economic Review 101, no. 2 (2011), pp. 556–
“Agency Theory Revisited: CEO Return and Shareholder Inter- 90; R. D. Bretz, R. A. Ash, and G. F. Dreher, “Do People Make
est Alignment,” Academy of Management Journal 53 (2010), the Place? An Examination of the Attraction–Selection–Attrition
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Tradition on Compensation Arrangements: An Experiment D. M. Cable and T. A. Judge, “Pay Performances and Job Search
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nal 33 (1990), pp. 603–22; K. M. Eisenhardt, “Agency- and Psychology 47 (1994), pp. 317–48.
19. G. T. Milkovich, J. M. Newman, and B. Gerhart, Compensation, Leadership and Profit-Sharing in the Cross-Level Influence of
11th ed. (New York: McGraw-Hill/Irwin, 2014); K. Abosch and Individual Pay-for-Performance,” Journal of Applied Psychology
B. Gerhart, “The Case for Differentiated Pay for Performance,” 100 (2014), pp. 417–30. Other evidence suggests that merit pay
World at Work Total Rewards Conference & Exhibition, 2013. may be more effective with certain employee personality profiles,
20. E. H. O’Boyle and H. Aguinis, “The Best and the Rest: Revisit- consistent with our earlier discussion of sorting. See I. S. Fulmer
ing the Norm of Normality of Individual Performance,” Personnel and W. J. Walker, “More Bang for the Buck? Personality Traits as
Psychology 65 (2012), pp. 79–119; H. Aguinis and E. O’Boyle, Moderators of Responsiveness to Pay-for-Performance,” Human
“Star Performers in Twenty-First Century Organizations,” Per- Performance 28, no. 1 (2015), pp. 40–65.
sonnel Psychology 67, no. 2 (2014), pp. 313–50; H. Aguinis, 26. Bretz et al., “Current State of Performance Appraisal.”
E. O’Boyle, E. Gonzalez-Mulé, and H. Joo, “Cumulative Advan- 27. B. D. Blume, T. T. Baldwin, and R. S. Rubin, “Reactions to Dif-
tage: Conductors and Insulators of Heavy-tailed Productivity Dis- ferent Types of Forced Distribution Performance Evaluation Sys-
tributions and Productivity Stars,” Personnel Psychology, 2014; tems,” Journal of Business and Psychology 24 (2009), pp. 77–91.
K. F. Hallock, Pay: Why People Earn What They Earn and What 28. Bretz et al., “Current State of Performance Appraisal.”
You Can Do Now to Make More (Cambridge: Cambridge Univer- 29. Ibid.
sity Press, 2012). A key part of the argument is that performance 30. W. E. Deming, Out of the Crisis (Cambridge, MA: Center for
is not normally distributed. For an alternative view of the evidence Advanced Engineering Study, Massachusetts Institute of Tech-
questioning whether the performance distribution is non-normal, nology, 1986), p. 110.
see J. W. Beck, A. S. Beatty, and P. R. Sackett, “On the Distribution 31. Ibid.
of Job Performance: The Role of Measurement Characteristics in 32. E. O’Boyle Jr. and H. Aguinis, “The Best and The Rest: Revisit-
Observed Departures from Normality,” Personnel Psychology 67 ing The Norm of Normality of Individual Performance, Person-
(2014) pp. 531–66. nel Psychology, 65 (2012), pp. 79–119; C. O. Trevor, G. Reilly,
21. Gerhart and Fang, “Pay for (Individual) Performance: Issues, and B. Gerhart, “Reconsidering Pay Dispersion’s Effect on the
Claims, Evidence and the Role of Sorting Effects.” Performance of Interdependent Work: Reconciling Sorting and
22. J. D. Shaw, “Pay Dispersion,” Annual Review of Organiza- Pay Inequality,” Academy of Management Journal, 55 (2012),
tional Psychology and Organizational Behavior 1, no. 1 (2014), pp. 585–610.
pp. 521–44; P. E. Downes and D. Choi, “Employee Reactions 33. Deming, Out of Crisis.
to Pay Dispersion: A Typology of Existing Research,” Human 34. Trevor et al., “Voluntary Turnover.”
Resource Management Review 24, no. 1 (2014), pp. 53–66; 35. Gerhart and Rynes, Compensation: Theory, Evidence, and Stra-
C. O. Trevor, G. Reilly, and B. Gerhart, “Reconsidering Pay Dis- tegic Implications.
persion’s Effect on the Performance of Interdependent Work: 36. Rynes, Gerhart, and Parks, “Personnel Psychology: Performance
Reconciling Sorting and Pay Inequality,” Academy of Manage- Evaluation and Compensation.”
ment Journal 55 (2012), pp. 585–610; A. Bucciol, N. J. Foss, and 37. J. Schaubroeck, J. D. Shaw, M. K. Duffy, “An Under-Met and
M. Piovesan, “Pay Dispersion and Performance in Teams,” PloS Over-Met Expectations Model of Employee Reactions to Merit
ONE 9(11): e112631, 2014. Raises,” Journal of Applied Psychology 93 (2008) pp. 424–34;
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objective is not typically advisable. ary Negotiations by Graduating Male and Female MBAs,” Journal
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Performance Evaluation and Compensation.” Some evidence sug- online December 19, 2013. As we go to press, however, a different
gests that merit pay may be more effective when reinforced by study reports no effect of merit bonuses, but does find a positive
other aspects of the pay strategy and/or by leadership of super- effect of merit pay on subsequent performance. See S. Park and
visors. See J. H. Han, K. M. Bartol, and S. Kim, “Tightening M.C. Sturman, “Evaluating Form and Functionality of Pay-for-
Up the Performance–Pay Linkage: Roles of Contingent Reward Performance Plans.” Human Resource Management (published
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Employee Benefits
13
C H A P T E R
LEARNING OBJECTIVES
LO 13-1 Discuss the growth in benefits costs and the underlying

reasons for that growth. page 536
LO 13-2 Explain the major provisions of employee benefits programs. page 539
LO 13-3 Discuss how employee benefits in the United States
compare with those in other countries. page 549
LO 13-4 Describe the effects of benefits management on

cost and workforce quality. page 553
LO 13-5 Explain the importance of effectively communicating the

nature and value of benefits to employees. page 562
LO 13-6 Describe the regulatory constraints that affect the way employee
benefits are designed and administered. page 566
534
>>>
Work (and Family?) in Silicon Valley
Recent statistics from the Organization for Economic Bret Taylor says, “The culture is not necessarily
Cooperation and Development show that the aver- friendly to families” and that companies have not
age annual hours actually worked per worker is fully grasped that problem. But what happens as
1,788 in the United States. By comparison, for the Silicon Valley’s workforce ages and some workers
two largest economies in Europe, Germany and have children? Facebook received a lot of attention
France, the corresponding numbers are 1,388 and for its egg-freezing employee benefit, which some
1,489. In other words, if the workweek is roughly interpreted as meaning Facebook was discouraging
40 hours, workers in Germany and France work its employees from having children any time soon.
7.5 to 10 weeks less per year than workers in the (See the “Competing through Technology” box later
United States. Even in Japan, the largest devel- in the chapter for a fuller range of viewpoints on
oped economy in Asia (and second largest overall that topic.)
after China), which has wrestled with “death by At least some companies in the Valley have
overwork,” workers work fewer hours per year begun to focus on how to become more family-
(1,735) than those in the United States. The United friendly as a way to recruit and retain valued
States is sometimes referred to as “The no vacation employees. The Happy Home Company, a home
nation.” The United States is also one of the very repair start-up, focuses on recruiting parents
few advanced economies that does not require paid because it feels they are overlooked by other start-
sick leave or paid maternity leave. ups for “not being a cultural fit,” which is read by
The norm of working many hours is even more some to be code for too old, too female, too much
pronounced in certain parts of the U.S. economy, of a parent, or too different. At Bret Taylor’s new
such as Silicon Valley. In a talk to aspiring entrepre- company, he says the founder group tells employ-
neurs several years ago, Facebook co-founder and ees they have children of their own and that they
chief executive Mark Zuckerberg said, “We may not leave each day at 5:30 p.m. If they have to work
own a car. We may not have a family. Simplicity in longer, they work from home to avoid employees’
life allows us to focus on what’s important.” Face- feeling pressure to stay late. Outside of the Valley,
book has all-night hackathons. Google has laser- SAS Institute, a software company in North Carolina,
tag retreats on weekends. One of the first things has long had a policy of a 35-hour work week. Com-
Marissa Mayer did when she took over as Yahoo’s panies like Happy Home and SAS compete, in part,
chief executive, was to make it more difficult for by being unique in the labor market. They offer an
employees to work from home. In a lawsuit against employment “deal” or relationship that allows them
Facebook, a former employee claims she was to recruit and retain high quality people who may
admonished for volunteering one day per month not “fit” at competitors and they also have taken
at her child’s school, even though this volunteer- steps that allow employees to stay and contribute
ing was part of (stated) company policy. Although as they move through different phases of their lives.
one incident does not mean there is a systematic SOURCE: C. C. Miller, “Silicon Valley’s Struggle Adapting to Families,”
problem, former Facebook chief technology officer The New York Times, April 8, 2015, p. A3.
535
536 CHAPTER 13 Employee Benefits
Introduction
If we think of benefits as a part of total employee compensation, many of the concepts
discussed in the two previous chapters on employee compensation apply here as well.
This means, for example, that both cost and behavioral objectives are important. The
cost of benefits adds an average of 46.3% to every dollar of payroll, thus accounting
for 31.6% of the total employee compensation package. Controlling labor costs is not
possible without controlling benefits costs. Similarly, achieving the objective of labor
costs being variable and moving in the same direction of revenues and profits (rather
than being fixed costs) is also not possible without careful attention to benefits strat-
egy. On the behavioral side, benefits seem to influence whether potential employees
come to work for a company, whether they stay, when they retire—perhaps even how
they perform (although the empirical evidence, especially for the latter point, is sur-
prisingly limited).1 Although employers continue to be focused on cost control, as the
chapter-opening story indicates, different employees look for different types of ben-
efits. Benefits can be used to differentiate an employer from competitors, allowing it
to tap into what in some cases may be a valuable, but underutilized, part of the pool of
human capital.
Although it makes sense to think of benefits as part of total compensation, benefits
have unique aspects. First, there is the question of legal compliance. Although direct
compensation is subject to government regulation, the scope and impact of regulation
on benefits is far greater. Some benefits, such as Social Security, are mandated by law.
Others, although not mandated, are subject to significant regulation or must meet certain
criteria to achieve the most favorable tax treatment; these include pensions and savings
plans. The heavy involvement of government in benefits decisions reflects the central
role benefits play in maintaining economic security.
A second unique aspect of benefits is that organizations so typically offer them that
they have come to be institutionalized. Providing medical and retirement benefits of
some sort remains almost obligatory for many (e.g., large) employers. A large employer
that did not offer such benefits to its full-time employees would be highly unusual, and
the employer might well have trouble attracting and retaining a quality workforce.
A third unique aspect of benefits, compared with other forms of compensation, is
their complexity. It is relatively easy to understand the value of a dollar as part of a
salary, but not as part of a benefits package. The advantages and disadvantages of dif-
ferent types of medical coverage, pension provisions, disability insurance, and invest-
ment options for retirement funds are often difficult to grasp, and their value (beyond
a general sense that they are good to have) is rarely as clear as the value of one’s
salary. Most fundamentally, employees may not even be aware of the benefits avail-
able to them; and if they are aware, they may not understand how to use them. When
employers spend large sums of money on benefits but employees do not understand
the benefits or attach much value to them, the return on employers’ benefits invest-
ment will be fairly dismal.2 One reason for giving more responsibility to employees for
retirement planning and other benefits is to increase their understanding of the value
of such benefits.
LO 13-1 Reasons for Benefits Growth

Discuss the growth in
benefits costs and the
In thinking about benefits as part of total compensation, a basic question arises: why
underlying reasons for do employers choose to channel a significant portion of the compensation dollar away
that growth. from cash (wages and salaries) into benefits? Economic theory tells us that people prefer
CHAPTER 13 Employee Benefits 537
a dollar in cash over a dollar’s worth of any specific commodity because the cash can
be used to purchase the commodity or something else.3 Cash is less restrictive. Several
factors, however, have contributed to less emphasis on cash and more on benefits in
compensation. To understand these factors, it is useful to examine the growth in benefits
over time and the underlying reasons for that growth.
Figure 13.1 gives an indication of the overall growth in benefits. Note that in 1929,
on the eve of the Great Depression, benefits added an average of only 3% to every dol-
lar of payroll. By 1955 this figure had grown to 17%, and it has continued to grow, now
accounting for 46.3 cents on top of every payroll dollar.
Many factors contributed to this tremendous growth.4 First, during the 1930s sev-
eral laws were passed as part of Franklin Roosevelt’s New Deal, a legislative program
aimed at buffering people from the devastating effects of the Great Depression. The
Social Security Act and other legislation established legally required benefits (such as
the Social Security retirement system) and modified the tax structure in such a way as
to effectively make other benefits—such as workers’ compensation (for work-related
injuries) and unemployment insurance—mandatory. Second, wage and price controls
instituted during World War II, combined with labor market shortages, forced employers
to think of new ways to attract and retain employees. Because benefits were not covered
Figure 13.1
Growth of Employee Benefits, Percentage of Wages and Salaries and of Total Compensation,
1929–2015, Civilian Workers
50%
46.3
42.2 43.5
40.4
40 37.9 37.7
31.6
30.0 29.7 30.3
30 28.8
Percentage
27.5 27.4
23.1
21.5
20 17.7
17.0
14.5
10
3.0 2.9
0
1929 1955 1965 1975 1990 1995 2000 2005 2010 2015
Year
Benefits as percentage of wages and salaries
Benefits as percentage of total compensation
SOURCES: Data through 1990, U.S. Chamber of Commerce Research Center, Employee Benefits 1990, Employee Benefits 1997, Employee Benefits
2000 (Washington, DC: U.S. Chamber of Commerce, 1991, 1997, and 2000). Data from 1995 onward, “Employer Costs for Employee Compensation,”
www.bls.gov.
Table 13.1
NOMINAL EFFECTIVE
Example of Marginal
TAX RATE TAX RATE
Tax Rates for an
Employee Salary of
$80,000 Federal 25.00% 25.00%
State (New York) 6.65 4.99
City (New York) 3.59 2.69
Social Security 6.20 6.20
Medicare 1.45 1.45
Total tax rate 42.89 40.33
Note: State and city taxes are deductible on the federal tax return, reducing their effective tax rate.
by wage controls, employers channeled more resources in this direction. Once institu-
tionalized, such benefits tended to remain even after wage and price controls were lifted.
Third, the tax treatment of benefits programs is often more favorable for employees
than the tax treatment of wages and salaries, meaning that a dollar spent on benefits has
the potential to generate more value for the employees than the same dollar spent on
Marginal Tax Rate wages and salaries. The marginal tax rate is the percentage of additional earnings that
The percentage of an goes to taxes. Consider the hypothetical employee in Table 13.1 and the effect on take-
additional dollar of home pay of a $1,000 increase in salary. The total effective marginal tax rate is higher
earnings that goes to
taxes.
for higher-paid employees and also varies according to state and city. (New York State
and New York City are among the highest.) A $1,000 annual raise for the employee
earning $80,000 per year would increase net pay $596.70 ($1,000 × [1 − 0.4033]). In
contrast, an extra $1,000 put into benefits would lead to an increase of $1,000 in “take-
home benefits.”
Employers, too, realize tax advantages from certain types of benefits. Although both
cash compensation and most benefits are deductible as operating expenses, employers
(like employees) pay Social Security and Medicare tax on salaries up to a limit ($118,500
for 2015) and Medicare tax on the entire salary, as well as other taxes like workers’ com-
pensation and unemployment compensation. However, no such taxes are paid on most
employee benefits. The bottom line is that the employer may be able to provide more
value to employees by spending the extra $1,000 on benefits instead of salary.
The tax advantage of benefits also takes another form. Deferring compensation until
retirement allows the employee to receive cash, but at a time (retirement) when the
employee’s tax rate is sometimes lower because of a lower income level. More impor-
tant, perhaps, is that investment returns on the deferred money typically accumulate tax
free, resulting in much faster growth of the investment.
A fourth factor that has influenced benefits growth is the cost advantage that groups
typically realize over individuals. Organizations that represent large groups of employ-
ees can purchase insurance (or self-insure) at a lower rate because of economies of scale,
which spread fixed costs over more employees to reduce the cost per person. Insur-
ance risks can be more easily pooled in large groups, and large groups can also achieve
greater bargaining power in dealing with insurance carriers or medical providers.
A fifth factor influencing the growth of benefits was the growth of organized labor
from the 1930s through the 1950s. This growth was partly a result of another piece of
New Deal legislation, the National Labor Relations Act, which greatly enhanced trade
unions’ ability to organize workers and negotiate contracts with employers. Benefits
were often a key negotiation objective. (Indeed, they still are. Benefits issues continue to
be a common reason for work stoppages.) Unions were able to successfully pursue their
Table 13.2
Rooftop dog park Zynga Differentiating via
$10,000 per employee allowance for computers and desk décor Pinterest Benefits
(e.g., refrigerators, headphones, custom-made chairs, rugs)
20 days of free backup care for 3- to 6-month-olds Goldman Sachs
Paid week off for new grandparents MBNA
Pregnant employees can take a paid month off before their Eli Lilly
due date
Use of the company plane for family emergencies BE&K
Dinner with the president and CEO after 10 years Cerner
A free stay at any company-run hotel. Six months to one year Four Seasons
of service gets three free nights, while more than 10 years
gets 20 nights
Pet insurance Timberland
$4 on-site haircuts Worthington Industries
$10,000 total benefit for infertility treatments and adoption aid CMP Media
10 paid hours a month for volunteer work Fannie Mae
35 extra vacation days on 10th year and every fifth year after Moog
1,200-acre camping and recreational area for employee use Steelcase
Life Cycle account of $10,000 to help employees cross Xerox
major thresholds such as buying first house or paying tuition
Every four years, holds an international Olympics for its Allianz
sports teams. The company covers the athletes’ expenses
and has an opening ceremony; most recent games were
held in Budapest with over 70 countries participating.
SOURCES: R. Feintzeig, “Lavish Perks Spawn New Job Category,” The Wall Street Journal, November 20, 2014, www.
wsj.com; “11 Top Perks from Best Companies,” 100 Best Companies to Work For: 2013, Fortune, accessed May 22,
2013, http://archive.fortune.com; “Best Benefits: Unusual Perks,” 100 Best Companies to Work For: 2012, Fortune,
accessed May 22, 2013, http://archive.fortune.com; B. Ballou and N. H. Goodwin, “Quality of Work Life,” Strategic
Finance, October 2007, pp. 40–48.
members’ interests in benefits, particularly when tax advantages provided an incentive

for employers to shift money from cash to benefits. For unions, a new benefit such as
medical coverage was a tangible success that could have more impact on prospective
union members than a wage increase of equivalent value, which might have amounted to
only a cent or two per hour. Also, many nonunion employers responded to the threat of
unionization by implementing the same benefits for their own employees, thus contrib-
uting to benefits growth.
Finally, employers may also provide unique benefits as a means of differentiat-
ing themselves in the eyes of current or prospective employees. In this way, employ-
ers communicate key aspects of their culture that set them apart from the rest of the
pack. Table 13.2 shows some examples. The “Competing through Sustainability” box
describes how Patagonia uses benefits to help sustain its business strategy.
Benefits Programs
Most benefits fall into one of the following categories: social insurance, private group LO 13-2
insurance, retirement, pay for time not worked, and family-friendly policies.5 Table 13.3, Explain the major provi-
based on Bureau of Labor Statistics (BLS) data, provides an overview of the prevalence sions of employee ben-
efits programs.
of specific benefits programs. As Table 13.3 shows, the percentage of employees
Company Benefits Help Sustain Patagonia’s Business Strategy
Patagonia, an outdoor cloth- hours, including climbing, biking, those outside the
ing company, prides itself on its fly fishing, and kayaking. Retail company will fol-
commitment to the “triple bottom marketing coordinator Danielle low: enjoying the great outdoors
line”: do well by shareholders, Egge pronounced that “I’m so and doing so in Patagonia gear.
but also by employees and the much more productive when I
community/environment. When get into the water every day” as DISCUSSION QUESTIONS
it comes to shareholders and she prepared to attend a meet- 1. If you were a Patagonia share-
employees, Patagonia makes ing about Patagonia’s new plant- holder, would you be pleased
sure its employees get outside based wetsuit. Employees are with the fact that employees
and test its gear. (To make that also eligible for two-month sab- can leave the office to surf,
easier, they set their own hours.) baticals to pursue environmental fish, climb, and kayak during
That is something its employees projects. Patagonia was also work hours? Explain.
enjoy and it also helps the com- one of the first companies to 2. Think of an organization you
pany design and re-design prod- offer on-site child care. Overall, know (e.g., where you are or
ucts so that they are attractive to Patagonia wants its employees were an employee). Describe
customers, which makes money to live a full and balanced life why the Patagonia employ-
for shareholders. It is only fitting because it feels it makes them ment and benefits model
for employees located in Ven- happier and more invested in would or would not work well
tura, California, that the title of what they are doing and that it at that organization.
founder Yvon Chouinard’s memo helps them bring an energy and SOURCES: J. Murphy, “At Patagonia, Trying
is “Let My People Go Surfing.” enthusiasm that they can sustain New Outdoor Adventures Is a Job Requirement,”
The Wall Street Journal, March 9, 2015, www
Employees mix in a variety of over the course of their careers. .wsj.com; B. Schulte, “A Company That Profits
activities in addition to surfing Of course, it also provides a as It Pampers Workers,” The Washington Post,
before, during, and after work model that Patagonia hopes October 25, 2014, www.washingtonpost.com.
covered by these benefits programs increases with establishment size. Likewise, as

shown in Table 13.4, benefits (and total compensation) costs also increase with estab-
lishment size.
SOCIAL INSURANCE (LEGALLY REQUIRED)

Social Security
Among the most important provisions of the Social Security Act of 1935 was the estab-
lishment of old-age insurance and unemployment insurance. The act was later amended
to add survivor’s insurance (1939), disability insurance (1956), hospital insurance
(Medicare Part A, 1965), and supplementary medical insurance (Medicare Part B, 1965)
for the elderly. Together these provisions constitute the federal Old Age, Survivors, Dis-
ability, and Health Insurance (OASDHI) program. More than 90% of U.S. employees
are covered by the program, the main exceptions being railroad and federal, state, and
local government employees, who often have their own plans. Note, however, that an
individual employee must meet certain eligibility requirements to receive benefits. To
be fully insured typically requires 40 quarters of covered employment and minimum
earnings of $1,160 per quarter in 2013. However, the eligibility rules for survivors’ and
disability benefits are somewhat different.
540
Table 13.3
ESTABLISHMENT SIZE
Percentage of Full-
1–99 500 OR MORE Time Workers in U.S.
ALL EMPLOYEES EMPLOYEES Private Industry with
Access to Selected
Medical care 69% 57% 89% Benefits Programs,
Short-term disability insurance 40 29 62 by Establishment Size
Long-term disability insurance 34 22 61
All retirement 65 50 89
Defined benefit pension 19 8 46
Defined contribution plan 60 47 80
Life insurance 57 40 86
Paid Leave
Sickness 61 52 81
Vacation 77 69 91
Personal 38 27 60
Family 12 8 21
SOURCE: U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in the United States,
March 2014, Bulletin 2779, September 2014, www.bls.gov.
Table 13.4
ESTABLISHMENT SIZE
Total Hourly
1–99 500 OR MORE Compensation and
ALL EMPLOYEES EMPLOYEES Benefits Costs, U.S.
Civilian Workers, by
Total compensation $31.32 $26.23 $45.88 Establishment Size
Wages and salaries 21.72 19.01 29.74
Benefits 9.60 7.01 16.14
SOURCE: Employer Costs for Employee Compensation—December 2014, USDL-15-0366, www.bls.gov.
Social Security retirement (old-age insurance) benefits for fully insured workers
begin at age 65 years and 6 months (full benefits) or age 62 (at a permanent reduction in
benefits) for those born in 1940. The full retirement age now rises with birth year, reach-
ing age 67 for those born in 1960 or later. Although the amount of the benefit depends on
one’s earnings history, benefits do not go up after reaching a certain earnings level. Thus
high earners help subsidize benefit payments to low earners. In 2015, the maximum
annual benefit at full retirement age was $31,956. Cost-of-living increases are provided
each year that the consumer price index increases. The age at which you retire matters.
If retiring at age 62 (i.e., before full retirement age), the maximum annual benefit in 2015
was $24,300. But, if you waited until age 70, the maximum retirement benefit in
2015 was $42,012. There is no further benefit to retiring after age 70.
An important attribute of the Social Security retirement benefit is that for those at full
retirement age, it is free from state tax in about half of the states and free from federal tax
if no other income is received or if that other income falls below a certain level (recently,
$25,000 for single tax return filers, $32,000 for married/joint filers. Additionally the
federal tax code has an earnings test for those who are still earning wages (and not yet
at full retirement age). In 2015, beneficiaries between age 62 and the full retirement age
were allowed to make $15,720; in the year an individual reaches full retirement age, the
earnings test is $41,880. If these amounts are exceeded, the Social Security benefit is
reduced $1 for every $2 in excess earnings for those under the full retirement age and $1
for every $3 in the year a worker reaches the full retirement age. These provisions are
important because of their effects on the work decisions of those between 62 and full
retirement age. The earnings test increases a person’s incentive to retire (otherwise full
Social Security benefits are not received), and if she continues to work, the incentive to
work part-time rather than full-time increases. A major change made in January 2000 is
that there is no earnings test once full retirement age is reached. Therefore, these workers
no longer incur any earnings penalty (and thus have no tax-related work disincentive).
How are retirement and other benefits financed? Both employers and employees are
assessed a payroll tax of 7.65% (a total of 15.3%) on the first $118,500 (as of 2015) of
the employee’s earnings. Of the 7.65%, 6.2% funds OASDHI and 1.45% funds Medicare
(Part A). Unlike the OASDHI tax, the 1.45% Medicare tax is assessed on all earnings.
(Self-employed pay a 12.4% OASDHI tax plus a 2.9% Medicare tax.) In addition, as of
2013, the Affordable Care Act added what the Social Security Administration calls a High
Income Tax and what the Internal Revenue Service calls the Additional Medicare Tax,
which is 0.9% on adjusted gross income above $200,000 for single filers and $250,000 for
married filers. This tax is paid only by individuals. Employers do not pay this tax.
What are the behavioral consequences of Social Security benefits? Because they are
legally mandated, employers do not have discretion in designing this aspect of their ben-
efits programs. However, Social Security does affect employees’ retirement decisions.
The eligibility age for benefits and any tax penalty for earnings influence retirement
decisions. The elimination of the tax penalty on earnings for those at full retirement age
should mean a larger pool of older workers in the labor force for employers to tap into.
Unemployment Insurance
Established by the 1935 Social Security Act, this program has four major objectives: (1) to
offset lost income during involuntary unemployment, (2) to help unemployed workers find
new jobs, (3) to provide an incentive for employers to stabilize employment, and (4) to pre-
serve investments in worker skills by providing income during short-term layoffs (which
allows workers to return to their employer rather than start over with another employer).
The unemployment insurance program is financed largely through federal and state
taxes on employers. Although, strictly speaking, the decision to establish the program
is left to each state, the Social Security Act created a tax incentive structure that quickly
led every state to establish a program. The federal tax rate is currently 0.6% on the first
$7,000 of wages. Many states have a higher rate or impose the tax on a greater share of
earnings. Currently, Washington State has the maximum covered (taxable) earnings of
any state at $42,100.6
A very important feature of the unemployment insurance program is that no state
imposes the same tax on every employer. Instead, the size of the tax depends on the
employer’s experience rating. Employers that have a history of laying off a large share
of their workforces pay higher taxes than those who do not. In some states, an employer
that has had very few layoffs may pay no state tax. In contrast, an employer with a poor
experience rating could pay a tax as high as 5% to 10%, depending on the state.7
Unemployed workers are eligible for benefits if they (1) have a prior attachment to
the workforce (often 52 weeks or four quarters of work at a minimum level of pay);
(2) are available for work; (3) are actively seeking work (including registering at the local
unemployment office); and (4) were not discharged for cause (such as willful misconduct),
did not quit voluntarily, and are not out of work because of a labor dispute.
Benefits also vary by state, but they are typically about 50% of a person’s earnings
and last for 26 weeks. Extended benefits for up to 13 weeks are also available. A state
must, for example, pay extended benefits if the insured unemployment rate for the previous
13 weeks is at least 5% and is 120% of the rate for the same 13-week period in the two pre-
vious years.8 Emergency extended (federal) benefits are also sometimes funded by Con-
gress. All states have minimum and maximum weekly benefit levels. In contrast to Social
Security retirement benefits, unemployment benefits are taxed as ordinary income.
Because unemployment insurance is, in effect, legally required, management’s discre-
tion is limited here, too. Management’s main task is to keep its experience rating low
by avoiding unnecessary workforce reductions (e.g., by relying, on the sorts of actions
described in Chapter 5).
Workers’ Compensation
Workers’ compensation laws cover job-related injuries and death.9 Prior to enactment
of these laws, workers suffering work-related injuries or diseases could receive com-
pensation only by suing for damages. Moreover, the common-law defenses available to
employers meant that such lawsuits were not usually successful. In contrast, these laws
operate under a principle of no-fault liability, meaning that an employee does not need
to establish gross negligence by the employer. In return, employers receive immunity
from lawsuits. (One exception is the employer who intentionally contributes to a dan-
gerous workplace.) Employees are not covered when injuries are self-inflicted or stem
from intoxication or “willful disregard of safety rules.”10 Approximately 90% of all U.S.
workers are covered by state workers’ compensation laws, although again there are dif-
ferences among states, with coverage ranging from 70% to more than 95%.
Workers’ compensation benefits fall into four major categories: (1) disability income,
(2) medical care, (3) death benefits, and (4) rehabilitative services.
Disability income is typically two-thirds of predisability earnings, although each state
has its own minimum and maximum. In contrast to unemployment insurance benefits,
disability benefits are tax free. The system is financed differently by different states,
some having a single state fund, most allowing employers to purchase coverage from
private insurance companies. Self-funding by employers is also permitted in most states.
The cost to the employer is based on three factors. The first factor is the nature of the
occupations and the risk attached to each. Premiums for low-risk occupations may be
less than 1% of payroll; the cost for some of the most hazardous occupations may be
as high as 100% of payroll. The second factor is the state where work is located. For
example, in the 50 U. S. states, the maximum compensation a worker can receive for loss
of an arm averages $169,878, but it ranges from a minimum of $48,840 in Alabama to a
maximum of $859,634 in Nevada.11 The third factor is the employer’s experience rating.
The experience rating system again provides an incentive for employers to make their
workplaces safer. Dramatic injuries (like losing a finger or hand) are less prevalent than
minor ones, such as sprains and strains. Back strain is the most expensive benign health
condition in developed countries. Each year in the United States, 3 to 4% of the popula-
tion is temporarily disabled and 1% is permanently and totally disabled.12 Many actions
can be taken to reduce workplace injuries, such as work redesign and training, and to
speed the return to health, and thus to work (e.g., exercise).13 Some changes can be fairly
simple (such as permitting workers to sit instead of having them bend over). It is also
important to hold managers accountable (in their performance evaluations) for making
workplaces safer and getting employees back to work promptly following an injury. With
the passage of the Americans with Disabilities Act, employers came under even greater
pressure to deal effectively and fairly with workplace injuries. See the discussion in
Chapter 3 on safety awareness programs for some of the ways employers and employees
are striving to make the workplace safer.
One challenge is managing pain from workplace injuries effectively and efficiently
and avoiding prescription painkiller abuse. Some firms and insurers have moved toward
using data better to assess high-risk workers. In such cases, a case worker is assigned to
the employee right from the start, who closely monitors the employee’s situation. If, for
example, a case worker sees that a worker with a broken ankle continues taking opioids
longer than two weeks, an alert may be issued. The idea is to intervene so that a broken
ankle or a minor lower-back injury does not turn into a lifetime problem with prescrip-
tion painkiller addiction. Companies can also use analytics from Rising (Rising Medi-
cal Solutions) and similar companies to benchmark their workers’ compensation cases
against those of other companies in the same industry or geographical location as a way
to compare the risk they face of fraud and abuse to that faced by other companies, which
can help them decide how much of a problem they have.
PRIVATE GROUP INSURANCE

As we noted earlier, group insurance rates are typically lower than individual rates
because of economies of scale, the ability to pool risks, and the greater bargaining power
of a group. This cost advantage, together with tax considerations and a concern for
employee security, helps explain the prevalence of employer-sponsored insurance plans.
We discuss two major types: medical insurance and disability insurance. Note that these
programs are not legally required; rather, they are offered at the discretion of employers.
Medical Insurance
Not surprisingly, public opinion surveys indicate that medical benefits are by far the most
important benefit to the average person.14 As Table 13.3 indicates, most full-time employ-
ees have medical insurance, especially in larger workplaces. Three basic types of medical
expenses are typically covered: hospital expenses, surgical expenses, and physicians’ visits.
Other benefits that employers may offer include dental care, vision care, birthing centers,
and prescription drug programs. Perhaps the most important issue in benefits management
is the challenge of providing quality medical benefits while controlling costs, a subject we
return to in a later section. We also discuss the Affordable Care Act in a later section.
Consolidated The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 requires
Omnibus Budget employers to permit employees to extend their health insurance coverage at group rates
Reconciliation Act for up to 36 months following a “qualifying event” such as termination (except for gross
(COBRA)
The 1985 act that
misconduct), a reduction in hours that leads to the loss of health insurance, death, and
requires employers other events. The beneficiary (whether the employee, spouse, or dependent) must have
to permit employees access to the same services as employees who have not lost their health insurance. Note
to extend their health that the beneficiaries do not get free coverage. Rather, they receive the advantage of
insurance coverage at purchasing coverage at the employer rather than the individual rate.
group rates for up to
36 months following a
qualifying event, such Disability Insurance
as a layoff. Two basic types of disability coverage exist.15 As Table 13.3 indicates, only in larger work-
places are most employees covered by short-term and long-term disability insurance. Short-
term plans typically provide benefits for six months or less, at which point long-term plans
take over, potentially covering the person for life. The median and modal salary replace-
ment rate is 60%, although short-term plans are sometimes higher. There are typically
(in 88% of plans) caps on the amount (median = $8,000) that can be paid each month.16
Federal income taxation of disability benefits depends on the funding method. Where
employee contributions completely fund the plan, there is no federal tax. Benefits based
on employer contributions are taxed. Finally, disability benefits, especially long-term ones,
need to be coordinated with other programs, such as Social Security disability benefits.
RETIREMENT
Earlier we discussed the old-age insurance part of Social Security, a legally required
source of retirement income. This remains the largest single component of the elderly’s
overall retirement income (35%). Other sources of income are pensions (17%), earnings
from assets (savings and other investments like stocks and bonds, 11%), earnings (34%)
and other sources (3%).17
Employers have no legal obligation to offer private retirement plans, but many do. As
we note later, if a private retirement plan is provided, it must meet certain standards set
forth by the Employee Retirement Income Security Act.
Defined Benefit
A defined benefit plan guarantees (“defines”) a specified retirement benefit level to
employees based typically on a combination of years of service and age as well as on the
employee’s earnings level (e.g., the three to five highest earnings years). For instance, an
organization might guarantee a monthly pension payment of $1,500 to an employee retiring
at age 65 with 30 years of service and an average salary over the final 5 years of $40,000.
As Table 13.3 indicates, full-time employees in 19% of all workplaces, 46% of large work-
places, are covered by such plans. (Defined benefit coverage has fallen by half since 1980.)18
Defined benefit plans insulate employees from investment risk, which is borne by the
company. In the event of severe financial difficulties that force the company to terminate or
reduce employee pension benefits, the Pension Benefit Guaranty Corporation (PBGC) pro- Pension Benefit
vides some protection of benefits. Established by the Employee Retirement Income Security Guaranty
Act (ERISA) of 1974, the PBGC guarantees a basic benefit, not necessarily complete pension Corporation (PBGC)
The agency that guar-
benefit replacement, for employees who were eligible for pensions at the time of termina- antees to pay employ-
tion. It insures the retirement benefits of 41 million workers in more than 24,000 plans. Since ees a basic retirement
1974, PBGC has become responsible for more than 1.5 million people in nearly 4,700 failed benefit in the event
single-employer and multi-employer plans, making payments of $5.6 billion annually as of that financial difficul-
FY 2014.19 The maximum annual benefit for single-employer plans is limited to the lesser of ties force a company
to terminate or reduce
an employee’s annual gross income during a PBGC-defined period or $60,136 at age 65 employee pension
($99,826 at age 70, $182,820 at age 75) for plans terminated in 2015. Thus, higher-paid benefits.
employees, who would have received higher pensions under the company plan, can experi- Employee
ence major cuts in pensions if the PBGC must take over the plan. Payouts are not adjusted for Retirement Income
cost-of-living changes. The PBGC is funded by an annual contribution of $57 per (single- Security Act (ERISA)
employer) plan participant in 2015 and $64 in 2016, plus an additional variable rate pre- The 1974 act that
increased the fiduciary
mium for underfunded plans.20 Note that the PBGC does not guarantee health care benefits.
responsibilities of pen-
sion plan trustees,
Defined Contribution established vesting
rights and portability
Unlike defined benefit plans, defined contribution plans do not promise a specific ben-
provisions, and estab-
efit level for employees upon retirement. Rather, an individual account is set up for lished the Pension
each employee with a guaranteed size of contribution. The advantage of such plans for Benefit Guaranty Cor-
employers is that they shift investment risk to employees and present fewer administra- poration (PBGC).
tive challenges because there is no need to calculate payments based on age and service
and no need to make payments to the PBGC. As Table 13.3 indicates, defined contri-
bution plans are especially preferred in smaller companies, perhaps because of small
employers’ desire to avoid long-term obligations or perhaps because small companies
tend to be younger, often being founded since the trend toward defined contribution
plans. Some companies have both defined benefit and defined contribution plans.
There is a wide variety of defined contribution plans, a few of which are briefly
described here. One of the simplest is a money purchase plan, under which an employer
specifies a level of annual contribution (such as 10% of salary). At retirement age, the
employee is entitled to the contributions plus the investment returns. The term “money
purchase” stems from the fact that employees often use the money to purchase an annuity
rather than taking it as a lump sum. Profit sharing plans and employee stock ownership
plans are also often used as retirement vehicles. Both permit contributions (cash and stock,
respectively) to vary from year to year, thus allowing employers to avoid fixed obligations
that may be burdensome in difficult financial times. Section 401(k) plans (named after the
tax code section) permit employees to defer compensation on a pretax basis. Annual con-
tributions in 2015 are limited to $18,000.21 For those age 50 or over, an additional $6,000
per year in catch-up contributions is also permitted. Additionally, many employers (80%)
match some portion (mean = 4.7%) of employee contributions.22 A final incentive is tax
based. For example, based on our earlier Table 13.1, $10,000 contributed to a 401(k) plan
would only be worth (1 − 0.4333) × $10,000 = $5,667 if taken in salary.
Defined contribution plans continue to grow in importance, while, as we saw earlier,
defined benefit plans have become less common. An important implication is that defined
contribution plans put the responsibility for wise investing squarely on the shoulders of the
employee. Several factors affect the amount of income that will be available to an employee
upon retirement. First, the earlier the age at which investments are made, the longer returns
can accumulate. As Figure 13.2 shows, an annual investment of $3,000 made between ages
21 and 29 will be worth much more at age 65 than a similar investment made between
ages 31 and 39. Second, different investments have different historical rates of return.
Figure 13.2 1.0

The Relationship of 0.9
Retirement Savings
Value of savings at age 65
to Age When 0.8

Savings Begins and 0.7
Type of Investment
Portfolio 0.6
0.5 $460,958
0.4
0.3
$227,709
0.2
$106,906
0.1 $75,861
0
21–29 31–39 21–29 31–39
Age range when $3,000 is saved annually
Investment portfolio of 60% stocks, 30% bonds,

and 10% cash (historical 7.31% average return)
Investment portfolio of 100% cash (historical 3.53% average return)
Note: Historical Rates of Return, Geometric Averages, 1928–2014: Stocks (S&P 500), 9.60%; Bonds 10-year U.S. Trea-
sury Bond, 5.00%; Cash (3-month U.S. Treasury Bill), 3.49%.
SOURCE: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html. Accessed June 8, 2015.
Between 1928 and 2014 the average annual return was 9.60% for stocks, 5.00% for bonds,
and 3.49% for cash (e.g., short-term Treasury bills or bank savings accounts). As Fig-
ure 13.2 shows, IF historical rates of return were to continue, an investment in a mix of
60% stock, 30% bonds, and 10% cash between the ages of 21 and 29 would be worth about
four times as much at age 65 as would the same amount kept in the form of cash. A third
consideration is the need to counteract investment risk by diversification because stock and
bond prices can be volatile in the short run. Although stocks have the greatest historical
rate of return, that is no guarantee of future performance, particularly over shorter time
periods. (This fact becomes painfully obvious during the dramatic drops in stock market
values that are experienced every so often, most recently a drop of 38% in the S&P 500
in 2008.) Thus some investment advisers recommend a mix of stock, bonds, and cash, as
shown in Figure 13.2, to reduce investment risk. Younger investors may wish to have more
stock, while those closer to retirement age typically have less stock in their portfolios.
It’s also important—indeed, extraordinarily important—not to invest too heavily in
any single stock.23 Some Enron employees had 100% of their 401(k) assets in Enron
stock. When the price dropped from $90 to less than $1 and Enron entered bankruptcy
their retirement money was gone. Risk is further compounded by risk of job loss when
one’s employer struggles financially. Employees at Bear Stearns, a storied Wall Street
firm, also learned the hard way what can happen when you put all your eggs in one
basket—company stock. When the stock price fell from its peak of $160 to $2 and Bear
was purchased by JP Morgan Chase, the value of employee-owned shares fell from $6.3
billion to $79 million, a loss of 99%. So, repeat after me: Always diversify and don’t put
all your retirement eggs in one basket.24
The Pension Protection Act (PPA) of 2006 requires defined contribution plans hold-
ing publicly traded securities to provide employees with (1) the opportunity to divest
employer securities and (2) at least three investment options other than employer securi-
ties. The PPA also allows employers to enroll workers in their 401(k) plan automatically
and to increase a worker’s 401(k) contribution automatically to coincide with a raise or a
work anniversary. Workers can decline, but the onus is on them to do so. Since the PPA,
automatic enrollment (50% of plans) and automatic escalation (44%) have become com-
mon, thus helping increase worker retirement contributions.25
According to the U.S. Department of Labor's Employee Benefits Security Adminis-
tration, ERISA requires that employers "meet fiduciary responsibilities." That includes
acting solely in the interest of plan participants in managing the retirement plan, carry-
ing out these management duties prudently, following plan documents, diversifying plan
investments, and paying only reasonable plan expenses. Companies can be sued for any
breach of these fiduciary responsibility duties. As an example, Lockheed reached a $62
million settlement in 2015 of a lawsuit that alleged its 401(k) plan was not prudently
managed (e.g., because it charged excessive fees to participants).
Cash Balance Plans

One way to combine the advantages of defined benefit plans and defined contribution
Cash Balance Plan
plans is to use a cash balance plan. This type of retirement plan consists of individual Retirement plan in
accounts, as in a 401(k) plan. But in contrast to a 401(k), all the contributions come from which the employer
the employer. Usually, the employer contributes a percentage of the employee’s salary, sets up an individual
say, 4% or 5%. The money in the cash balance plan earns interest according to a prede- account for each
employee and contrib-
termined rate, such as the rate paid on U.S. Treasury bills. Employers guarantee this rate
utes a percentage of
as in a defined benefit plan. This arrangement helps employers plan their contributions the employee’s salary;
and helps employees predict their retirement benefits. If employees change jobs, they the account earns inter-
generally can roll over the balance into an individual retirement account. est at a predefined rate.
Organizations switching from traditional defined benefit plans to cash balance plans
should consider the effects on employees as well as on the organization’s bottom line.
Defined benefit plans are most generous to older employees with many years of service,
and cash balance plans are most generous to young employees who will have many years
ahead in which to earn interest. For an organization with many experienced employees,
switching from a defined benefit plan can produce great savings in pension benefits. In
that case, the older workers are the greatest losers, unless the organization adjusts the
program to retain their benefits.
Funding, Communication, and Vesting Requirements

ERISA does not require organizations to have pension plans, but those that are set up must
meet certain requirements. In addition to the termination provisions discussed earlier, plans
must meet certain guidelines on management and funding. For example, employers are
required to make yearly contributions that are sufficient to cover future obligations. (As
noted previously, underfunded plans require higher premiums.) ERISA also specifies a num-
ber of reporting and disclosure requirements involving the IRS, the Department of Labor,
and employees.26 Employees, for example, must receive within 90 days after entering a plan
Summary Plan a summary plan description (SPD) that describes the plan’s funding, eligibility requirements,
Description (SPD) risks, and so forth. Upon request, an employer must also make available to an employee an
A reporting require- individual benefit statement, which describes the employee’s vested and unvested benefits.
ment of the Employee
Retirement Income
Obviously, employers may wish to provide such information on a regular basis anyway as a
Security Act (ERISA) means of increasing the understanding and value employees attach to their benefits.
that obligates employ- ERISA guarantees employees that when they become participants in a pension plan
ers to describe the and work a specified minimum number of years, they earn a right to a pension upon
plan’s funding, eligibility retirement. These are referred to as vesting rights.27 Vested employees have the right
requirements, risks, and
so forth within 90 days
to their pension at retirement age, regardless of whether they remain with the employer
after an employee has until that time. Employee contributions to their own plans are always completely vested.
entered the plan. The vesting of employer-funded pension benefits must take place under one of two
schedules. Employers may choose to vest employees after five years; until that time,
employers can provide zero vesting if they choose. Alternatively, employers may vest
employees over a three- to seven-year period, with at least 20% vesting in the third year
and each year thereafter. These two schedules represent minimum requirements; employ-
ers are free to vest employees more quickly. These are the two choices relevant to the
majority of employers. However, so-called top-heavy plans, where pension benefits for
“key” employees (like highly paid top managers) exceed a certain share of total pension
benefits, require faster vesting for nonkey employees. On the other hand, multiemployer
pension plans need not provide vesting until after 10 years of employment.
These requirements were put in place to prevent companies from terminating employ-
ees before they reach retirement age or before they reach their length-of-service require-
ments in order to avoid paying pension benefits. It should also be noted that transferring
employees or laying them off as a means of avoiding pension obligations is not legal
either, even if such actions are motivated partly by business necessity.28 On the other
hand, employers are free to choose whichever of the two vesting schedules is most advan-
tageous. For example, an employer that experiences high quit rates during the fourth and
fifth years of employment may choose five-year vesting to minimize pension costs.
The traditional defined benefit pension plan discourages employee turnover or delays it
until the employer can recoup the training investment in employees.29 Even if an employee’s
pension benefit is vested, it is usually smaller if the employee changes employers, mainly
because the size of the benefit depends on earnings in the final years with an employer.
Consider an employee who earns $30,000 after 20 years and $60,000 after 40 years.30
The employer pays an annual retirement benefit equal to 1.5% of final earnings times the
number of years of service. If the employee stays with the employer for 40 years, the annual
benefit level upon retirement would be $36,000 (0.015 × $60,000 × 40). If, instead, the
employee changes employers after 20 years (and has the same earnings progression),
the retirement benefit from the first employer would be $9,000 (0.015 × $30,000 × 20).
The annual benefit from the second employer would be $18,000 (0.015 × $60,000 × 20).
Therefore, staying with one employer for 40 years would yield an annual retirement benefit
of $36,000, versus a combined annual retirement benefit of $27,000 ($9,000 + $18,000)
if the employee changes employers once. It has also been suggested that pensions are
designed to encourage long-service employees, whose earnings growth may eventually
exceed their productivity growth, to retire. This is consistent with the fact that retirement
benefits reach their maximum at retirement age.31
The fact that in recent years many employers have sought to reduce their workforces
through early retirement programs is also consistent with the notion that pensions are
used to retain certain employees while encouraging others to leave. One early retirement
program approach is to adjust years-of-service credit upward for employees willing to
retire, resulting in a higher retirement benefit for them (and less monetary incentive to
work). These workforce reductions may also be one indication of a broader trend toward
employees becoming less likely to spend their entire careers with a single employer.32 On
one hand, if more mobility across employers becomes necessary or desirable, the current
pension system’s incentives against (or penalties for) mobility may require modification.
On the other hand, perhaps increased employee mobility will reinforce the continued
trend toward defined contribution plans [like 401(k)s], which have greater portability
(ease of transfer of funds) across employers.33
PAY FOR TIME NOT WORKED

At first blush, paid vacation, holidays, sick leave, and so forth may not seem to make LO 13-3
economic sense. The employer pays the employee for time not spent working, receiving Discuss how employee
no tangible production value in return. Therefore, some employers may see little direct benefits in the United
States compare
advantage. Perhaps for this reason, a minimum number of vacation days (20) is man-
with those in other
dated by law in the European Community. As many as 30 days of vacation is not uncom- countries.
mon for relatively new employees in Europe. By contrast, there is no legal minimum in
the United States, but 10 days is typical for large companies. U.S. workers must typically
be with an employer for 20 to 25 years before they receive as much paid vacation as their
western European counterparts.34
Sick leave programs in the United States, among employers that provide them, often
provide full salary replacement for a limited period of time, usually not exceeding 26
weeks. The amount of sick leave is often based on length of service, accumulating with
service (one day per month, for example). Sick leave policies need to be carefully struc-
tured to avoid providing employees with the wrong incentives. For example, if sick leave
days disappear at the end of the year (rather than accumulate), a “use it or lose it” mental-
ity may develop among employees, contributing to greater absenteeism. Organizations
have developed a number of measures to counter this.35 Some allow sick days to accumu-
late, then pay employees for the number of sick days when they retire or resign. Employ-
ers may also attempt to communicate to their employees that accumulated sick leave is
better saved to use as a bridge to long-term disability, because the replacement rate (the
ratio of sick leave or disability payments to normal salary) for the former is typically
higher. Sick leave payments may equal 100% of usual salary, whereas the typical replace-
ment ratio for long-term disability is 60%, so the more sick leave accumulated, the longer
INTEGRITY IN ACTION
Microsoft Requires Vendors to Provide Paid Time Off for Employees
Microsoft recently announced Microsoft range from well-paid such policies
that its contractors and vendors engineers to security guards or would it
that employ 50 or more people and janitors. Recently, Google be better to have a federal
would be obligated to provide announced that it was convert- mandate?
paid sick leave and/or paid ing its security guards from con- 2. The new paid vacation/
vacation (15 days per year of tractors to employees. Alfredo paid sick leave requirement
unrestricted time off or 10 paid Fletes of the Service Employees will cost contractors more
vacation days and 5 days of International Union praised such money. To what degree will
paid sick leave) for their employ- moves as helping “give every- those costs be offset by
ees that do work for Microsoft. one a fair shot at a better way positive workforce reactions
According to Microsoft’s general of life.” Microsoft’s and Google’s of the sort mentioned by
counsel, one reason for the new actions are examples of com- the Microsoft general
requirement is that “research panies acting in the absence of counsel?
shows” that workers who public policies/laws mandating 3. Should Microsoft help pay
receive benefits of this sort have such policies for workers, which for the policies that it is now
better morale and are more exist in some other parts of the requiring of its contractors
productive. Another reason world (e.g., Europe). and vendors?
was complaints from contract SOURCES: C. C. Miller, “Microsoft Tells Its
employees who did not have DISCUSSION QUESTIONS Partners to Provide Paid Sick Leave,” The New
such benefits when working 1. Is it better to have com- York Times, March 26, 2015, p. A3; J. Elder,
“Google to Make Security Guards Employees,
alongside Microsoft employees panies act on their own to Rather than Contractors,” The Wall Street Jour-
who did. Contractors working at assure worker coverage by nal, October 3, 2014, http://blogs.wsj.com.
an employee can avoid dropping to 60% of usual pay when unable to work. As the “Integ-
rity in Action” box shows, Microsoft recently required its contractors and vendors to pro-
vide paid sick leave for their employees. In 2015, President Obama signed an executive
order requiring companies that contract with the federal government to provide paid sick
leave. Other companies pay for time that employees devote to charity. For example, Gen-
eral Electric has a program where employees in its high potential program can be paid
for a week doing charitable work. One recent example was volunteering with BuildOn, a
charity that has built more than 660 schools in impoverished areas of the world.36
Although vacation and other paid leave programs help attract and retain employees,
there is a cost to providing time off with pay, especially in a global economy. The fact that
vacation and other paid leave practices differ across countries contributes to the differences
in labor costs described in Chapter 11. Consider that, on average, in manufacturing, Ger-
man workers work 400 fewer hours per year than their U.S. counterparts. (See Figure 13.3.)
In other words, German workers are at work approximately 10 fewer weeks per year than
their U.S. counterparts. It is perhaps not surprising then that German manufacturers have
looked outside Germany for alternative production sites. (However, you might consider
what you could do with the equivalent of an extra 10 weeks away from work. Hmm . . .)
FAMILY-FRIENDLY POLICIES
To ease employees’ conflicts between work and nonwork, organizations may use family-
friendly policies such as family leave policies and child care. Although the programs dis-
cussed here would seem to be targeted to a particular group of employees, these programs
550
Figure 13.3
Normal Annual
Hours Worked
+449 Relative to United
+375
States
–53
–299
–400
Mexico Korea United States Japan France Germany

2,237 hours 2,163 hours 1,788 hours 1,735 hours 1,489 hours 1,388 hours
SOURCE: Organization for Economic Cooperation and Development. Data for 2013. http://stats.oecd.org/Index.aspx?
Section on Labour, Subsection on Labour Force Statistics. Accessed May 4, 2015.
often have “spillover effects” on other employees, who see them as symbolizing a gen-
eral corporate concern for human resources, thus promoting loyalty even among employee
groups that do not use the programs and possibly resulting in improved organizational per-
formance.37 Evidence suggests that firms using family-friendly policies have better quality
management practices overall that are positively associated with organization performance.38
Since 1993 the Family and Medical Leave Act requires organizations with 50 or more Family and Medical
employees within a 75-mile radius to provide as much as 12 weeks of unpaid leave after Leave Act
childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an The 1993 act that
requires employers with
employee’s own serious illness. Employees are guaranteed the same or a comparable job 50 or more employees
on their return to work. Employees with less than one year of service or who work under to provide up to 12
25 hours per week or who are among the 10% highest paid are not covered. weeks of unpaid leave
Many employers had already taken steps to deal with this issue, partly to help attract after childbirth or adop-
and retain key employees. Less than 10% of American families fit the image of a hus- tion; to care for a seri-
ously ill child, spouse,
band working outside the home and a wife who stays home to take care of the children.39 or parent; or for an
The United States still offers significantly less unpaid leave than most western Euro- employee’s own seri-
pean countries and Japan. Moreover, paid family leave remains rare in the United States ous illness.
(12% of employees are eligible according to Table 13.3), in even sharper contrast to
western Europe and Japan, where it is typically mandated by law.40 Until the passage
of the Americans with Disabilities Act, the only applicable law was the Pregnancy Dis-
crimination Act of 1978, which requires employers that offer disability plans to treat
pregnancy as they would any other disability.
Experience with the Family and Medical Leave Act suggests that a majority of those
opting for this benefit fail to take the full allotment of time. This is especially the case
among female executives. Many of these executives find they do not enjoy maternity
leave as much as they expected they would and miss the challenges associated with
their careers. Others fear that their careers would be damaged in the long run by missing
out on opportunities that might arise while they are out on leave.41 As the “Competing
Through Technology” box demonstrates, “family friendly” can take many forms, with
some debate over what is and what is not family friendly.
Child Care
U.S. companies increasingly provide some form of child care support to their employ-
ees. This support comes in several forms that vary in their degree of organizational
“Family Friendly” Takes On a Whole New Meaning at Some Companies
Oocyte cryopreservation, more and its family (un)friendly nature. subsidizes daycare
commonly known as egg freez- Rebecca Mead of The New and has nursing
ing, is used in an attempt to allow Yorker argued, “The inclusion rooms on its campus. Facebook
women to preserve their eggs of egg freezing as an employee also pays for alternative paths to
to have babies in the future. benefit partakes of the techno- pregnancy, including surrogacy
Apple and Facebook are among utopian fantasy on which com- agency fees, in-vitro fertiliza-
the companies that provide egg panies like Facebook and Apple tion, egg and sperm donor fees,
freezing as an employee benefit subsist—the conviction that there and legal costs associated with
(i.e., they pay for the procedure). must be a solution to every prob- adoption.
These companies came in for lem, an answer to every question,
criticism for what some thought a response to every need, if only DISCUSSION QUESTIONS
was their likely motive: discourag- the right algorithm can be found.” 1. What do you think is Face-
ing women from interrupting their As others have noted, how- book’s motivation for offering
work at those companies to go ever, it turns out that Facebook, egg freezing as a benefit? Do
on leave (either temporarily or the target of much of the criticism, you think it matters?
permanently) to have a baby. As actually offers very generous 2. Does Facebook sound like an
Bloomberg Business put it, this benefits to employees who do environment that is open to
viewpoint was that the companies choose to have children. Face- its employees taking time off
hoped for many “years of labor book offers four months of paid to have children or to spend
uninterrupted by soccer games parental leave. Only 15% of U.S. time with their families? (As a
and ballet recitals.” Others wor- companies offer any paid leave at further resource on this topic,
ried that women would discount all. (Of course, in thinking about please see: C. C. Miller, “Sili-
the risk that egg freezing would issues covered in the chapter con Valley’s Struggle Adapting
not work and/or the fact that fertil- opening, what we do not know to Families,” The New York
ity drops with age. Still others saw is whether Facebook employees Times, April 8, 2015, p. A3.)
the egg-freezing benefit as a sign feel free to use this much leave SOURCES: R. Mead, “Cold Comfort: Tech Jobs
of all that is wrong with the Sili- or whether they feel pressure and Egg Freezing,” The New Yorker, October 17,
2014; J. Brustein, “Facebook’s Egg Freezing
con Valley culture and what they to return to work sooner than Policy Isn’t an Evil Plot,” Bloomberg Business,
see as its obsession with work they might wish.) Facebook also October 15, 2014, www.bloomberg.com.
involvement.42 The lowest level of involvement,

offered by 38% of companies, is when an organi-
zation supplies and helps employees collect infor-
mation about the cost and quality of available
child care. At the next level, organizations pro-
vide vouchers or discounts for employees to use
at existing child care facilities (2% of companies).
At the highest level, firms provide child care at or
near their worksites (7% of companies). Toyota’s
Child Development Program provides 24-hours-
a-day care for children of workers at its George-
town, Kentucky, plant. This facility is designed to
© MCT via Getty Images meet the needs of employees working evening and
Toyota employees check in on their kids at the night shifts who want their children to be on the
Georgetown location onsite child care. same schedule. In this facility, the children are kept
552
awake all night. At the end of the night shift, the parents pick up their children and the
whole family goes home to bed.43
An organization’s decision to staff its own child care facility should not be taken
lightly. It is typically a costly venture with important liability concerns. Moreover, the
results, in terms of reducing absenteeism and enhancing productivity, are often mixed.44
One reason for this is that many organizations are “jumping on the day care bandwagon”
without giving much thought to the best form of assistance for their specific employees.
As an alternative example, Memphis-based First Tennessee Bank, which was losing
1,500 days of productivity a year because of child care problems, considered creating its
own on-site day care center. Before acting, however, the company surveyed its employ-
ees. This survey indicated that the only real problem with day care occurred when the
parents’ regular day care provisions fell through because of sickness on the part of the
child or provider. Based on these findings, the bank opted to establish a sick-child care
center, which was less costly and smaller in scope than a full-time center and yet still
solved the employees’ major problem. As a result, absenteeism dropped so dramatically
that the program paid for itself in the first nine months of operation.45
Managing Benefits: Employer Objectives

and Strategies
Although the regulatory environment places some important constraints on benefits deci- LO 13-4
sions, employers retain significant discretion and need to evaluate the payoff of such deci- Describe the effects of
sions.46 As discussed earlier, however, this evaluation needs to recognize that employees benefits management
on cost and workforce
have come to expect certain things from employers. Employers who do not meet these
quality.
expectations run the risk of violating what has been called an “implicit contract” between
the employer and its workers. If employees believe their employers feel little commitment to
their welfare, they can hardly be expected to commit themselves to the company’s success.
Clearly, there is much room for progress in the evaluation of benefits decisions.47 Despite
some of the obvious reasons for benefits—group discounts, regulation, and minimizing com-
pensation-related taxes—organizations do not do as well as they could in spelling out what
they want their benefits package to achieve and evaluating how well they are succeeding.
Research suggests that most organizations do not have written benefits objectives.48 Obvi-
ously, without clear objectives to measure progress, evaluation is difficult (and less likely
to occur). Table 13.5 provides an example of one organization’s written benefits objectives.
SURVEYS AND BENCHMARKING

As with cash compensation, an important element of benefits management is knowing what
the competition is doing. Survey information on benefits packages is available from private
consultants, the U.S. Chamber of Commerce, and the Bureau of Labor Statistics (BLS).49
BLS data of the sort in Table 13.3 and the more detailed information on programs and provi-
sions available from consultants are useful in designing competitive benefits packages. To
compete effectively in the product market, cost information is also necessary. A good source
is again the BLS, which provides information on benefits costs for specific categories as well
as breakdowns by industry, occupation, union status, and organization size. (See Figure 13.4.)
COST CONTROL
In thinking about cost control strategies, it is useful to consider several factors. First,
the larger the cost of a benefit category, the greater the opportunity for savings. Second,
Table 13.5
Importance of Employee Benefits Objectives
PERCENTAGE OF
PLAN SPONSORS
SAYING “VERY
OBJECTIVES IMPORTANT”
Controlling health care-related costs 65%

Retaining employees 53
Reducing the cost of benefits administration 52
Increasing employee productivity 48
Attracting employees 41
Increasing employee satisfaction with the value of your overall benefits package 41
Helping employees make better benefits decisions 35
Addressing the diverse benefits needs of your employee population 28
Increasing enrollment in voluntary and/or optional plans 25
SOURCE: Prudential Group Insurance, “Sixth Annual Study of Employee Benefits: Today & Beyond: Insight into the Next Generation of Employee
Benefits,” 2011.
Figure 13.4 % of Total

Employee Benefits Compensation
Cost by Category,
Private Sector
Workers 8.0
3.5 Legally required
Retirement and savings plans
Medical and other insurance
4.2 Payments for time not worked
6.9 Supplemental pay
7.6 Total Benefits = $9.60, 30.6% of

total compensation ($31.32)
SOURCE: “Employer Costs for Employee Compensation,” March 2015, www.bls.gov.
the growth trajectory of the benefit category is also important: even if costs are cur-
rently acceptable, the rate of growth may result in serious costs in the future. Third, cost
containment efforts can only work to the extent that the employer has significant discre-
tion in choosing how much to spend in a benefit category. Much of the cost of legally
required benefits (like Social Security) is relatively fixed, which constrains cost reduc-
tion efforts. Even with legally required benefits, however, employers can take actions
to limit costs because of “experience ratings,” which impose higher taxes on employers
with high rates of unemployment or workers’ compensation claims.
One benefit—medical and other insurance—stands out as a target for cost control
for two reasons. Costs are high and growth in costs has typically been high, even in the
face of determined efforts to control the growth of costs. Second, employers have many
options for attacking costs and improving quality, and the recent Affordable Care Act
makes these issues even more salient for employers.
Health Care: Controlling Costs and Improving Quality

As Table 13.6 indicates, the United States spends more on health care than any other
country in the world, which helps explain why there is so much focus on controlling
health care costs. U.S. health care expenditures have gone from roughly 5% of gross
domestic product (GDP) in 1960 (about $27 billion) to roughly 16% (about $2.7 trillion)
more recently. Yet the percentage of full-time workers receiving job-related health ben-
efits has declined over the same period, peaking at 16 to 17%, or almost 50 million
uninsured (see Table 13.7).50 As Table 13.6 also shows, the United States also trails
Japan and western Europe on measures of life expectancy and infant mortality. Very
recently, however, the United States has made progress on health insurance coverage
(see Table 13.7), apparently due to the Affordable Care Act.51
Table 13.6
Health Care Costs and Outcomes in Various Countries
LIFE HEALTH
EXPECTANCY INFANT EXPENDITURES
AT BIRTH, MORTALITY AS A PERCENTAGE
FEMALE RATE (PER 1,000) OF GDP
Canada 84 5 10%
France 85 4 11
Germany 83 3 11
Japan 86 2 10
Korea 85 3 7
Mexico 77 13 6
United Kingdom 83 4 9
United States 81 6 16
SOURCES: Organization for Economic Cooperation and Development, OECD Health Statistics 2014, www.OECD.org and World Bank, http://data.
worldbank.org/indicator/SP.DYN.IMRT.IN
Table 13.7
CENTERS FOR DISEASE GALLUP–HEALTHWAYS,
Number and
CONTROL, ALL AGES 18 AND OLDER
Percentage of
YEAR MILLIONS % % People without
Health Insurance,
2000 41.3 14.9 United States
2005 41.2 14.2
2010 48.6 16.0 16.4
2011 46.3 15.1 17.0
2012 45.5 14.7 16.8
2013 44.8 14.4 17.4
2014 14.0
2015 (1st Quarter) 11.9
SOURCES: J. Levy, “In U.S., Uninsured Rate Dips to 11.9% in First Quarter,” http://www.gallup.com/poll/182348/
uninsured-rate-dips-first-quarter.aspx; J. S. Schiller, B. W. Ward, and G. Freeman, “Early Release of Selected Estimates
Based on Data from the 2013 National Health Interview Survey,” June 2014, Centers for Disease Control, http://www.
cdc.gov/nchs/data/nhis/earlyrelease/earlyrelease201406.pdf.
Unlike workers in most western European countries, who have nationalized health
systems, the majority of Americans receiving health insurance get it through their (or
a family member’s) employer.52 Consequently, health insurance, like pensions, discour-
ages employee turnover because not all employers provide health insurance benefits.53
One trend in plan design has been to shift costs to employees through the use of
(higher) deductibles, coinsurance, exclusions and limitations, and maximum benefits.54
These costs can be structured such that employees act on incentives to shift to less expen-
sive plans.55 Another trend has been to focus on reducing, rather than shifting, costs
through such activities as preadmission testing and second surgical opinions. The use of
Health Maintenance alternative providers like health maintenance organizations (HMOs) and preferred
Organization (HMO) provider organizations (PPOs) has also increased. HMOs differ from more traditional
A health care plan that providers by focusing on preventive care and outpatient treatment, requiring employees
provides benefits on
a prepaid basis for
to use only HMO services, and providing benefits on a prepaid basis. Many HMOs pay
employees who are physicians and other health care workers a flat salary instead of using the traditional fee-
required to use only for-service system, under which a physician’s pay may depend on the number of patients
HMO medical service seen. Paying on a salary basis is intended to reduce incentives for physicians to schedule
providers. more patient visits or medical procedures than might be necessary. (Of course, there is
the risk that incentives will be reduced too much, resulting in inadequate access to medi-
Preferred Provider cal procedures and specialists.) PPOs are essentially groups of health care providers that
Organization (PPO)
contract with employers, insurance companies, and so forth to provide health care at a
A group of health care
providers who con- reduced fee. They differ from HMOs in that they do not provide benefits on a prepaid
tract with employers, basis and employees often are not required to use the preferred providers. Instead,
insurance companies, employers may provide incentives for employees to choose, for example, a physician
and so forth to pro- who participates in the plan. In general, PPOs seem to be less expensive than traditional
vide health care at a
delivery systems but more expensive than HMOs.56
reduced fee.
Another trend in employers’ attempts to control costs has been to vary required
employee contributions based on the employee’s health and risk factors rather than
charging each employee the same premium. Some companies go further, refusing to
employ people with certain risk factors such as smokers. See Exercising Strategy at the
end of the chapter for more on this issue.
Some employers now offer a “Medical tourism” benefit, which means sending patients
to other countries where medical procedures can sometimes be done much more cheaply.
For example, under a program at Hannaford Brothers, a Maine-based grocery chain, the
company would pay for an employee (and significant other) to travel to Singapore for a
knee or hip replacement. Doing so saved the company roughly $30,000 to $40,000 and
saved the employee about $3,000 in out-of-pocket costs (i.e., the deductible). And, the
employee and travel companion get to experience another country.57
Employee Wellness Programs. Employee wellness programs (EWPs) focus on chang-
ing behaviors both on and off work time that could eventually lead to future health prob-
lems. EWPs are preventive in nature; they attempt to manage health care costs (and
workers’ compensation costs) by decreasing employees’ needs for services. Typically,
these programs aim at specific health risks such as high blood pressure, high cholesterol
levels, smoking, and obesity. They also try to promote positive health influences such as
physical exercise and good nutrition. Johnson & Johnson estimated a return of $2.71 for
every $1.00 spent on employee wellness programs.58
EWPs are either passive or active. Passive programs use little or no outreach to indi-
viduals, nor do they provide ongoing support to motivate them to use the resources.
Active wellness centers assume that behavior change requires not only awareness and
opportunity but support and reinforcement.
EVIDENCE-BASED HR
Several years ago, Sloan Valve Company conducted research to identify the five most
common medical conditions among its employees. They found that these medical
conditions were all correlated with employee obesity. In response, Sloan designed
and implemented a health and wellness program for the 500 employees at headquar-
ters to address obesity in hopes of addressing the five medical conditions. Among its
components were:
∙ Biometric screenings and health risk assessments. As an incentive, participating
employees were able to enroll in a health plan with higher levels of coverage.
∙ A walking club was started to encourage employees to walk during their break
times. For every mile walked, $1 was donated to the Juvenile Diabetes Research
Foundation. Zumba and yoga classes were also offered onsite and participation
was tracked.
∙ Biggest loser contest, smoking cessation classes, and wellness lunch and learns
were also instituted.
∙ An onsite medical clinic was opened.
Sloan reports the following outcomes of their health and wellness program:
∙ More than 80 participants in the weight loss program lost a combined 1,040
pounds.
∙ Seven employees quit smoking.
∙ The walking club has 47 participants and recently walked 4,300 miles over a
20-week period.
∙ The number of employees classified as being high-risk in terms of their health
has been decreased by 2.3%.
QUESTION
Do you feel the evidence on the outcomes of the Sloan plan’s effectiveness is sufficient for you
to evaluate its effectiveness? What about the “research design”? What other evidence or what
other research/evaluation methods would you like to have or see used?
SOURCE: Margie Rodino. Case Study: The Sloan Valve Co. Approach to Health & Wellness. Benefits & Work-Life
Focus. April 2015. WorldatWork. https://www.worldatwork.org/focus/benefits-focus.jsp
One example of a passive wellness program is a health education program, which

aims to raise awareness of the importance of good health and how to achieve it. In
these kinds of programs, a health educator usually conducts classes or lunchtime lec-
tures (or coordinates outside speakers). The program may also have various promo-
tions (like an annual mile run or a “smoke-out”) and include a newsletter that reports
on current health issues.
Another kind of passive employee wellness program is a fitness facility. In this kind
of program, the company sets up a center for physical fitness equipped with aerobic and
muscle-building exercise machines and staffed with certified athletic trainers. The facil-
ity is publicized within the organization, and employees are free to use it on their own
time. Aetna, for example, has created five state-of-the-art health clubs that serve more
than 7,500 workers.59 Northwestern Mutual Life’s fitness facilities are open 24 hours a
day to its 3,300 employees.60 Health education classes related to smoking cessation and
weight loss may be offered in addition to the facilities.
One kind of active wellness center is the outreach and follow-up model. This type of
wellness center contains all the features of a passive model, but it also has counselors who
handle one-on-one outreach and provide tailored, individualized programs for employees.
Typically, tailored programs obtain baseline measures on various indicators (weight, blood
pressure, lung capacity, and so on) and measure individuals’ progress relative to these
indicators over time. The programs set goals and provide small, symbolic rewards to indi-
viduals who meet their goals. Of course, stronger incentives are available and these could
be paired with a wellness program as well.
This encouragement needs to be particularly targeted to employees in high-risk cat-
egories (like those who smoke, are overweight, or have high blood pressure) for two rea-
sons. First, a small percentage of employees create a disproportionate amount of health
care costs; therefore, targeted interventions are more efficient. Second, research shows
that those in high-risk categories are the most likely to perceive barriers (like family
problems or work overload)61 to participating in company-sponsored fitness programs.
Thus untargeted interventions are likely to miss the people that most need to be included.
Research on these different types of wellness centers leads to several conclusions.62
First, the costs of health education programs are significantly less than those associated
with either fitness facility programs or the follow-up model. Second, all three models
are effective in reducing the risk factors associated with cardiovascular disease (obesity,
high blood pressure, smoking, and lack of exercise). However, the follow-up model is
significantly better than the other two in reducing the risk factors.
Somewhat ironically, well-meaning employers sometimes do things that work at cross-
purposes—for example, providing employees with easy access to good food, while also
wanting employees to be fit. Google decided to keep its good food, but it also decided it
needed to change the way it presented food to employees. Its research found that people
tend to load up on the first food they see. So, Google changed the cafeteria line so that the
first thing employees now see is something healthy: the salad bar. Desserts weren’t taken
away but were banished to the far corner of the cafeteria (and serving size reduced). Google
also focused on communicating to employees which foods were low calories (green tags)
and which ones (higher calorie) were best taken in smaller portions (red tags).63
Finally, unique employee health issues can arise for expatriates (and their families).
The “Competing through Globalization” box provides an illustration.
Health Care Costs and Quality: Ongoing Challenges. In 2014, the average annual
premium for family coverage was $16,834, with employers paying $12,011 (71%) and
employees paying $4,843 (29%) on average.64 (These numbers pertain only to employers
that provide health care benefits.) Premiums for employer-sponsored health care (family
coverage) continue to grow much faster than the overall inflation rate (2.4 times as fast
from 2009 to 2014, 2.6 times as fast from 2004 to 2009, and 5.5 times as fast from 1999
to 2004). Thus, control of health care costs is an ongoing challenge.
Two important phenomena are often encountered in cost control efforts. First, piece-
meal programs may not work well because steps to control one aspect (such as medical
cost shifting) may lead employees to “migrate” to other programs that provide medical
treatment at no cost to them (like workers’ compensation). Second, there is often a so-
called Pareto group, which refers to a small percentage (perhaps 20%) of employees
being responsible for generating the majority (often 80%) of health care costs. Obvi-
ously, cost control efforts will be more successful to the extent that the costs generated
by the Pareto group can be identified and managed effectively.65
Although cost control will continue to require a good deal of attention, there is a
growing emphasis on monitoring health care quality, which has been described as “the
Air Quality in Beijing and Expatriate Recruiting Challenges
PM 2.5 refers to particulate mat- in the world’s second largest a 40-person
ter 2.5 micrometers or smaller in economy and one of its fast- executive search
diameter per cubic meter. When est growing. As one possible firm in Beijing,
inhaled, PM 2.5 can interfere indicator, UniGroup Relocation, recently spent $6,000 to buy
with gas exchange inside the which moves over 260,000 two air purifiers for his office.
lungs. Chronic exposure to PM families per year worldwide Simon Gleave heads KPMG’s
particles contributes to the risk for work, reports that twice Asia-Pacific Financial Services
of developing cardiovascular as many people moved out Practice and is based in Beijing.
and respiratory diseases, as well of China than into the country He recently approved $4,000
as of lung cancer. The World in 2014. Global recruiters and for an air-quality monitor and
Health Organization recom- companies report difficulties in $15,000 for air filters, and has
mends 24-hour exposure of no attracting expatriates to China an indoor virtual-reality biking
higher than 25 micrograms per and keeping them there and system for days when the air is
cubic meter. In 2014, Beijing’s companies have also reported too bad for him to cycle outside.
average PM 2.5 was 85.9, and that they are incurring added International schools, where
it had 45 days when PM 2.5 costs to do so. One cost is the children of expatriates are
was 150 or higher. From Febru- a recent return to offering often enrolled, have moved
ary 2009 to December 2013, hardship pay to compensate quickly to purchase sealed
Beijing’s worst one-day PM 2.5 expatriates and their families domes to cover playgrounds,
reached 569, and it had 48 days for living with air pollution. For so that children can play “out-
where PM 2.5 exceeded 300. some expatriates, especially side” even when the air is not
To put that in perspective, Los those with families, the added safe. For example, Dulwich Col-
Angeles is considered to have pay does not matter, as they lege Beijing, an international
the worst air pollution in the are unwilling to put the health school, recently paid $650,000
United States and is specifically of their families at risk. Thus, to install an 18,000-square-foot
third worst on PM 2.5, with an recruiting mid-level and senior- dome. Dulwich sends children
average level of 18. From Febru- level executives to China has into the dome, which has bas-
ary 2009 to December 2013, become especially difficult. ketball courts and special light-
Beijing’s worst one-day average Louie Cheng, president of ing, rather than outside anytime
reading was 569. In contrast, Pure-Living China, which assists the PM 2.5 index reaches 250.
LA’s worst PM 2.5 was 79. Over companies in improving indoor As noted earlier, for some,
the same timeframe, Beijing had air, says installing air purifiers these solutions are not enough.
48 days with a PM 2.5 above in an office space in China One family that decided to send
300, which is considered to be can cost $100,000 or more for the non-working spouse and
“hazardous.” The U.S. Embassy larger offices. Some smaller children back to the United
collects its own data on PM 2.5 companies are also buying States put it this way: “It’s not a
levels in Beijing. It has recorded air purifiers for their offices to way to live, to keep your baby
hourly readings as high as 886. provide employees with better inside with an air filter running.”
Not surprisingly, air pollu- air. For example, Qoros Auto
tion (or “Airpocalypse” as it is Co., a joint Israeli–Chinese DISCUSSION QUESTIONS
sometimes called) in Beijing and venture, spent about 150,000 1. Would air quality concerns
much of the rest of China is cre- yuan ($24,000) for purifiers keep you from accepting
ating challenges for companies at its offices. U.K. expatriate an expatriate assignment in
to recruit expatriates to work Robert Parkinson, who owns China?
CONTINUED
559
2. Why hasn’t more been done Renews Effort to Reduce PM 2.5, www.bloomberg.com; K. Holliday, “Transfer to
Other Airborne Pollutants,” China Daily, Beijing? Why Expats Are Saying ‘No Thanks,’”
to address air pollution con- January 5, 2015, http://www.chinadaily.com. CNBC, March 24, 2014, http://www.cnbc.com;
cerns in China? cn; J. Makinen and D. Smith, “Beijing’s Smog L. Burkitt and B. Spegele, “Why Leave Job in
Makes Los Angeles Air Look Good,” Los Beijing? To Breathe,” The Wall Street Journal,
SOURCES: A. Zheng, “Twice as Many Expatri- Angeles Times, September 10, 2014, http:// April 14, 2013, www.wsj.com; W. Ma, “Beijing
ates Leaving China Than Arriving, Moving Com- www.latimes.com; A. Cordeiro, “China’s Pollution Hits Highs,” The Wall Street Journal,
pany Says,” The Wall Street Journal, February Smog Splits Families as Toxic Pollution January 14, 2013, www.wsj.com.
9, 2015, http://blogs.wsj.com; Z. Jinran, “Beijing Extracts,” Bloomberg Business, April 7, 2014,
next battlefield.” A major focus is on identifying best medical practices by measuring

and monitoring the relative success of alternative treatment strategies using large-scale
databases and research.66 “Big data” can be used to move beyond intuition to make bet-
ter decisions, including helping organizations to provide quality health care coverage
for employees, while controlling costs. At Caesars Entertainment Corporation (which
operates casinos), health-insurance claim data on its 65,000 employees and their covered
family members is analyzed as part of meeting this challenge. Among the thousands
of variables that can be tracked are how much different medical services are used, the
degree to which employees use name-brand versus (less expensive) generic prescrip-
tion drugs, and the number of emergency-room (ER) visits, which evidence shows costs
over $1,200 on average (for outpatient visits). By contrast, a visit to the doctor’s office
or to an urgent care facility is much less expensive (e.g., between $100 and $200). As
an example, when Caesars looked at its Harrah’s property in Philadelphia, it discovered
that only about 11% of emergencies were being treated at urgent care facilities versus
34% across all of Caesars. To encourage employees to use the less expensive urgent-
care option more and emergency rooms less, Harrah’s initiated a campaign to remind
employees of how expensive ER visits are and provided them with a list of urgent-care
and other alternative facilities that they were encouraged to use. Two years later, 17%
of emergencies (up from 11%) were going to urgent care. Further, multiple ER visits by
individual employees fell from 40% to 30%. Overall, on a companywide basis, in the
first few years since beginning to track ER visits, Caesars reduced ER visits by 10,000,
replacing them with less expensive alternatives, resulting in a savings of $4.5 million.67
In addition, employers increasingly cooperate with one another to develop “report cards”
on health care provider organizations to facilitate better choices by the employers and
to receive improved health care. General Motors, Ford, and Chrysler, for example, have
developed this type of system and made it web-accessible.68
When we come to the Affordable Care Act, we will see that the Act allows employers
to use larger incentives (and penalties) than previously to encourage employee wellness
and some companies are accordingly making changes. We have provided a number of
examples in the current chapter of how employers use these tools. We now provide a few
more. The State of Maryland will penalize employees as much as $450 per year for not
undergoing required screenings or for not following up on treatment plans for chronic con-
ditions. At pharmacy company CVS Health, an employee not completing the annual health
assessment will have to pay $600 more per year for insurance coverage. (On the incentive
side, JetBlue employees can receive as much as $400 per year in their health savings or
reimbursement accounts for signing up for a variety of activities including smoking ces-
sation.) Survey evidence indicates that most employees don’t agree with such programs.
Nevertheless, use seems to be increasing as employers seek to control health care costs.69
Staffing Responses to Control Benefits Cost Growth

Employers may change staffing practices to control benefits costs. First, because ben-
efits costs are fixed (in that they do not usually go up with hours worked), the benefits
560
cost per hour can be reduced by having employees work more hours. However, there
are drawbacks to having employees work more hours. The Fair Labor Standards Act
(FLSA), introduced in Chapter 11, requires that nonexempt employees be paid time-and-
a-half for hours in excess of 40 per week. Yet the decline in U.S. work hours tapered off
in the late 1940s; work hours have actually gone up since then. Thus, even with the time-
and-a-half cost of overtime, it may be that employers prefer to work employees more
hours, given their level of fixed benefits costs (and the fact that hiring additional workers
would further increase fixed benefits costs, as well as recruiting and training costs).70
A second possible effect of FLSA regulations (although this is more speculative) is
that organizations will try to have their employees classified as exempt whenever pos-
sible (although such attempts may run afoul of FLSA law). The growth in the number of
salaried workers (many of whom are exempt) may also reflect an effort by organizations
to limit the benefits cost per hour without having to pay overtime. A third potential effect
is the growth in part-time employment and the use of temporary workers, which may be
a response to rising benefits costs. Part-time workers are less likely to receive benefits
than full-time workers although labor market shortages in recent years have reduced this
difference.71 Benefits for temporary workers are also usually quite limited.
Fourth, employers may be more likely to classify workers as independent contrac-
tors rather than employees, which eliminates the employer’s obligation to provide legally
required employee benefits. However, the Internal Revenue Service (IRS) scrutinizes such
decisions carefully, as Microsoft and other companies have discovered. Microsoft was com-
pelled to reclassify a group of workers as employees (rather than as independent contrac-
tors) and to grant them retroactive benefits. Uber, which competes with taxis by providing
ride-sharing, is one of many companies currently facing legal action challenging its clas-
sification of workers (drivers in the Uber case) as contractors rather than as employees.
The IRS looks at several factors, including the permanency of the relationship between
employer and worker, how much control the employer exercises in directing the worker, and
whether the worker offers services to only that employer. Permanency, control, and dealing
with a single employer are viewed by the IRS as suggestive of an employment relationship.
NATURE OF THE WORKFORCE

Although general considerations such as cost control and “protection against the risks
of old age, loss of health, and loss of life” (see Table 13.5) are important, employers
must also consider the specific demographic composition and preferences of their cur-
rent workforces in designing their benefits packages.
At a broad level, basic demographic factors such as age and sex can have important
consequences for the types of benefits employees want. For example, an older workforce
is more likely to be concerned about (and use) medical coverage, life insurance, and
pensions. A workforce with a high percentage of women of childbearing age may care
more about disability leave. Young, unmarried men and women often have less interest
in benefits generally, preferring higher wages and salaries.
Although some general conclusions about employee preferences can be drawn based on
demographics, more finely tuned assessments of employee benefit preferences need to be
done. One approach is to use marketing research methods to assess employees’ preferences
the same way consumers’ demands for products and services are assessed.72 Methods include
personal interviews, focus groups, and questionnaires. Relevant questions might include
∙ What benefits are most important to you?
∙ If you could choose one new benefit, what would it be?
∙ If you were given x dollars for benefits, how would you spend it?
As with surveys generally, care must be taken not to raise employee expectations
regarding future changes. If the employer is not prepared to act on the employees’ input,
surveying may do more harm than good.
The preceding discussion may imply that the current makeup of the workforce is a
given, but this is not the case. As discussed earlier, the benefits package may influence
the composition of the workforce. For example, a benefits package that has strong medical
benefits and pensions may be particularly attractive to older people or those with families.
An attractive pension plan may be a way to attract workers who wish to make a long-term
commitment to an organization. Where turnover costs are high, this type of strategy may
have some appeal. On the other hand, a company that has very lucrative health care benefits
may attract and retain people with high health care costs. Sick leave provisions may also
affect the composition of the workforce. Organizations need to think about the signals their
benefits packages send and the implications of these signals for workforce composition. In
this vein, Table 13.8 shows the benefits used by Google, a company that regularly tops For-
tune’s list of “100 Best Companies to Work For,” to attract and retain its desired workforce.
COMMUNICATING WITH EMPLOYEES AND MAXIMIZING BENEFITS VALUE

Employees Typically Underestimate the Value of their Benefits
LO 13-5 Effective communication of benefits information to employees is critical if employers are
Explain the importance to realize sufficient returns on their benefits investments. Research makes it clear that cur-
of effectively com-
municating the nature
rent employees and job applicants often have a very poor idea of what benefits provisions
and value of benefits to are already in place and the cost or market value of those benefits. One study asked employ-
employees. ees to estimate both the amount contributed by the employer to their medical insurance and
Table 13.8
Employee Benefits at
Google
parking; free washers and dryers; and free breakfast, lunch, and dinner on a daily
basis at 11 gourmet restaurants
bocce, and shuffle ball; and horseshoe pits
pursue further education for up to 5 years and $150,000 in reimbursement
offices
foreign-language lessons in French, Spanish, Japanese, and Mandarin
each receive $12,000 per year until age 19 (age 23 if full-time students)
SOURCES: J. Bort, “These 18 Tech Companies Offer the Best Benefits, According to Employees,” Business Insider,
accessed May 5, 2015, www.businessinsider.com; J. D’Onfro and K. Smith, “Google Employees Reveal Their Favorite
Perks about Working for the Company,” Business Insider, accessed May 5, 2015, www.businessinsider.com; “100 Best
Companies to Work For,” Fortune, accessed May 5, 2015, http://fortune.com; The Great Place to Work® Institute, 2008,
www.greatplacetowork.com.
what it would cost the employees to provide their own health insurance. Employees signifi-
cantly underestimated both the cost and market value of their medical benefits. In the case
of family coverage, employee estimates of what it costs their employer to provide coverage
for them were, on average, 62% below the actual cost.73 As we saw earlier, the average
employer today providing health care benefits spends $12,011 per year for family cover-
age. In the absence of effective communication, the just-discussed study would imply that
a typical employee today might credit employers with only providing a benefit worth
$4,564 (0.38 × $12,011)—again, a very poor return on the employer’s investment.
Research suggests that the situation with job applicants is no better. One study of
MBAs found that 46% believed that benefits added 15% or less on top of direct pay-
roll. Not surprisingly, perhaps, benefits were dead last on the applicants’ priority lists in
making job choices.74 A study of undergraduate business majors found similar results,
with benefits ranked 15th (out of 18) in importance in evaluating jobs. These results
must be interpreted with caution, however. Some research suggests that job attributes can
be ranked low in importance, not because they are unimportant per se, but because all
employers are perceived to be about the same on that attribute. If some employers offered
noticeably poorer benefits, the importance of benefits could become much greater.
Organizations can help remedy the problem of applicants’ and employees’ lack
of knowledge about benefits. One study found that employees’ awareness of benefits
information was significantly increased through several media, including memoranda,
question-and-answer meetings, and detailed brochures. The increased awareness, in
turn, contributed to significant increases in benefits satisfaction. Another study suggests,
however, that increased employee knowledge of benefits can have a positive or nega-
tive effect, depending on the nature of the benefits package. For example, there was a
negative, or inverse, correlation between cost to the employee and benefits satisfaction
overall, but the correlation was more strongly negative among employees with greater
knowledge of their benefits.75 The implication is that employees will be least satisfied
with their benefits if their cost is high and they are well informed.
One thing an employer should consider with respect to written benefits communica-
tion is that it has been estimated that tens of millions of employees in the United States
may be functionally illiterate. Of course, there are many alternative ways to communi-
cate benefits information. (See Table 13.9.) Nevertheless, most organizations spend little
to communicate information about benefits, and much of this is spent on general written
communications. Considering that Bureau of Labor Statistics data cited earlier indicate
that U.S. employers spend a very large amount of money on benefits ($9.60/hour or
about $19,968/year) and that large employers spend even more ($16.14/hour or about
$33,571/year), together with the complex nature of many benefits and the poor under-
standing of most employees, the typical communication effort may be inadequate.76
On a more positive note, organizations are increasingly using online tools to personal-
ize and tailor communications to individual employees. Online tools have also enabled
many organizations to eliminate benefits-related jobs now that employees can get
answers to many benefits questions on their own. In addition, effective use of traditional
approaches (e.g., booklets) can have a large effect on employee awareness.77 Survey data
(see Table 13.10) indicate that both traditional and online methods are seen as effective
by employees, although one suspects that will continue to evolve over time.
Flexible Benefits Plans

Rather than a single standard benefits package for all employees, flexible benefit plans
(flex-plans or cafeteria-style plans) permit employees to choose the types and amounts
of benefits they want for themselves. The plans vary according to such things as whether
Table 13.9
PERCENTAGE
Benefits
Communication
Methods Used by Enrollment materials (online or paper) 84%
Organizations Group employee benefits communications with an organiza- 65
tional representative
One-to-one employee benefits counseling with an organizational 51
representative
Internet 48
Direct mail to home/residence 41
Newsletters (online or paper) 39
Benefit fairs 26
Virtual education 13
Social media 4
Group employee benefits communications with your vendor 3
Other 2
Note: Survey of 447 organizations.

SOURCE: Employee Benefits Communication Methods, Adapted from “SHRM Survey Findings: State of Employee
Benefits in the Workplace—Communicating Benefits,” © SHRM 2012 (series), p. 15. Reprinted with permission.
minimum levels of certain benefits (such as health care coverage) are prescribed and
whether employees can receive money for having chosen a “light” benefits package (or
have to pay extra for more benefits). One example is vacation, where some plans permit
employees to give up vacation days for more salary or, alternatively, purchase extra vaca-
tion days through a salary reduction.
What are the potential advantages of such plans?78 In the best case, almost all of the
objectives discussed previously can be positively influenced. First, employees can gain
a greater awareness and appreciation of what the employer provides them, particularly
with plans that give employees a lump sum to allocate to benefits. Second, by permitting
employee choice, there should be a better match between the benefits package and the
employees’ preferences. As just one example of heterogeneous employee preferences,
one study looked at how much salary employees would be willing to give up to have cer-
tain benefits. In the case of work schedule flexibility, females, those above median pay,
and those age 57 or older would give up 23%, 30%, and 28% more base pay (compared
to other groups), respectively, for greater flexibility.79 Matching benefits to different
employee preferences should improve employee attitudes and retention and perhaps per-
formance.80 Third, employers may achieve overall cost reductions in their benefits pro-
grams. Cafeteria plans can be thought of as similar to defined contribution plans, whereas
traditional plans are more like defined benefit plans. The employer can control the size of
Table 13.10
Percentage Work e-mail: 47%
of Employees Personal e-mail: 28%
Preferring Online avatar that recommends benefits to meet individual needs: 19%
Various Benefits Group meetings: 19%
Communication Individual one-on-one meetings: 18%
Methods
Note: N = 1,000 employees, ages 22 or older, who work full time for a company with at least 25 employees.
SOURCE: Prudential Group Insurance, “Eighth Annual Study of Employee Benefits: Today & Beyond,” http://research.
prudential.com, 2014.
the contribution under the former, but not under the latter, because the cost and utilization
of benefits is beyond the employer’s control. Costs can also be controlled by designing
the choices so that employees have an incentive to choose more efficient options. For
example, in the case of a medical flex-plan, employees who do not wish to take advan-
tage of the (presumably more cost-effective) HMO have to pay significant deductibles
and other costs under the alternative plans. Choice and resulting better matches might
also lower costs by reducing spending on benefits that few employees value.
One drawback of cafeteria-style plans is their administrative cost, especially in the
initial design and start-up stages. However, software packages and standardized flex-
plans developed by consultants offer some help in this regard. Another possible draw-
back to these plans is adverse selection. Employees are most likely to choose benefits
that they expect to need the most. Someone in need of dental work would choose as
much dental coverage as possible. As a result, employer costs can increase significantly
as each employee chooses benefits based on their personal value. Another result of
adverse selection is the difficulty in estimating benefits costs under such a plan, espe-
cially in small companies. Adverse selection can be controlled, however, by limiting
coverage amounts, pricing benefits that are subject to adverse selection higher, or using
a limited set of packaged options, which prevents employees from choosing too many
benefits options that would be susceptible to adverse selection.
Flexible Spending Accounts

A flexible spending account permits pretax contributions to an employee account
that can be drawn on to pay for uncovered health care expenses (like deductibles or
copayments). A separate account of up to $2,500 per year is permitted for pretax con-
tributions to cover dependent care expenses. The federal tax code requires that funds
in the health care and dependent care accounts be earmarked in advance and spent
during the plan year. Remaining funds revert to the employer. Therefore, the accounts
work best to the extent that employees have predictable expenses. The major advan-
tage of such plans is the increase in take-home pay that results from pretax payment
of health and dependent care expenses. Consider again the hypothetical employee
with an effective total marginal tax rate of 40.33% from Table 13.1. The take-home
pay from an additional $10,000 in salary with and without a flexible dependent care
account is as follows:
NO FLEXIBLE FLEXIBLE
SPENDING CARE SPENDING CARE
ACCOUNT ACCOUNT
Salary portion $10,000 $10,000

Pretax dependent care 0 −2,500
contribution
Taxable salary 10,000 7,500
Tax (40.33%) −4,033 −3,025
Aftertax cost of dependent care −2,500 0
Take-home pay $ 3,467 $ 4,475
Therefore, the use of a flexible spending account saves the employee $1,000 ($4,475–
$3,467) per year.
General Regulatory Issues

LO 13-6 Although we have already discussed a number of regulatory issues, some additional
Describe the regulatory ones require attention.
constraints that affect
the way employee ben-
efits are designed and AFFORDABLE CARE ACT
administered.
The Affordable Care Act, signed into law in 2010, has several provisions that will have a
major impact on employers as they are implemented through the year 2018. Table 13.11
summarizes key issues for employers.
NONDISCRIMINATION RULES, QUALIFIED PLANS, AND TAX TREATMENT

As a general rule, all benefits packages must meet certain rules to be classified as quali-
fied plans. What are the advantages of a qualified plan? Basically, it receives more favor-
able tax treatment than a nonqualified plan. In the case of a qualified retirement plan, for
example, these tax advantages include (1) an immediate tax deduction for employers for
their contributions to retirement funds, (2) no tax liability for the employee at the time of
the employer deduction, and (3) tax-free investment returns (from stocks, bonds, money
markets, or the like) on the retirement funds.81
What rules must be satisfied for a plan to obtain qualified status? Each benefit area
has different rules. It would be impossible to describe the various rules here, but some
general observations are possible. Taking pensions as an example again, vesting require-
ments must be met. More generally, qualified plans must meet so-called nondiscrimina-
tion rules. Basically, this means that a benefit cannot discriminate in favor of “highly
compensated employees.” One rationale behind such rules is that the tax benefits of
qualified benefits plans (and the corresponding loss of tax revenues for the U.S. gov-
ernment) should not go disproportionately to the wealthy.82 Rather, the favorable tax
treatment is designed to encourage employers to provide important benefits to a broad
spectrum of employees. The nondiscrimination rules discourage owners or top managers
from adopting plans that benefit them exclusively.
SEX, AGE, AND DISABILITY

Beyond the Pregnancy Discrimination Act’s requirements that were discussed earlier
in the chapter, a second area of concern for employers in ensuring legal treatment of
men and women in the benefits area has to do with pension benefits. Women tend to
live longer than men, meaning that pension benefits for women are more costly, all else
being equal. However, in its 1978 Manhart ruling, the Supreme Court declared it illegal
for employers to require women to contribute more to a defined benefit plan than men:
Title VII protects individuals, and not all women outlive all men.83
Two major age-related issues have received attention under the Age Discrimination
in Employment Act (ADEA) and later amendments such as the Older Workers Benefit
Protection Act (OWBPA). First, employers must take care not to discriminate against
workers over age 40 in the provision of pay or benefits. As one example, employers can-
not generally cease accrual (stop the growth) of retirement benefits at some age (like 65)
as a way of pressuring older employees to retire.84 Second, early retirement incentive
programs need to meet the following standards to avoid legal liability: (1) the employee
is not coerced to accept the incentive and retire, (2) accurate information is provided
regarding options, and (3) the employee is given adequate time (is not pressured) to
make a decision.
Table 13.11
The Affordable Care Act: Impact on Employers
PENALTIES FOR NOT PROVIDING HEALTH BENEFITS

The health reform law does not require employers to provide health benefits. However, it does impose
penalties in some cases on larger employers (those with 50 or more full-time workers or 50 or more full-time
equivalents [FTE]) that do not provide insurance to their workers or that provide coverage that is unaffordable.
Larger employers that do not provide coverage are assessed a penalty if any one of their workers receives a
tax credit when buying insurance on their own in a health insurance exchange. Workers with income up to 400%
of the poverty level are eligible for tax credits. The employer penalty is equal to $2,000 multiplied by the number
of workers in the business in excess of 30 workers (with the penalty amount increasing over time).
In some instances, larger employers that offer coverage could be subject to penalties as well. If the coverage does
not have an actuarial value of at least 60%—meaning that on average it covers at least 60% of the cost of covered
services for a typical population—or the premium for the coverage would exceed 9.5% of a worker’s income, then the
worker can obtain coverage in an exchange and be eligible for a tax credit. For each worker receiving a tax credit,
the employer will pay a penalty up to a maximum of $2,000 times the number of workers in excess of 30 workers.
On the other hand, businesses with fewer than 25 full-time equivalents and average annual wages of less than
$50,000 that pay at least half of the cost of health insurance for their employees are eligible for a tax credit.
TAXES*
The law increases the Medicare Hospital Insurance (Part A) payroll tax on earnings for higher-income taxpayers
(more than $200,000/individual and $250,000/couple) by 0.9 percentage points from 1.45% to 2.35%. Employers
will be responsible for withholding these taxes.
The law creates a new tax on so-called “Cadillac” insurance plans provided by employers. Beginning in 2018,
plans valued at $10,200 or more for individual coverage or $27,500 or more for family policies will be subject to
an excise tax of 40% on the value of the plan that exceeds these thresholds. The tax will be levied on insurers and
self-insured employers, not directly on employees. The threshold amounts will be increased for inflation beginning
in 2020, and may be adjusted upward if health care costs rise more than expected prior to implementation of the
tax in 2018. The thresholds are also adjusted upward for retired individuals age 55 and older who are not eligible
for Medicare, for employees engaged in high-risk professions, and for firms that may have higher health care costs
because of the age or gender of their workers.
COVERAGE OF DEPENDENTS
The Affordable Care Act requires plans and issuers that offer dependent coverage to make the coverage available
until a child reaches the age of 26. Both married and unmarried children qualify for this coverage. This rule applies
to all plans in the individual market and to new employer plans. It also applies to existing employer plans unless
the adult child has another offer of employer-based coverage (such as through his or her job). Children up to age
26 can stay on their parent’s employer plan even if they have another offer of coverage through an employer.
WELLNESS PROGRAMS
Employers can provide rewards to employees of up to 30% of the total plan premium as part of a wellness pro-
gram incentive, up from the previous limit of 20%. Under the law, the Secretary of Health and Human Services may
increase this limit to 50% if deemed appropriate. Wellness programs must be “reasonably designed to promote
health or prevent disease.” The law also creates a five-year grant program to encourage small employers that do not
currently have wellness programs to establish them. The program would offer $200 million in Fiscal Years 2011–
2015 to employers with fewer than 100 employees who work 25 hours or more per week.
*Two new taxes do not directly involve employers. First, there is a 2.3% medical device excise tax on the sale of any taxable medical device by its
manufacturer, producer or importer. Second, there is (another) additional Medicare payroll tax of 3.8% on investment income for singles earning
$200,000 or more and couples earning $250,000 or more.
SOURCES: Internal Revenue Service, “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act,” www.
irs.gov, accessed May 5, 2015; The Henry J. Kaiser Family Foundation, http://kff.org/health-reform/faq/health-reform-frequently-asked-questions/
and http://kff.org/quiz/health-reform-quiz/, accessed May 22, 2013; UC-Berkeley Labor Center, “Affordable Care Act Summary of Provisions Affecting
Employer-Sponsored Insurance,” April 2013, http://laborcenter.berkeley.edu/healthpolicy/ppaca12.pdf, accessed May 22, 2013; National Associa-
tion of Manufacturers, “Affordable Care Act Provisions Affecting Employers, 2013 and Beyond,” www.nam.org/∼ /media/DB85A8CD0C174B6A8B-
C9077850FE6AC9/AffordableCareActEmployers_11_2_12.pdf, accessed May 22, 2013; U.S. Department of Labor, Employee Benefits Security
Administration, “Young Adults and the Affordable Care Act: Protecting Young Adults and Eliminating Burdens on Businesses and Families,” www.dol.
gov/ebsa/faqs/faq-dependentcoverage.html.
567
Employers also have to comply with the Americans with Disabilities Act (ADA),
which went into effect in 1992. The ADA specifies that employees with disabilities must
have “equal access to whatever health insurance coverage the employer provides other
employees.” However, the act also notes that the terms and conditions of health insur-
ance can be based on risk factors as long as this is not a subterfuge for denying the ben-
efit to those with disabilities. Employers with risk-based programs in place would be in
a stronger position, however, than employers who make changes after hiring employees
with disabilities.85
MONITORING FUTURE BENEFITS OBLIGATIONS

Financial Financial Accounting Statement (FAS) 106, issued by the Financial Accounting Standards
Accounting Board, became effective in 1993. This rule requires that any benefits (excluding pen-
Statement (FAS) 106 sions) provided after retirement (the major one being health care) can no longer be
The rule issued by the
Financial Accounting
funded on a pay-as-you-go basis. Rather, they must be paid on an accrual basis, and
Standards Board in companies must enter these future cost obligations on their financial statements. The
1993 requiring compa- effect on financial statements can be substantial.
nies to fund benefits Increasing retiree health care costs (and the change in accounting standards)
provided after retire- have also led some companies to require white-collar employees and retirees to pay
ment on an accrual
rather than a pay-as-
insurance premiums for the first time in history and to increase copayments and
you-go basis and to deductibles. Survey data indicate that some companies are ending retiree health care
enter these future cost benefits altogether. GM, for example, recently eliminated retiree health care benefits
obligations on their for white-collar workers. Union contracts prevented GM from eliminating the blue-
financial statements. collar plan.
However, as part of its bankruptcy proceeding it reached a settlement with the
United Auto Workers union (UAW) to create a voluntary employee benefit associa-
tion (VEBA) trust. GM agreed to contribute roughly $35 billion to fund the VEBA.
Ford ($13.2 billion) and Chrysler ($7.1 billion) also reached agreements to set up
VEBAs. By one estimate, the VEBAs moved $100 billion in retiree health care obli-
gations off the financial statements of the three U.S. automakers, playing a major
role in reducing labor cost per vehicle produced. Also, the VEBAs, like defined con-
tribution plans, make the cost for the companies certain. After paying to set up the
VEBAs, they have no future obligations to cover retiree health care. It is up to the
UAW to administer the VEBA.86
Other companies have reduced benefits or increased retiree contributions. Obviously,
such changes hit the elderly hard, especially those with relatively fixed incomes. Not
surprisingly, legal challenges have arisen. The need to balance the interests of sharehold-
ers, current employees, and retirees in this area will be one of the most difficult chal-
lenges facing managers in the future.
Although use of defined benefit (pension) plans has declined significantly over
time in the United States, there continue to be tens of millions covered by ongoing
plans (and/or frozen plans—those not open to new participants). Two factors are about
to make the cost of funding these plans significantly more expensive for organizations.
First, the PBGC, which insures pensions, is raising its annual premium to $64/worker
by 2016, up from $42/worker in 2014, a 53% increase in cost to employers. Second,
the Society of Actuaries revised its mortality tables for the first time since 2000. Life
expectancy for a 65-year-old has been revised upward from 85.2 to 88.8 for women
and from 82.6 to 86.6 for men, again substantially increasing the cost obligation to
employers.87
A LOOK BACK
We have seen that many organizations have become less paternalistic in their
employee benefits strategies. Employees now have more responsibility, and
sometimes more risk, regarding their benefits choices. One change has been
in the area of retirement income plans, where employers have moved toward
greater reliance on defined contribution plans. Such plans require employees to
understand investing; otherwise, their retirement years may not be so happy. The
risk to employees is especially great when defined contribution plans invest a
substantial portion of their assets in company stock. One reason companies do
this is because they wish to move away from an entitlement mentality and instead
link benefits to company performance. However, if the company has financial
problems, employees risk losing not only their jobs, but also their retirement
money. Another change has been in the area of health care benefits. Employees
are being asked to increase the proportion of costs that they pay and also to use
data on health care quality to make better choices about health care. Of course,
different companies have different benefits strategies. We saw at the beginning
of the chapter (and later in the cases of Google and Patagonia) that tech com-
panies, for example, are not in the mode of reducing benefits and/or passing on
more costs to employees. Rather, they are looking for ways to make their benefits
packages more attractive to help them compete in the labor market for valuable
human capital.
QUESTIONS
1. Why do employers offer benefits? Is it because the law requires it, because it
makes good business sense, or because it is the right thing to do? How much
responsibility should employers have for the health and well-being of their
employees? Take the perspective of both a shareholder and an employee in
answering this question.
2. If you were advising a new company on how to design its health care plan, what
would you recommend?
SUMMARY
Effective management of employee benefits is an important Employers continue to be a major source of economic
means by which organizations successfully compete. Ben- security for employees, often providing health insurance,
efits costs are substantial and continue to grow rapidly in retirement benefits, and so forth. Changes to benefits can
some areas, most notably health care. Control of such costs have a tremendous impact on employees and retirees. There-
is necessary to compete in the product market. At the same fore, employers carry a significant social responsibility in
time, employers must offer a benefits package that per- making benefits decisions. At the same time, employees need
mits them to compete in the labor market. Beyond invest- to be aware that they will increasingly become responsible
ing more money in benefits, this attraction and retention for their own economic security. Health care benefit design
of quality employees can be helped by better communica- is changing to encourage employees to be more informed
tion of the value of the benefits package and by allowing consumers, and retirement benefits will depend more and
employees to tailor benefits to their own needs through more on the financial investment decisions employees make
flexible benefits plans. on their own behalf.
KEY TERMS
Marginal tax rate, 538 Employee Retirement Income Security Health maintenance organization
Consolidated Omnibus Budget Act (ERISA), 545 (HMO), 556
Reconciliation Act Cash balance plan, 547 Preferred provider organization (PPO),
(COBRA), 544 Summary plan description 556
Pension Benefit Guaranty Corporation (SPD), 548 Financial Accounting Statement (FAS)
(PBGC), 545 Family and Medical Leave Act, 551 106, 568
1. The chapter-opening story described how employers are potential positive consequences of more effective ben-
shifting more employee health care costs to employees. efits communication?
What are the likely consequences of this change? Where 4. What are the potential advantages of flexible benefits
does the social responsibility of employers end, and and flexible spending accounts? Are there any potential
where does the need to operate more efficiently begin? drawbacks?
2. Your company, like many others, is experiencing double- 5. Although benefits account for a large share of employee
digit percentage increases in health care costs. What sug- compensation, many feel there is little evidence on
gestions can you offer that may reduce the rate of cost whether an employer receives an adequate return on the
increases? benefits investment. One suggestion has been to link ben-
3. Why is communication so important in the employee efits to individual, group, or organization performance.
benefits area? What sorts of programs can a company Explain why you would or would not recommend this
use to communicate more effectively? What are the strategy to an organization.
One way companies determine which types of benefits to employee benefits. For each benefit, mark an X in the col-
provide is to use a survey asking employees which types of umn that indicates whether it is important to you or not.
benefits are important to them. Read the following list of
Important Not Important % Employers
Benefit to Have to Have Offering
Dependent-care flexible spending account 70%
Flextime 64
Ability to bring child to work in case of emergency 30
Elder-care referral services 21
Adoption assistance 21
On-site child care center 6
Gym subsidy 28
Vaccinations on site (e.g., flu shots) 61
On-site fitness center 26
Casual dress days (every day) 53
Organization-sponsored sports teams 39
Food services/subsidized cafeteria 29
Travel-planning services 27
Dry-cleaning services 15
Massage therapy services at work 12
Self-defense training 6
Concierge services 4
Compare your importance ratings for each benefit to the SOURCE: Based on Figure 2, “Percent of Employers Offering Work/Life
Benefits (by Year),” in Workplace Visions 4 (2002), p. 3, published by the
corresponding number in the right-hand column that indicates
Society for Human Resource Management.
the percentage of employers that offer the benefit. Are you
likely to find jobs that provide the benefits you want? Explain.
EXERCISING STRATEGY
Controlling Health Care Costs: Employers Turn to “Carrots and Sticks”
If you are a man with waist size 40 inches or more or a have conditions that make it impossible for them to meet the
woman with waist size 35 inches or more, that “spare tire” health care goals.
will cost you some money this year if you work at tire-maker Honeywell International Inc. is another company that
Michelin North America Inc. Employees may have to pay as penalizes workers for some health care choices. The com-
much as an extra $1,000 in health insurance if their blood pany used to provide an incentive to workers who got a
pressure, blood sugar, cholesterol or waist size exceeds second opinion before undergoing (expensive) elective sur-
targets. geries such as knee replacement, hip replacement, and/or
As part of the plan to control increasing health care costs, back surgery; but it looked at effectiveness data of using
companies are penalizing employees for not meeting health incentives in such cases and decided to re-frame the pro-
targets; and companies may also penalize employees if they gram as a penalty (of $1,000) that workers must pay if they
decline to share personal health-related information like that do not comply. It reports that compliance with these steps
discussed above (e.g., weight, blood pressure). went from under 20% to more than 90% as a result and that
Companies say health-care costs cannot be controlled it is saving it at least $3 million more annually.
without changing workers’ health-related lifestyles and Companies also continue to increase their focus on
habits. Large employers now pay an average of over smoking with some companies taking the step of no longer
$11,000 per worker per year in health care premiums. A hiring smokers. For example, Arkansas Children’s Hospital,
Gallup survey and study estimated that overweight U.S. which also has a new “Tobacco and Nicotine-Free Campus
workers miss 450 million more days of work each year Policy,” now requires applicants to take urine tests for nic-
than other workers and that the lost productivity could otine after receiving a contingent offer of employment. If
exceed $153 million per year. they fail, they are permitted to re-apply 90 days later. Health
Employers like Michelin are using wellness plans and/or care costs are higher on average for smokers, and second-
adding monetary consequences in hopes of more success- hand smoke is also a concern. Furthermore, a health care
fully getting employees to make healthier choices. Although organization may feel that it should set an example for how
framing the incentives in terms of rewards might seem like a to be healthier.
more positive approach, it may be that framing them as pen-
QUESTIONS
alties (instead of rewards) is more consistent with research
1. Does Title VII of the Civil Rights Act prohibit dis-
from behavioral economics, which shows that people react
crimination against smokers? Do you feel it is a wise
more strongly to monetary losses than to monetary gains of
business decision? Do you think it is unfair to smokers?
the same dollar amount.
Will not hiring smokers affect the quality of the work-
This approach gives rise to concerns among employee-
force? How?
rights advocates. Are such penalties for poor health a form
2. What are the reasons why companies are taking steps
of “legal discrimination”? Will workers with chronic condi-
to improve the health of their employees? What is the
tions such as high blood pressure lose out on jobs? Are the
nature of the expected return on this investment?
penalties for those having costly health conditions anything
other than lower pay for people with such conditions? SOURCES: Associated Press, “Arkansas Children’s Hospital to No Longer
Under current law, companies can use health-contingent Hire Smokers,” The Washington Times, April 1, 2015, www.washingtontimes.
com; Leslie Kwoh, “When Your Boss Makes You Pay for Being Fat,” The Wall
rewards or penalties, but they cannot exceed 20% of the cost Street Journal, April 5, 2013; The Henry J. Kaiser Family Foundation and
of the employee’s health coverage. Current law also requires Health Research and Educational Trust, “Survey of Employer Health Benefits
employers to exempt employees from such penalties if they 2012,” www.kff.org.
MANAGING PEOPLE
The Affordable Care Act—How Will Small Employers Respond?
Sales at Automation Systems LLC, a parts-assembly factory Some say they’re likely to reduce their workers’ hours
in the Chicago suburbs, dropped 60% following the 2008 or even lay off staff in order to remain below the thresholds
financial collapse. Owner Carl Schanstra was able to get the established under the act. Under the law, firms with 50 or
firm back on its feet by breaking into new markets, such as more full-time-equivalent employees will have to provide
the auto industry. Sales are up 12% this year, and are likely “minimum essential” and “affordable” coverage, or pay a pen-
to rise again next year, too. alty for each employee in excess of 30 full-time employees.
But for the 34-year-old, the expected growth in sales Sidney Brodsky, chief executive officer of James Gerard
brings a new concern. He is worried that as Automation Sys- Foods, a gourmet food business in Phoenix with roughly
tems continues to expand, it will be subject to a provision in 50 employees, says he is considering “weeding out” his
the health care overhaul that could damage its bottom line. weakest performers to reduce his firm’s head count to below
Mr. Schanstra is contemplating various strategies he can 50 full-time equivalents. He would then bring on contract
take next year in order to sidestep what he believes are signifi- workers, should he need more help.
cant burdens of complying with the law. In fact, he’s consider- Mr. Brodsky has offered health care benefits to his employ-
ing whether he should split his manufacturing firm in two. ees for the past 12 years, though he only contributes 50%
That is because his plant, with sales of about $1.6 million toward their premiums. By hovering under the law’s employee
for 2012, currently employs 40 full-time workers, mostly low- threshold, he can continue to offer health benefits to his
paid employees who monitor the factory equipment. If sales employees without having to worry about meeting the “mini-
were to continue to rise, the plant could, conceivably, employ mum essential” mandate. In order to avoid penalties, employ-
50 full-time workers in 2014. Under the new health care law, ers must offer a plan that covers at least 60% of the actuarial
the Affordable Care Act, businesses with 50 or more full-time value of the cost of the benefits. In addition, employers must
equivalent employees will be required, starting in that year, not charge the employee more than 9.5% of his or her house-
to offer workers health insurance or potentially pay a penalty. hold income toward the cost of health-insurance premiums.
The expense, says Mr. Schanstra, would drive up the cost Others plan to shift to part-time workers, because there are
of his labor. So he doesn’t want to let employment at the fac- no penalties if part-time employees aren’t offered coverage.
tory reach that number. “I’ll be hammered for having more Mr. Schanstra says he is thinking of bringing in a partner
people at work.” to take over one-half of the business, should he divide it. He
Splitting the business into two would be a “headache,” is also considering opening a factory in South America—
he acknowledges. But with fewer than 50 full-time equiva- and focus his growth there. “I want to see where the cards
lent employees in each half of the business, he would hope fall,” he says. “Splitting the company is not off the table.”
to avoid paying the penalties that otherwise could amount Mr. Schanstra is aware that dividing his business into two
to at least $40,000 a year. His firm hasn’t offered health- may not help him dodge the law’s requirements. His backup
insurance benefits since 2003, when premiums jumped 50%, plan, if he can’t split his firm, is to keep his head count low
bringing his yearly outlay for coverage for his staff of 20 or to invest in machinery that would replace workers. He
people to about $40,000 total. also plans to raise prices as much as 20% starting in January
Experts say breaking up a firm—as Mr. Schanstra is to buffer any health care related costs he may incur in 2014.
contemplating—generally won’t be a solution. According to Getting part-time staff is “not a really good functional
the Internal Revenue Code, all workers who are employed way for us to operate our business,” he says, because of how
by a common group of corporations or business partners employees’ shifts, which rotate 24 hours a day, are sched-
must be treated as being employed by a single owner. uled for optimal productivity.
But an owner could potentially create a spinoff entity if “The unknown makes everyone stop spending and start
his or her business has more than one revenue stream, and if saving,” he says. “We will be more cautious and leaner and
there are different owners for each entity, says Peter Flem- tighten up.”
ing, Wilke & Associates LLP. But, “the spinoff move is a
big step,” he says, because it requires surrendering a portion QUESTIONS
of the company over to someone else. 1. How do you feel about companies looking for ways to
Exploring far-reaching strategies to dodge the employer avoid coverage under the Affordable Care Act?
mandate isn’t uncommon, adds Katie Mahoney, executive 2. Do you feel that it is more understandable that small
director of health care policy at the U.S. Chamber of Com- companies like these would look to avoid coverage, com-
merce, because, for some business owners, “it’s a matter of pared to larger companies?
dollars and cents and they don’t have it. They find a way 3. What are the consequences for companies, workers, and
around it or they close their business.” society of companies avoiding coverage by the law?
Babies Welcomed at T3
T3 is an independent advertising agency launched by Gay somewhere to check on your child.” She admits that she has
Warren Gaddis in Austin, Texas, in 1989. It has grown rapidly, to be extra flexible when her baby, Annie, is awake but adds,
thanks to Gaddis’s ability to stay in front of tumultuous change “I powerhouse when she sleeps.” When the babies reach
in the advertising and marketing industry. Traditional agen- nine months or start to crawl, the parents are expected to
cies have approached their work by thinking about ads to be make arrangements for day care.
placed on the air or in newspapers and magazines. In contrast, Bringing babies to work is, of course, only one employee
Gaddis and her staff have specialized in developing integrated benefit. T3, which now has offices in New York and San
campaigns that harness all the ways to communicate about a Francisco as well as the one in Austin, offers medical, den-
brand, including communication via the Internet. tal, and vision insurance; various life insurance policies;
Innovation continues to be a company value. The compa- disability insurance; a 401(k) plan; paid time for vacations,
ny’s careers web page says T3 looks for “Great thinkers. Indi- holidays, and sick leave; and discounts on gym memberships
viduals with curious, open minds. Relentless problem-solvers and cell phone plans. There are also some other unusual
constantly looking for new, often unconventional, solutions.” benefits: breakfast on Mondays, candy on Fridays, a book
The company is structured without the boundaries that have club, and a “bring your dog to work” policy. As for this last
traditionally separated functions in the advertising world, so policy, the T3 website comments, “While we don’t have hard
that employees can bring their perspectives together to solve metrics on what [dogs] do for our creativity or productivity,
client problems. we do believe they play a part in adding balance to what can
That innovative spirit hasn’t been limited to advertising. be a very unbalanced business.”
Gaddis also thinks creatively about managing her firm’s Advertising may be an “unbalanced” business, but so
human resources. Six years after starting T3, Gaddis observed far, T3 seems to be coping well enough. And T3’s fearless
that four of her key employees were all pregnant at about the leader, Gay Warren Gaddis, was recently named Ernst and
same time. If they all proceeded in the traditional way, taking Young’s Entrepreneur of the Year for central Texas.
a few months’ leave, Gaddis would be scrambling to keep her
agency running without them. So Gaddis decided to try some- QUESTIONS
thing unusual: she told the four employees they were welcome 1. Of the employee benefits mentioned in this case, which
to bring their babies to work. While some big companies of them do you think are important for keeping a creative
establish on-site day care, Gaddis simply counted on the workforce engaged at T3?
employees to work flexibly in the presence of their children. 2. What are some of the advantages of the agency’s T3 and
Many people would assume that babies at work would Under policy? What are some of the risks? How can the
create a distracting environment, but in fact, the new pro- company address those risks?
gram was a success. T3 kept the policy in place and even 3. At what other kinds of companies, if any, do you think a
gave it a name: T3 and Under. So far, 80 babies have come “bring your baby to work” policy might be effective as an
to work at one point or another. Gaddis says parents are so employee benefit? Why?
appreciative that they try extra hard to make the arrangement SOURCES: Josh Spiro, “Where Every Day Is Take Your Baby to Work Day,”
work. One such parent, Emily Dalton, feels reassured by Inc., December 9, 2009, www.inc.com; Eric Aasen, “Babies-at-Work Programs
Let New Parents Stay Close to Their Kids,” Dallas Morning News, March 26,
being able to just swivel her chair when she wants to check
2008, Business & Company Resource Center, http://galenet.galegroup.com;
on her baby: “You’re not worrying,” she told a newspaper and T3, “Careers” and “Company,” corporate website, www.t-3.com, accessed
reporter, “You’re being spit up on, but you’re not . . . calling July 21, 2014.
NOTES
1. James H. Dulebohn, Janice C. Molloy, Shaun M. Pichler, and and L. M. Hough (Palo Alto, CA: Consulting Psychologists Press,
Brian Murray, “Employee Benefits: Literature Review and Emerg- 1992); J. Swist, “Benefits Communications: Measuring Impact and
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pp. 86–103; Joseph J. Martocchio, Employee Benefits, 2nd ed. 3. R. Ehrenberg and R. S. Smith, Modern Labor Economics: The-
(New York: McGraw-Hill, 2006). ory and Public Policy, 7th ed. (Upper Saddle River, NJ: Addison
2. H. W. Hennessey, “Using Employee Benefits to Gain a Competi- Wesley Longman, 2000).
tive Advantage,” Benefits Quarterly 5, no. 1 (1989), pp. 51–57; 4. B. T. Beam Jr. and J. J. McFadden, Employee Benefits, 6th ed.
B. Gerhart and G.T. Milkovich, “Employee Compensa- (Chicago: Dearborn Financial Publishing, 2000).
tion: Research and Practice,” in Handbook of Industrial and 5. The organization and description in this section draws heavily on
Organizational Psychology, vol. 3, 2nd ed., ed. M. D. Dunnette Beam and McFadden, Employee Benefits.
6. U.S. Department of Labor, Employment and Training Admin- Circuit Ruling That Pension Avoidance Scheme Is ERISA Vio-
istration, “Comparison of State Unemployment Laws,” http:// lation,” No. 234, p. A-14.
workforcesecurity.doleta.gov/unemploy/comparison2012.asp; 29. A. L. Gustman, O. S. Mitchell, and T. L. Steinmeier, “The Role
Employment Security Department, Washington State, “Taxable of Pensions in the Labor Market: A Survey of the Literature,”
Wage Base,” http://www.esd.wa.gov/uitax/taxreportsandrates/ Industrial and Labor Relations 47 (1994), pp. 417–38.
fileandpaytaxes/taxable-wage-base.php, accessed May 4, 2015. 30. D. A. DeCenzo and S. J. Holoviak, Employee Benefits (Engle-
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11. L. Groeger, M. Grabell, and C. Cotts, “Workers’ Comp Benefits: munity Directive 93/104/EC, issued November 23, 1993, and
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emedicine.com (2002). 36. N. Knox and M. Murphy, “Charity as a Recruiting Tool,” The
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Disability in Occupational Settings: A Review of the Literature 37. S. L. Grover and K. J. Crooker, “Who Appreciates Family
from a Human Resource Management View,” Personnel Psy- Responsive Human Resource Policies: The Impact of Family-
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Interventions, and Absence from Work: A Time-Based Meta- T. J. Rothausen, J. A. Gonzalez, N. E. Clarke, and L. L. O’Dell,
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Potential Impact on the Retirement Incomes of Baby Boomers,” panies (e.g., AT&T, Apple, Exxon, IBM, Merck), see “A Look
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19. Pension Benefit Guaranty Corporation, Annual Report, 2014, ments,” June 2001, www.census.gov.
www.pbgc.gov. 40. J. Waldfogel, “International Policies toward Parental Leave and
20. Ibid. Child Care,” Future of Children 11, no. 1 (2001), pp. 99–111.
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limits. Maternity Leave,” Personnel Journal, September 1995, p. 19.
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2014. ers,” http://familiesandwork.org/site/research/reports/main.html,
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The New York Times, March 17, 2008; P. Lattman and 1995, pp. 82–88.
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Savings Wiped Out, “The Wall Street Journal, March 18, 2008; Employee Problems, Preferences, and Work-Related Out-
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Whammy: Bear Saga Shows Perils of Loading Up on Employer 45. “A Bank Profits from Its Work/Life Program,” Workforce,
Equity,” The Wall Street Journal, March 18, 2008. February 1997, p. 49.
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26. Beam and McFadden, Employee Benefits. Human Resource Management Handbook, ed. D. Lewin, D. J.
27. B. J. Coleman, Primer on Employee Retirement Income Security B. Mitchell, and M. A. Zadi (San Francisco: JAI Press, 1996).
Act, 3rd ed. (Washington, DC: Bureau of National Affairs, 1989). 47. Dulabohn et al., “Employee Benefits.”
28. Continental Can Company v. Gavalik, summary in Daily Labor 48. Hennessey, “Using Employee Benefits to Gain a Competitive
Report (December 8, 1987): “Supreme Court Lets Stand Third Advantage.”
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Compensation,” www.bls.gov; U.S. Chamber of Commerce 73. M. Wilson, G. B. Northcraft, and M. Neale, “The Perceived
Research Center, Employee Benefits Study, annual (Washing- Value of Fringe Benefits,” Personnel Psychology 38 (1985),
ton, D.C.: U.S. Chamber of Commerce). pp. 309–20.
50. www.census.gov. 74. R. Huseman, J. Hatfield, and R. Robinson, “The MBA and
51. S. Armour, “Uninsured Rate Down Sharply Since Health Law Was Fringe Benefits,” Personnel Administrator 23, no. 7 (1978),
Enacted,” The Wall Street Journal, March 16, 2015, www.wsj.com. pp. 57–60. See summary in H. W. Hennessey Jr., “Using
52. Employee Benefit Research Institute, EBRI’s Fundamentals of Employee Benefits to Gain a Competitive Advantage,” Benefits
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Mobility: The Effects of Public Policy on Job-Lock,” Industrial found no impact of the increased awareness and benefits satis-
and Labor Relations Review 48 (1994), pp. 86–102. faction on overall job satisfaction. G. F. Dreher, R. A. Ash, and
54. R. Lieber, “New Way to Curb Medical Costs: Make Employees R. D. Bretz, “Benefit Coverage and Employee Cost: Critical
Feel the Sting,” The Wall Street Journal, June 23, 2004, p. A1. Factors in Explaining Compensation Satisfaction,” Personnel
55. M. Barringer and O. S. Mitchell, “Workers’ Preferences among Psychology 41 (1988), pp. 237–54.
Company-Provided Health Insurance Plans,” Industrial and 76. M. C. Giallourakis and G. S. Taylor, “An Evaluation of Benefit
Labor Relations Review 48 (1994), pp. 141–52. Communication Strategy,” Employee Benefits Journal 15, no. 4
56. Beam and McFadden, Employee Benefits. (1991), pp. 14–18; Employee Benefits Research Institute, “How
57. Jared Shelly, “Transformation Vacation,” Human Resource Readable Are Summary Plan Descriptions for Health Care
Executive, November 1, 2008. Plans,” EBRI Notes, October 2006, ebri.org.
58. Leonard Berry, Ann Mirabito, and William Baun, “What’s the 77. J. Abraham, R. Feldman, and C. Carlin, “Understanding
Hard Return on Employee Wellness Programs?” Harvard Busi- Employee Awareness of Health Care Quality Information:
ness Review, December 2010, pp. 104–12. How Can Employers Benefit?” Health Services Research 39
59. S. Tully, “America’s Healthiest Companies,” Fortune, June 12, (2004), pp. 1799–1816; J. H. Marler, S. L. Fisher, and W. Ke,
1995, pp. 98–106. “Employee Self-Service Technology Acceptance: A Compari-
60. G. Flynn, “Companies Make Wellness Work,” Personnel Jour- son of Pre-Implementation and Post-Implementation Relation-
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61. D. A. Harrison and L. Z. Liska, “Promoting Regular Exercise 78. Beam and McFadden, Employee Benefits; M. W. Barringer
in Organizational Fitness Programs: Health-Related Differ- and G. T. Milkovich, “A Theoretical Explanation of the Adop-
ences in Motivational Building Blocks,” Personnel Psychology tion and Design of Flexible Benefit Plans: A Case of Human
47 (1994), pp. 47–71. Resource Innovation,” Academy of Management Review
62. J. C. Erfurt, A. Foote, and M. A. Heirich, “The Cost-Effectiveness 23 (1998), pp. 305–24.
of Worksite Wellness Programs for Hypertension Control, 79. T. Eriksson and N. Kristensen, “Wages or Fringes? Some Evi-
Weight Loss, Smoking Cessation and Exercise,” Personnel Psy- dence on Trade-Offs and Sorting,” Journal of Labor Economics
chology 45 (1992), pp. 5–27. 32, no. 4 (2014), pp. 899–928.
63. J. Chang and M. Marsh, “The Google Diet: Search Giant Over- 80. For supportive evidence, see A. E. Barber, R. B. Dunham, and
hauled Its Eating Options to ‘Nudge’ Healthy Choices,” ABC R. A. Formisano, “The Impact of Flexible Benefits on Employee
News, accessed May 11, 2013, www.abc.com. Satisfaction: A Field Study,” Personnel Psychology 45 (1992),
64. The Henry J. Kaiser Family Foundation, “Visualizing Health pp. 55–75; E. E. Lawler, Pay and Organizational Develop-
Policy: Recent Trends in Employer-Sponsored Insurance,” ment (Reading, MA: Addison-Wesley, 1981); J. C. Dencker,
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65. H. Gardner, unpublished manuscript (Cheyenne, WY: Options for Intergenerational Conflict,” Human Resource Management
& Choices, 1995); The Henry J. Kaiser Family Foundation and Review 17 (2007), pp. 208–20; A. Caza, M. W. McCarter, and
Health Research and Educational Trust, http://kff.org/health- G. B. Northcraft, “Performance Benefits of Reward Choice: A
costs/slide/concentration-of-health-care-spending-in-the-u-s- Procedural Justice Perspective,” Human Resource Management
population-2010/, accessed May 20, 2013. Journal 25 (2015), 184–199. Caza et al. also found a positive
66. H. B. Noble, “Quality Is Focus for Health Plans,” The New York effect of benefits choice on performance in a library study where
Times, July 3, 1995, p. A1; J. D. Klinke, “Medicine’s Industrial performance was measured by how well undergraduate students
Revolution,” The Wall Street Journal, August 21, 1995, p. A8. were able to combine words into compound words.
67. S. Rosenbush and M. Totty, “How Big Data Is Changing the 81. Beam and McFadden, Employee Benefits.
Whole Equation for Business,” The Wall Street Journal, March 82. Ibid.
8, 2013; S. Kliff, “An Average ER Visit Costs More than an 83. Los Angeles Dept. of Water & Power v. Manhart, 435 US SCt
Average Month’s Rent,” The Washington Post, March 2, 2013; 702 (1978), 16 EPD, 8250.
A. W. Mathews, “Same Doctor Visit, Double the Cost,” The 84. S. K. Hoffman, “Discrimination Litigation Relating to Employee
Wall Street Journal, August 27, 2012. Benefits,” Labor Law Journal, June 1992, pp. 362–81.
68. J. B. White, “Business Plan,” The Wall Street Journal, October 85. Ibid., p. 375.
19, 1998, p. R18. 86. S. J. Sacher and J. Day, “The New VEBAs,” BNA Pension and
69. L. Weber, “A Health Check for Wellness Programs,” The Wall Benefits blog, June 1, 2010. http://pblog.bna.com, extracted
Street Journal, October 8, 2014, p. B1. June 3, 2011; P. C. Borzi, “Retiree Health VEBAs: A New
70. J. Schor, The Overworked American: The Unexpected Decline of Twist on an Old Paradigm. Implications for Retirees, Unions,
Leisure (New York: Basic Books, 1991); U.S. Bureau of Labor and Employers,” The Henry J. Kaiser Family Foundation, March
Statistics, “Workers Are on the Job More Hours over the Course 2009.
of a Year,” Issues in Labor Statistics, February 1997. 87. V. Monga, “Pension Plans Brace for a One–Two Punch,” The
71. Hewitt Associates. www.hewitt.com. Wall Street Journal, March 25, 2014, p. B1.
Collective Bargaining
and Labor Relations
PART FIVE
14
C H A P T E R
Special Topics in Human Resource Management
LEARNING OBJECTIVES
LO 14-1 Describe what is meant by collective bargaining

and labor relations. page 578
LO 14-2 Identify the labor relations goals of management,

labor unions, and society. page 580
LO 14-3 Explain the legal environment’s impact on labor relations. page 590

LO 14-4 Describe the major labor–management interactions: organizing,
contract negotiations, and contract administration. page 594
LO 14-5 Describe new, less adversarial approaches to

labor–management relations. page 609
LO 14-6 Explain how changes in competitive challenges (e.g., product

market competition and globalization) are influencing
labor–management interactions. page 616
LO 14-7 Explain how labor relations in the public sector differ from
labor relations in the private sector. page 619
576
>>>
Collective Action by Nonunion Workers and Supporters
The National Labor Relations Act protects “concerted unions to bring pressure on the company there (e.g.,
action” (collectively discussing or taking action to accusing the company of tax avoidance in Europe).
address work conditions) by workers, whether they are Recently, McDonald’s did increase its lowest wage
represented by a union or not. Increasingly, low-wage, rates to be at least $1 above the applicable minimum
nonunion workers have taken concerted action to wage, which nationally is $7.25 and in New York,
raise wages for themselves and others. A primary tar- where the actions got their start, $8.75. Although
get has been McDonald’s. A major goal is to create a protesters believed their actions played a major role,
national movement to raise hourly wages to $15/hour McDonald’s did not attribute the wage increase to the
(the “Fight for 15” ) to help workers make ends meet. protests, but rather said it was due to tightening labor
Nonunion workers went out on strike a few years market competition. (See the opening to Chapter 11.)
ago for a day in just one city, New York. But now, Also, in reading the fine print of the announcement,
organizers believe they will soon have strikers and only workers in stores owned by McDonald’s (not
supporters out on the streets in 200 cities nationwide, franchisee-owned stores) will be covered, which
with supporting actions in 35 other countries. A accounts for only about 10% of McDonald’s employ-
spokesman for McDonald’s stated that such events ees. And, of course, the new pay rates do not satisfy
were not strikes, but rather “organized rallies designed the goal of $15/hour. One activist stated, “We aren’t
to garner media attention” and that “very few going to stop until the service sector . . . becomes the
McDonald’s employees have participated.” According next foundation for the American middle class.”
to The New York Times, the Service Employees Inter-
national Union (SEIU) has contributed more than $15 SOURCES: R. L. Swarns, “McDonald’s Workers, Vowing a Fight, Say
Raises are Too Little for Too Few,” The New York Times, April 6, 2015,
million to support the movement. Some believe the www.nytimes; S. Greenhouse, “A Broader Strategy on Wages,” The New
SEIU has also coordinated with McDonald’s European York Times, March 31, 2015, www.nytimes.com.
Introduction
In the chapter opening, we see workers taking collective action to change collective
terms and conditions of employment, but in this instance without any formal union rep-
resentation and without being members of a union. The National Labor Relations Act
protects such “concerted activity” for everyone, whether union members or not. In this
case, workers and their supporters, similar to unionized workers, hope to bring pres-
sure to bear on McDonald’s (and others) to improve wages and other aspects of the job.
Unions can help achieve important worker goals, including not only higher wages, but
also worker protection, and giving workers a say in their workplaces. A main source of
negotiating leverage for unions is the ability to strike, which interrupts production, sales,
and profits. In the end, however, such conflicts must be balanced against the common
interests that bind workers and companies together. Worker jobs and income, as well as
company profits, depend on the two parties being able to cooperate to assure the ability
of the company to be competitive and survive.
577
578 CHAPTER 14 Collective Bargaining and Labor Relations
The Labor Relations Framework

LO 14-1 John Dunlop, former secretary of labor and a leading industrial relations scholar, suggested
Describe what is meant in the book Industrial Relations Systems (1958) that a successful industrial relations sys-
by collective bargaining tem consists of four elements: (1) an environmental context (technology, market pressures,
and labor relations.
and the legal framework, especially as it affects bargaining power); (2) participants, includ-
ing employees and their unions, management, and the government; (3) a “web of rules”
(rules of the game) that describe the process by which labor and management interact and
resolve disagreements (such as the steps followed in settling contract grievances); and
(4) ideology.1 For the industrial relations system to operate properly, the three participants
must, to some degree, have a common ideology (e.g., acceptance of the capitalist system)
and must accept the roles of the other participants. Acceptance does not translate into con-
vergence of interests, however. To the contrary, some degree of worker–management con-
flict is inevitable because, although the interests of the two parties overlap (e.g., survival of
the firm and thus survival of workers’ jobs and investors’ profits), they also diverge in key
respects (such as how to divide the economic profits between workers and investors).2
Therefore, according to Dunlop and other U.S. scholars of like mind, an effective
industrial relations system does not eliminate conflict. Rather, it provides institutions
(and a “web of rules”) that resolve conflict in a way that minimizes its costs to manage-
ment, employees, and society. The collective bargaining system is one such institution,
as are related mechanisms such as mediation, arbitration, and participation in decision
making. These ideas formed the basis for the development in the 1940s of schools and
departments of industrial and labor relations to train labor relations professionals who,
working in both union and management positions, would have the skills to minimize
costly forms of conflict such as strikes (which were reaching record levels at the time)
and maximize integrative (win–win) solutions to such disagreements.
A more recent industrial relations model, developed by Harry Katz and Thomas Kochan,
is particularly helpful in laying out the types of decisions management and unions make in
their interactions and the consequences of such decisions for attainment of goals in areas
such as wages and benefits, job security, and the rights and responsibilities of unions and
managements.3 According to Katz and Kochan, these choices occur at three levels.
First, at the strategic level, management makes basic choices such as whether to work
with its union(s) or to devote its efforts to developing nonunion operations. Environ-
mental factors (or competitive challenges) offer both constraints and opportunities in
implementing strategies. For example, if public opinion toward labor unions becomes
negative during a particular time period, some employers may see that as an opportu-
nity to rid themselves of unions, whereas other employers may seek a better working
relationship with their unions. Similarly, increased competition may dictate the need to
increase productivity or reduce labor costs, but whether this is accomplished by shifting
work to nonunion facilities or by working with unions to become more competitive is a
strategic choice that management faces.
Although management has often been the initiator of change in recent years, unions
face a similar choice between fighting changes to the status quo and being open to new
labor–management relationships (like less adversarial forms of participation in decision
making, such as labor–management teams).
Katz and Kochan suggest that labor and management choices at the strategic level in
turn affect the labor–management interaction at a second level, the functional level, where
contract negotiations and union organizing occur, and at the final workplace level, the
arena in which the contract is administered. Although the relationships between labor and
management at each of the three levels are somewhat interdependent, the relationship at
the three levels may also differ. For example, while management may have a strategy of
CHAPTER 14 Collective Bargaining and Labor Relations 579
building an effective relationship with its unions at the strategic level, there may be sig-
nificant day-to-day conflicts over work rules, grievances, and so forth at any given facility
or bargaining unit (workplace level).
The labor relations framework depicted in Figure 14.1 incorporates many of the ideas
discussed so far, including the important role of the environment (the competitive chal-
lenges); union, management, and societal goals; and a separation of union–management
interactions into categories (union organizing, contract negotiation, contract administra-
tion) that can have important influences on one another but may also be analyzed somewhat
independently. The model also highlights the important role that relative bargaining power
plays in influencing goals, union–management interactions, and the degree to which each
party achieves its goals. Relative bargaining power, in turn, is significantly influenced by
the competitive environment (legal, social, quality, high-performance work systems, and
globalization competitive challenges) and the size and depth of union membership.4
We now describe the components of this model in greater depth. The remainder of
the chapter is organized into the following sections: the goals and strategies of society,
management, and unions; union structure (including union administration and member-
ship); the legal framework, perhaps the key aspect of the competitive environment for
labor relations; union and management interactions (organizing, contract negotiation,
contract administration); and goal attainment. Environmental factors (other than legal)
and bargaining power are discussed in the context of these sections. In addition, two
special topics, international comparisons and public sector labor relations, are discussed.
Figure 14.1
Environment and A Labor Relations
Context Framework
Legal
Stakeholder needs
Globalization
High-performance
work systems
Goals Union
Employees and Membership
unions and Relative
Management Bargaining
Society Power
Union Structure Union and Goal Attainment

and Management Employees and
Administration Interactions unions
Organizing Management
Negotiating Society
Administering
Goals and Strategies

SOCIETY
LO 14-2 In one sense, labor unions, with their emphasis on group action, do not fit well with the
Identify the labor rela- individualistic orientation of U.S. capitalism. However, industrial relations scholars such
tions goals of manage- as Beatrice and Sidney Webb and John R. Commons argued in the late 1800s and early
ment, labor unions, and
1900s that individual workers’ bargaining power was far smaller than that of employers,
society.
who were likely to have more financial resources and the ability to easily replace work-
ers.5 Effective institutions for worker representation (like labor unions) were therefore
seen as a way to make bargaining power more equal.
Labor unions’ major benefit to society is the institutionalization of industrial conflict,
which is therefore resolved in the least costly way. Although disagreements between
management and labor continue, it is better to resolve disputes through discussion (col-
lective bargaining) than by battling in the streets. As an influential group of industrial
relations scholars put it in describing the future of advanced industrial relations around
the world, “Class warfare will be forgotten. The battles will be in the corridors instead
of the streets, and memos will flow instead of blood.”6 In this sense, collective bargain-
ing not only has the potential to reduce economic losses caused by strikes but may also
contribute to societal stability. For this reason, industrial relations scholars have often
viewed labor unions as an essential component of a democratic society.7 These were
some of the beliefs that contributed to the enactment of the National Labor Relations
Act (NLRA) in 1935, which sought to provide an environment conducive to collective
bargaining and has since regulated labor and management activities and interactions.
Even Senator Orrin Hatch, described by Bloomberg BusinessWeek as “labor’s archri-
val on Capitol Hill,” has spoken of the need for unions:
There are always going to be people who take advantage of workers. Unions even that out,
to their credit. We need them to level the field between labor and management. If you didn’t
have unions, it would be very difficult for even enlightened employers not to take advantage
of workers on wages and working conditions, because of [competition from] rivals. I’m
among the first to say I believe in unions.8
Although an industrial relations system based on collective bargaining has draw-
backs, so too do the alternatives. Unilateral control by management sacrifices workers’
rights. Extensive involvement of government and the courts can result in conflict resolu-
tion that is expensive, slow, and imposed by someone (a judge) with much less firsthand
knowledge of the circumstances than either labor or management.
MANAGEMENT
One of management’s most basic decisions is whether to encourage or discourage the union-
ization of its employees. It may discourage unions because it fears higher wage and benefit
costs, the disruptions caused by strikes, and an adversarial relationship with its employees
or, more generally, greater constraints placed on its decision-making flexibility and discre-
tion. Historically, management has used two basic strategies to avoid unionization.9 It may
seek to provide employment terms and conditions that employees will perceive as suf-
ficiently attractive and equitable so that they see little gain from union representation. Or
it may aggressively oppose union representation, even where there is significant employee
interest. Use of the latter strategy has increased significantly during the last 30 to 40 years.
If management voluntarily recognizes a union or if employees are already represented
by a union, the focus is shifted from dealing with employees as individuals to employees
as a group. Still, certain basic management objectives remain: controlling labor costs
and increasing productivity (by keeping wages and benefits in check) and maintaining
management prerogatives in important areas such as staffing levels and work rules. Of
course, management always has the option of trying to decertify a union (that is, encour-
aging employees to vote out the union in a decertification election) if it believes that the
majority of employees no longer wish to be represented by the union.
LABOR UNIONS
Labor unions seek, through collective action, to give workers a formal and independent
voice in setting the terms and conditions of their work. Table 14.1 shows typical provi-
sions negotiated by unions in collective bargaining contracts. Labor unions attempt to
Table 14.1
Typical Provisions in Collective Bargaining Contracts
Establishment and Wage determination and Plant operations

administration of the administration Work and shop rules
agreement General provisions Rest periods and other in-plant
Bargaining unit and plant Rate structure and wage time allowances
supplements differentials Safety and health
Contract duration and Allowances Plant committees
reopening and renegotiation Incentive systems and Hours of work and premium pay
provisions production bonus plans practices
Union security and Production standards and Shift operations
the checkoff time studies Hazardous work
Special bargaining committees Job classification and job Discipline and discharge
Grievance procedures evaluation Paid and unpaid leave
Arbitration and mediation Individual wage adjustments Vacations and holidays
Strikes and lockouts General wage adjustments Sick leave
Contract enforcement during the contract period Funeral and personal leave
Functions, rights, and Job or income security Military leave and jury duty
responsibilities Hiring and transfer arrangements Employee benefit plans
Management rights clauses Employment and income Health and insurance plans
Plant removal guarantees Pension plans
Subcontracting Reporting and call-in pay Profit-sharing, stock purchase,
Union activities on company Supplemental unemployment and thrift plans
time and premises benefit plans Bonus plans
Union–management Regulation of overtime, Special groups
cooperation shift work, etc. Apprentices and learners
Regulation of technological Reduction of hours to forestall Workers with disabilities and
change layoffs older workers
Advance notice and Layoff procedures; seniority; Women
consultation recall Veterans
Worksharing in lieu of layoff Union representatives
Attrition arrangements Nondiscrimination clauses
Promotion practices
Training and retraining
Relocation allowances
Severance pay and layoff
benefit plans
Special funds and study
committees
SOURCE: From Harry Katz, Thomas Kochan, and Alexander Colvin, An Introduction to Collective Bargaining and Industrial Relations 4E, 2008.
Reproduced with permission of The McGraw-Hill Companies, Inc.
INTEGRITY IN ACTION
The Alliance for Bangladesh Worker Safety
According to the website of the to worker safety.
Alliance for Bangladesh Worker used by Alliance members as Production at the
Safety, it was established to sources for their garments. factory was stopped and safety
improve workplace safety in upgrades made. The Alliance
Bangladesh’s garment facto- roughly 1 million workers and paid one-half of the salaries of
ries in the aftermath of factory managers employed in these workers who were not able to
tragedies there such as the col- factories. work during that time period
lapse of the Rana Plaza build- and the owner of the factory
The Alliance’s first annual
ing. The Alliance reports that its paid the other half of employ-
report also provided the fol-
accomplishments in its first year ees salaries.
lowing case study of its actions
included: SOURCE: “Protecting the Lives and Liveli-
at a local company called RSI
hoods of Bangladesh’s Garment Workers,”
Apparels Limited. It reported First Annual Report of the Alliance for
Bangladesh’s first integrated that an inspection revealed Bangladesh Worker Safety, July 2014,
fire safety and structural a building structural problem www.bangladeshworkersafety.org.
integrity standard. that posed an immediate risk
represent their members’ interests in these decisions. Without adequate union represen-
tation, not only worker wages, but also their safety and welfare, are more likely to be put
at risk. This is particularly true in low-wage economies where regulatory protection may
also be lacking.
Just before more than 1,100 workers perished in the Rana Plaza eight-story factory
building collapse in Bangladesh in April 2013, workers on the third floor were star-
tled by what sounded like an explosion. They also saw cracks in the walls. An engi-
neer was brought in to examine the cracks, and he found that they were structural. He
recommended immediate evacuation of the building. Workers evacuated, but were
ordered back to work. If they did not go back, they would lose their pay, which at $38
a month, they likely did not feel they could afford. The question was how could such
a tragedy be prevented from happening again? One response has been for companies
that buy from garment suppliers in Bangladesh to develop and enforce worker safety
and treatment standards. (See the “Integrity in Action” box for more details on this
effort.) Another response is: What if these workers at Rana Plaza had been repre-
sented by a labor union? Perhaps those workers, if unionized, could have refused to
follow the order to return to work. As one response to the tragedy, the Bangladesh
government stated that it would begin to allow the country’s 4 million garment work-
ers to form trade unions and do so without first obtaining prior permission from fac-
tory owners. Labor unions can provide protection for workers and also help negotiate
higher wages for workers to give them a better standard of living. Of course, these
potential advantages will be weighed against the potential consequence of higher
labor costs and/or lost working time due to strikes (and thus less competitive product
prices, which could reduce sales and employment). In the best case scenario, an effec-
tive labor–management relationship can bring more efficient organization of workers
in the production process and higher wages can allow more selectivity in hiring and a
more productive workforce.
582
A major goal of labor unions is bargaining effectiveness, because with it comes the
power and influence to make the employees’ voices heard and to effect changes in the
workplace.10 The right to strike is one important component of bargaining power. In
turn, the success of a strike (actual or threatened) depends on the relative magnitude of
the costs imposed on management versus those imposed on the union. A critical factor
is the size of union membership. More members translate into a greater ability to halt or
disrupt production and also into greater financial resources for continuing a strike in the
face of lost wages.
Union Structure, Administration,

and Membership
A necessary step in discussing labor–management interactions is a basic knowledge of
how labor and management are organized and how they function. Management has been
described throughout this book. We now focus on labor unions.
NATIONAL AND INTERNATIONAL UNIONS

Most union members belong to a national or international union. In turn, most national
unions are composed of multiple local units, and most are affiliated with the American
Federation of Labor and Congress of Industrial Organizations (AFL-CIO).
The largest national unions are listed in Table 14.2. The National Education Associa-
tion, which is not affiliated with the AFL-CIO, is the largest union with almost 3 million
Table 14.2
NUMBER OF
Largest Labor Unions
ORGANIZATION MEMBERS
in the United States
1. National Education Association 2,963,121

2. Service Employees International Union 1,893,775
3. American Federation of Teachers 1,597,140
4. American Federation of State, County, and Municipal Employees 1,337,126
5. International Brotherhood of Teamsters 1,305,773
6. United Food and Commercial Workers International Union 1,271,804
7. International Brotherhood of Electrical Workers 658,812
8. Communications Workers of America 623,020
9. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, 589,907
Allied Industrial, and Service Workers International Union
10. International Association of Machinists and Aerospace Workers 569,373
11. Laborers 557,870
12. United Brotherhood of Carpenters and Joiners 412,278
13. United Automobile, Aerospace, and Agricultural Implement Work- 403,466
ers of America International Union
14. International Union of Operating Engineers 374,521
15. United Association of Journeymen and Apprentices of the 329,954
Plumbing and Pipe Fitting Industry of the United States and Canada
SOURCE: U.S. Department of Labor, Office of Labor-Management Standards, Public Disclosure Home, http://kcerds.
dol-esa.gov/query/getOrgQry.do, accessed May 12, 2015.
members. An important characteristic of a union is whether it is a craft or industrial

union. The electrical workers’ and carpenters’ unions are craft unions, meaning that the
members all have a particular skill or occupation. Craft unions often are responsible
for training their members (through apprenticeships) and for supplying craft workers to
employers. Requests for carpenters, for example, would come to the union hiring hall,
which would decide which carpenters to send out. Thus craft workers may work for many
employers over time, their constant link being to the union. A craft union’s bargaining
power depends greatly on the control it can exercise over the supply of its workers.
In contrast, industrial unions are made up of members who are linked by their work
in a particular industry (such as steelworkers and autoworkers). Typically they represent
many different occupations. Membership in the union is a result of working for a partic-
ular employer in the industry. Changing employers is less common than it is among craft
workers, and employees who change employers remain members of the same union only
if they happen to move to other employers covered by that union. Whereas a craft union
may restrict the number of, say, carpenters to maintain higher wages, industrial unions
try to organize as many employees in as wide a range of skills as possible.
LOCAL UNIONS
Even when a national union plays the most critical role in negotiating terms of a collec-
tive bargaining contract, negotiation occurs at the local level as well as over work rules
and other issues that are locally determined. In addition, administration of the contract is
largely carried out at the local union level. Consequently, the bulk of day-to-day interac-
tion between labor and management takes place at the local union level.
The local of an industrial-based union may correspond to a single large facility or
to a number of small facilities. In a craft-oriented union, the local may cover a city or a
region. The local union typically elects officers (like president, vice president, treasurer).
Responsibility for contract negotiation may rest with the officers, or a bargaining com-
mittee may be formed for this purpose. Typically the national union provides assistance,
ranging from background data about other settlements and technical advice to sending a
representative to lead the negotiations.
Individual members’ participation in local union meetings includes the election of
union officials and strike votes. However, most union contact is with the shop steward,
who is responsible for ensuring that the terms of the collective bargaining contract are
enforced. The shop steward represents employees in contract grievances. Another union
position, the business representative, performs some of the same functions, especially
where the union deals with multiple employers, as is often the case with craft unions.
AMERICAN FEDERATION OF LABOR AND CONGRESS

OF INDUSTRIAL ORGANIZATIONS (AFL-CIO)
The AFL-CIO is not a labor union but rather an association that seeks to advance the
shared interests of its member unions at the national level, much as the Chamber of
Commerce and the National Association of Manufacturers do for their member employ-
ers. As Figure 14.2 indicates, there are 56 affiliated national and international unions
and thousands of locals. An important responsibility of the AFL-CIO is to represent
labor’s interests in public policy issues such as civil rights, economic policy, safety, and
occupational health. It also provides information and analysis that member unions can
use in their activities: organizing new members, negotiating new contracts, and admin-
istering contracts.
Figure 14.2
56 Affiliated AFL-CIO
National Unions Organization Chart
Executive Council
55 Vice Presidents
President
Secretary-Treasurer
Executive Vice President
AFL-CIO Departments
Trade and Industrial

Departments
SOURCE: AFL-CIO, www.aflcio.org, accessed May 13, 2015.

UNION SECURITY
The survival and security of a union depends on its ability to ensure a regular flow of
new members and member dues to support the services it provides. Therefore, unions
typically place high priority on negotiating two contract provisions with an employer
that are critical to a union’s security or viability: checkoff provisions and union member-
Checkoff Provision ship or contribution. First, under a checkoff provision, the employer, on behalf of the
A union contract provi- union, automatically deducts union dues from employees’ paychecks.
sion that requires an A second union security provision focuses on the flow of new members (and their
employer to deduct
union dues from
dues). The strongest union security arrangement is a closed shop, under which a person
employees’ paychecks. must be a union member (and thus pay dues) before being hired. A closed shop is, how-
ever, illegal under the NLRA. A union shop requires a person to join the union within a
Closed Shop certain amount of time (30 days) after beginning employment. An agency shop is similar
A union security provi- to a union shop but does not require union membership, only that dues be paid.
sion requiring a person Maintenance of membership rules do not require union membership but do require that
to be a union member employees who choose to join must remain members for a certain period of time (such
before being hired. Ille-
as the length of the contract).
gal under NLRA.
Under the 1947 Taft–Hartley Act (an amendment to the NLRA), states may pass so-
called right-to-work laws, which make union shops, maintenance of membership, and
Union Shop
A union security provi-
agency shops illegal. The idea behind such laws is that compulsory union membership
sion that requires a (or making employees pay union dues) infringes on the employee’s right to freedom of
person to join the union association. From the union perspective, a big concern is “free riders,” employees who
within a certain amount benefit from union activities without belonging to a union. By law, all members of a
of time after being bargaining unit, whether union members or not, must be represented by the union. If the
hired.
union is required to offer service to all bargaining unit members, even those who are not
union members, it may lose its financial viability.
Agency Shop
A union security provi-
sion that requires an UNION MEMBERSHIP AND BARGAINING POWER
employee to pay union At the strategic level, management and unions meet head-on over the issue of union
membership dues but
not to join the union.
organizing. Increasingly, employers are actively resisting unionization in an attempt to
control costs and maintain their flexibility. Unions, on the other hand, must organize new
members and hold on to their current members to have the kind of bargaining power and
Maintenance of
Membership financial resources needed to achieve their goals in future organizing and to negotiate
Union rules requiring and administer contracts with management. For this reason we now discuss trends in
members to remain union membership and possible explanations for those trends.
members for a certain Since the 1950s, when union membership rose to 35% of employment, membership
period of time (such as
has consistently declined as a percentage of employment. It now stands at 11.1% of all
the length of the union
contract). employment and 6.6% of private-sector employment.11 As Figure 14.3 indicates, this
decline shows no indication of reversing.12
Right-to-Work Laws
What factors explain the decline in union membership? Several have been identified.13
State laws that make
union shops, mainte-
nance of membership,
Structural Changes in the Economy
and agency shops At the risk of oversimplifying, we might say that unions have traditionally been strongest
illegal. in urban workplaces (especially those outside the South) that employ middle-aged men
in blue-collar jobs. However, much recent job growth has occurred among women and
youth in the service sector (in contrast to the manufacturing sector) of the economy.
Although unionizing such groups is possible, unions have so far not had much suc-
cess organizing these groups in the private sector. Despite the importance of structural
changes in the economy, studies show that they account for no more than one-quarter of
the overall union membership decline.14
Figure 14.3
Union Membership Density among U.S. Wage and Salary Workers, 1973–2014
40%
35 Public Sector
Percentage Union Membership
30
25
20
Total
15
10
Private Sector
5
0
757677 78 79 80 81 82 83 84 858687 88 89 90 91 92 93 94 959697 98 99 00 01 02 03 04 050607 08 09 10 11 12 13 14
Year
Private Public Total
SOURCE: From B. T. Hirsch and D. A. MacPherson, Union Membership and Earnings Data Book 2001 (Washington, DC: The Bureau of National
Affairs, Inc., 2001). Reprinted with permission. Data for 2001 to 2014 obtained from U.S. Bureau of Labor Statistics, www.bls.gov.
Increased Employer Resistance

Almost one-half of large employers in a survey reported that their most important labor
goal was to be union-free. This contrasts sharply with 60 years ago, when Jack Barbash
wrote that “many tough bargainers [among employers] prefer the union to a situation
where there is no union. Most of the employers in rubber, basic steel and the automobile
industry fall in this category.” The idea then was that an effective union could help assess
and communicate the interests of employees to management, thus helping management
make better decisions. But product-market pressures, such as foreign competition and
deregulation (e.g., trucking, airlines, telecommunications), have contributed to increas-
ing employer resistance to unions.15 These changes in the competitive environment have
contributed to a change in management’s perspective and goals.16
In the absence of significant competition from foreign producers, unions were often
able to organize entire industries. For example, the UAW organized all four major pro-
ducers in the automobile industry (GM, Ford, Chrysler, and American Motors). The
UAW usually sought and achieved the same union–management contract at each com-
pany. As a consequence, a negotiated wage increase in the industry could be passed on to
the consumer in the form of higher prices. No company was undercut by its competitors
because the labor cost of all major producers in the industry was determined by the same
union–management contract, and the U.S. public had little option but to buy U.S.-made
cars. However, the onset of foreign competition in the automobile market changed the
competitive situation as well as the UAW’s ability to organize the industry.17 U.S. auto-
makers were slow to recognize and respond to the competitive threat from foreign pro-
ducers, resulting in a loss of market share and employment.
Competitive threats have contributed to increased employer resistance to union

organizing and, in some cases, to an increased emphasis on ridding themselves of
existing unions. Unionized workers receive, on average, 26% higher wages, and this
advantage is still estimated to be 10% to 15% when observable characteristics of union
and nonunion workers are equated. The compensation advantage is still larger if ben-
efits are also included. Many employers have decided that they can no longer com-
pete with these higher labor costs, and union membership has suffered as a result.18
One measure of increased employer resistance is the dramatic increase in the late
1960s in the number of unfair employer labor practices (violations of sections of the
NLRA such as section 8(a)(3), which prohibits firing employees for union organizing,
as we discuss later) even though the number of elections held did not change much.
(See Figure 14.4.) The use of remedies such as back pay for workers also grew, but the
costs to employers of such penalties does not appear to have been sufficient to prevent
the growth in employer unfair labor practices. Not surprisingly, the union victory rate
in representation elections decreased from almost 59% in 1960 to below 50% by 1975.
Although the union victory rate in elections during the two most recent years has actu-
ally been higher (64%), the number of elections has declined precipitously, from 7,422
in 1970 to 1,330 in 2013, a decrease of 82%. Moreover, decertification elections have
come to represent a larger share of all elections in recent years.19 Given the signifi-
cant decline in both elections and union membership percentage (see Figure 14.3), the
increases in the number of unfair labor practice charges and back pay awards is all the
more notable.
Finally, even if a union wins the right to represent employees, its ability to success-
fully negotiate a contract with the employer is not guaranteed. Indeed, refusal to bar-
gain by the employer is the unfair labor practice most frequently filed (over half of all
charges) against employers. One study examined 22,000 organizing drives by unions in
the United States over a six-year period. Only about one-seventh of these drives eventu-
ally resulted in a union contract, either because the election was lost (or challenged) or
because after a win, a contract could not be obtained with the employer. Further, this
success rate was lower still (by 30%) in cases where the employer filed an unfair labor
practice against the union.20
At a personal level, some managers may face serious consequences if a union suc-
cessfully organizes a new set of workers or mounts a serious organizing drive. One study
indicated that 8% of the plant managers in companies with organizing drives were fired,
and 10% of those in companies where the union was successful were fired (compared
with 2% in a control group).21 Furthermore, only 3% of the plant managers facing an
organizing drive were promoted, and none of those ending up with a union contract were
promoted (compared with 21% of the managers in the control group). Therefore, manag-
ers are often under intense pressure to oppose unionization attempts.
Substitution with HRM

A major study of the human resource management strategies and practices among large,
nonunion employers found that union avoidance was often an important employee rela-
tions objective.22 Top management’s values in such companies drive specific policies
such as promotion from within, an influential personnel–human resource department,
and above-average pay and benefits. These policies, in turn, contribute to a number of
desirable outcomes such as flexibility, positive employee attitudes, and responsive and
committed employees, which ultimately lead to higher productivity and better employee
relations. In other words, employers attempt to remain nonunion by offering most of the
Figure 14.4
Employer Resistance to Union Organizing, 1950–2013
400
350
Reported Incidents (1960 = 100)
300
250
200
150
100
50
0
0 1950 1960 1970 1980 1990 2000 2010 2011 2012 2013
Year
Unfair Labor Practice Charges Filed
Representation Elections Held
1800
1600
1400
Back pay (1960 = 100)
1200
1000
800
600
400
200
0
0 1950 1960 1970 1980 1990 2000 2010 2011 2012 2013
Year
Backpay Received by Workers as Remedy to Unfair
Labor Practice (2013 dollars)
SOURCE: Adapted and updated from R. B. Freeman and J. L. Medoff, What Do Unions Do? (New York: Basic Books,
1984). Data for from www.nlrb.gov.
things a union can offer, and then some, while still maintaining a productivity advantage
over their competitors. Of course, one aspect of union representation that employers can-
not duplicate is the independent employee voice that a union provides.
Substitution by Government Regulation

Since the 1960s, regulation of many employment areas has increased, including equal
employment opportunity, pensions, and worker displacement. Combined with existing
regulations, this increase may result in fewer areas in which unions can provide worker
rights or protection beyond those specified by law. Yet western European countries gener-
ally have more regulations and higher levels of union membership than the United States.23
Worker Views
Industrial relations scholars have long argued that the absence in the United States of
a history of feudalism and of strong class distinctions found in western Europe have
contributed to a more pragmatic, business-oriented (versus class-conscious) unionism.
Although this may help explain the somewhat lower level of union membership in the
United States, its relevance in explaining the downward trend is not clear. Further, when
U.S. workers are asked about their interest in joining a union, interest is substantial.24
Union Actions and Industry Structure

In some ways, unions have hurt their own cause. First, corruption in unions such as the
Teamsters may have had a detrimental effect. Second, questions have been raised about
how well unions have adapted to recent changes in the economic structure. Employee
groups and economic sectors with the fastest growth rates tend to have the lowest rates of
unionization.25 Women are slightly less likely to be in unions than men (10.5% vs. 11.7%.),
and nonmanufacturing industries such as finance, insurance, and real estate have a lower
union representation (2.0%) than does manufacturing (9.7%). The South is also less heavily
organized than the rest of the country, with, for example, South Carolina having a union-
ization rate of 2.2%, compared with 24.6% in New York State.26 For example, none of the
foreign-owned automobile assembly plants (e.g., BMW, Mercedes-Benz, Toyota, Volk-
swagen, Nissan), located in the South are unionized (although they would be in their home
countries). One reason for the smaller union presence in southern states is the existence of
right-to-work laws (see our earlier discussion) in such states. (We should note, however,
that since 2012, Indiana, Michigan, and Wisconsin, traditional union strongholds, have all
become right-to-work states.)
Legal Framework
LO 14-3 Although competitive challenges have a major impact on labor relations, the legal frame-
Explain the legal envi- work of collective bargaining is an especially critical determinant of union membership
ronment’s impact on and relative bargaining power and, therefore, of the degree to which employers, employ-
labor relations.
ees, and society are successful in achieving their goals. The legal framework also con-
strains union structure and administration and the manner in which unions and employers
interact. Perhaps the most dramatic example of labor laws’ influence is the 1935 passage
of the Wagner Act (also known as the National Labor Relations Act or NLRA), which
actively supported collective bargaining rather than impeding it. As a result, union mem-
bership nearly tripled, from 3 million in 1933 (7.7% of all employment) to 8.8 million
(19.2% of employment) by 1939.27 With increased membership came greater union bar-
gaining power and, consequently, more success in achieving union goals.
Before the 1930s, the legal system was generally hostile to unions. The courts gener-
ally viewed unions as coercive organizations that hindered free trade. Unions’ focus on
collective voice and collective action (strikes, boycotts) did not fit well with the U.S.
emphasis on capitalism, individualism, freedom of contract, and property rights.28
The Great Depression of the 1930s, however, shifted public attitudes toward business
and the free-enterprise system. Unemployment rates as high as 25% and a 30% drop
in the gross national product between 1929 and 1933 focused attention on employee
rights and on the shortcomings of the system as it existed then. The nation was in a
crisis, and President Franklin Roosevelt responded with dramatic action, the New Deal.
On the labor front, the 1935 NLRA ushered in a new era of public policy for labor
unions, enshrining collective bargaining as the preferred mechanism for settling labor–
management disputes.
The introduction to the NLRA states:
It is in the national interest of the United States to maintain full production in its economy.
Industrial strife among employees, employers, and labor organizations interferes with full
production and is contrary to our national interest. Experience has shown that labor disputes
can be lessened if the parties involved recognize the legitimate rights of each in their rela-
tions with one another. To establish these rights under the law, Congress enacted the National
Labor Relations Act. Its purpose is to define and protect the rights of employees and employ-
ers, to encourage collective bargaining, and to eliminate certain practices on the part of labor
and management that are harmful to the general welfare.29
The rights of employees are set out in Section 7 of the act, including the “right to self-
organization, to form, join, or assist labor organizations, to bargain collectively through
representatives of their own choosing, and to engage in other concerted activities for the
purpose of collective bargaining. The act also gives employees the right to refrain from
any or all of such activities except [in cases] requiring membership in a labor organiza-
tion as a condition of employment.”30 Examples of protected activities include
∙ Union organizing.
∙ Joining a union, whether it is recognized by the employer or not.
∙ Going out on strike to secure better working conditions.
∙ Refraining from activity on behalf of the union.31
Although the NLRA has broad coverage in the private sector, Table 14.3 shows that
there are some notable exclusions.
UNFAIR LABOR PRACTICES—EMPLOYERS

The NLRA prohibits certain activities by both employers and labor unions. Unfair labor
practices by employers are listed in Section 8(a) of the NLRA. Section 8(a)(1) prohibits
employers from interfering with, restraining, or coercing employees in exercising their
rights to join or assist a labor organization or to refrain from such activities. Section 8(a)
(2) prohibits employer domination of or interference with the formation or activities
of a labor union. Section 8(a)(3) prohibits discrimination in any aspect of employment
that attempts to encourage or discourage union-related activity. Section 8(a)(4) prohibits
discrimination against employees for providing testimony relevant to enforcement of the
NLRA. Section 8(a)(5) prohibits employers from refusing to bargain collectively with
a labor organization that has standing under the act. Examples of employer unfair labor
practices are listed in Table 14.4.
Table 14.3
Are You Excluded The NLRA specifically excludes from its coverage individuals who are
from the NLRA’s
Coverage?
SOURCE: www.nlrb.gov/publications/engulp.html.
Table 14.4
Examples of Employer Unfair Labor Practices
they are union members.
because employees at the first plant joined a union.
plan covering employees.
SOURCE: National Labor Relations Board, Basic Guide to the National Labor Relations Act (Washington, DC: U.S. Government Printing Office, 1997).
Available at www.nlrb.gov. Accessed May 13, 2015.
UNFAIR LABOR PRACTICES—LABOR UNIONS

Originally the NLRA did not list any union unfair labor practices. These were added
Taft-Hartley Act through the 1947 Taft-Hartley Act. The 1959 Landrum-Griffin Act further regulated
The 1947 act that unions’ actions and their internal affairs (like financial disclosure and conduct of elec-
outlawed unfair union tions). Section 8(b)(1)(a) of the NLRA states that a labor organization is not to “restrain
labor practices.
or coerce employees in the exercise of the rights guaranteed in Section 7” (described
earlier). Table 14.5 provides examples of union unfair labor practices.
ENFORCEMENT
Enforcement of the NLRA rests with the National Labor Relations Board, which is com-
posed of a five-member board, the general counsel, and 33 regional offices. The basis
Table 14.5
Examples of Union Unfair Labor Practices
determined by a group to which it does not belong.
supervisory responsibilities.
by the union.
to the union.
Mediation and Conciliation Service, and the state mediation service (where one exists).
obtaining beer at a brewery by inducing the brewery’s employees to refuse to fill the distributor’s orders).
recognize the union (a “secondary boycott”).
SOURCE: National Labor Relations Board, A Guide to Basic Law and Procedures under the National Labor Relations Act (Washington, DC: U.S.
Government Printing Office, 1997). Available at www.nlrb.gov. Accessed May 13, 2015.
for the NLRA is the commerce clause of the U.S. Constitution. Therefore, the NLRB’s
jurisdiction is limited to employers whose operations affect commerce generally and
interstate commerce in particular. In practice, only purely local firms are likely to fall
outside the NLRB’s jurisdiction. Specific jurisdictional standards (nearly 20) that vary
by industry are applied. Two examples of businesses that are covered (and the standards)
are retail businesses that had more than $500,000 in annual business and newspapers
that had more than $200,000 in annual business.
The NLRB’s two major functions are to conduct and certify representation elections
and prevent unfair labor practices. In both realms, it does not initiate action. Rather, it
responds to requests for action. The NLRB’s role in representation elections is discussed
in the next section. Here we discuss unfair labor practices.
Unfair labor practice cases begin with the filing of a charge, which is investigated by
a regional office. A charge must be filed within six months of the alleged unfair practice,
and copies must be served on all parties. (Registered mail is recommended.) If the NLRB
finds the charge to have merit and issues a complaint, there are two possible actions. It
may defer to a grievance procedure agreed on by the employer and union. Otherwise, a
hearing is held before an administrative law judge. The judge makes a recommendation,
which can be appealed by either party. The NLRB has the authority to issue cease-and-
desist orders to halt unfair labor practices. It can also order reinstatement of employees,
with or without back pay. In one recent year, for example, $110 million in back pay was
awarded. Note, however, that the NLRA is not a criminal statute, and punitive damages are
not available. If an employer or union refuses to comply with an NLRB order, the board
has the authority to petition the U.S. Court of Appeals. The court can choose to enforce
the order, remand it to the NLRB for modification, change it, or set it aside altogether.
Union and Management

Interactions: Organizing
LO 14-4 To this point we have discussed macro trends in union membership. Here we shift our
Describe the major focus to the more micro questions of why individual employees join unions and how the
labor–management organizing process works at the workplace level.
interactions: organiz-
ing, contract nego-
tiations, and contract WHY DO EMPLOYEES JOIN UNIONS?
administration.
Virtually every model of the decision to join a union focuses on two questions.32 First, is
there a gap between the pay, benefits, and other conditions of employment that employees
actually receive versus what they believe they should receive? Second, if such a gap exists
and is sufficiently large to motivate employees to try to remedy the situation, is union
membership seen as the most effective or instrumental means of change? The outcome of
an election campaign hinges on how the majority of employees answer these two questions.
THE PROCESS AND LEGAL FRAMEWORK OF ORGANIZING

The NLRB is responsible for ensuring that the organizing process follows certain steps.
At the most general level, the NLRB holds a union representation election if at least
30% of employees in the bargaining unit sign authorization cards (see Figure 14.5). If
more than 50% of the employees sign authorization cards, the union may request that
the employer voluntarily recognize it. If 50% or fewer of the employees sign, or if the
employer refuses to recognize the union voluntarily, the NLRB conducts a secret-ballot
election. The union is certified by the NLRB as the exclusive representative of employ-
ees if more than 50% of employees vote for the union. If more than one union appears
on the ballot and neither gains a simple majority, a runoff election is held. Once a union
has been certified as the exclusive representative of a group of employees, no addi-
tional elections are permitted for one year. After the negotiation of a contract, an election
Figure 14.5
Authorization Card YES, I WANT THE IAM
I, the undersigned employee of
(Company)
authorize the International Association of Machinists and Aerospace
Workers (IAM) to act as my collective bargaining agent for wages, hours
and working conditions. I agree that this card may be used either to
support a demand for recognition or an NLRB election, at the discretion
of the union.
Name (print) Date
Home Address Phone
City State Zip
Job Title Dept. Shift
Sign Here
Note: This authorization to be SIGNED and DATED in employee’s own handwriting.

YOUR RIGHT TO SIGN THIS CARD IS PROTECTED BY FEDERAL LAW.
RECEIVED BY (Initial)
cannot be held for the contract’s duration or for three years, whichever comes first. The
parties to the contract may agree not to hold an election for longer than three years, but
an outside party cannot be barred for more than three years.
As mentioned previously, union members’ right to be represented by leaders of their
own choosing was expanded under the Taft-Hartley Act to include the right to vote an
existing union out—that is, to decertify it. The process follows the same steps as a repre-
sentation election. A decertification election is not permitted when a contract is in effect.
Research indicates that when decertification elections are held, unions typically do not
fare well, losing the majority of the time.33
The NLRB also is responsible for determining the appropriate bargaining unit and
the employees who are eligible to participate in organizing activities. A unit may cover
employees in one facility or multiple facilities within a single employer, or the unit may
cover multiple employers. In general, employees on the payroll just prior to the ordering
of an election are eligible to vote, although this rule is modified in some cases where, for
example, employment in the industry is irregular. Most employees who are on strike and
who have been replaced by other employees are eligible to vote in an election (such as a
decertification election) that occurs within 12 months of the onset of the strike.
As shown in Table 14.3, the following types of employees cannot be included in bar-
gaining units: agricultural laborers, independent contractors, supervisors, and managers.
Beyond this, the NLRB attempts to group together employees who have a community of
interest in their wages, hours, and working conditions. In many cases this grouping will
be sharply contested, with management and the union jockeying to include or exclude
certain employee subgroups in the hope of influencing the outcome of the election.
In 2014 and 2015, the NLRB issued important new rulings. One ruling is designed to
streamline and speed representation elections, presumably in hopes of helping unions be
more successful in organizing new workers. Specific changes include allowing unions to
file election petitions electronically rather than requiring they be submitted by mail, requir-
ing businesses to give unions personal email addresses (in addition to telephone numbers)
of workers if they have them on file (within two days), and making it more difficult for
employers to challenge elections until after they are conducted. The changes are intended
to shorten the time between the call for a vote and actual election to 25 days or less, nearly
2 weeks less than the current median of 38 days and 3.5 weeks less than the median of
59 days in cases where employers contest the holding or other aspects of an election.34 A
second ruling, which may have even larger ramifications, appears to make it more likely
that in a case where Company A contracts with a staffing firm (Company B) to provide it
with workers, Company A could be held responsible (depending on the amount of control
it exercises over workers, directly and/or indirectly) as a joint employer (along with Com-
pany B) for employment practices, rather than such responsibility falling exclusively to
Company B. As such, a union now has a better chance of being able to negotiate directly
with Company A, making it more difficult for Company A to avoid dealing with the union.
Organizing Campaigns: Management and Union Strategies and Tactics

Tables 14.6 and 14.7 list common issues that arise during most campaigns.35 Unions
attempt to persuade employees that their wages, benefits, treatment by employers, and
opportunity to influence workplace decisions are not sufficient and that the union will
be effective in obtaining improvements. Management emphasizes that it has provided
a good package of wages, benefits, and so on. It also argues that, whereas a union is
unlikely to provide improvements in such areas, it will likely lead to certain costs for
employees, such as union dues and the income loss resulting from strikes.
Table 14.6 PERCENTAGE

Most Common Issues
UNION ISSUES OF CAMPAIGNS
Raised by Unions
in Representation
Union will prevent unfairness and will set up a grievance procedure 82%
Election Campaigns
and seniority system.
Union will improve unsatisfactory wages. 79
Union strength will give employees voice in wages, working conditions. 79
Union, not outsider, bargains for what employees want. 73
Union has obtained gains elsewhere. 70
Union will improve unsatisfactory sick leave and insurance. 64
Dues and initiation fees are reasonable. 64
Union will improve unsatisfactory vacations and holidays. 61
Union will improve unsatisfactory pensions. 61
Employer promises and good treatment may not be continued 61
without union.
Employees choose union leaders. 55
Employer will seek to persuade or frighten employees to vote 55
against union.
No strike without vote. 55
Union will improve unsatisfactory working conditions. 52
Employees have legal right to engage in union activity. 52
SOURCE: J. Getman, S. Goldberg, and J. B. Herman, Union Representation Elections: Law and Reality (New York:
Russell Sage Foundation, 1976), Table 4–3; N = 33 representation election campaigns.
Table 14.7
Most Common PERCENTAGE
Issues Raised by COMPANY ISSUES OF CAMPAIGNS
Companies in
Representation Improvements not dependent on unionization. 85%
Election Campaigns Wages good, equal to, or better than under union contract. 82
Financial costs of union dues outweigh gains. 79
Union is outsider. 79
Get facts before deciding; employer will provide facts and accept 76
employee decision.
If union wins, strike may follow. 70
Loss of benefits may follow union win. 67
Strikers will lose wages; lose more than gain. 67
Unions not concerned with employee welfare. 67
Strike may lead to loss of jobs. 64
Employer has treated employees fairly and/or well. 60
Employees should be certain to vote. 54
SOURCES: J. Fossum, Labor Relations: Development, Structure and Processes, 5th ed., 1992. Reprinted with permis-
sion of The McGraw-Hill Companies, Inc. Original data from J. Getman, S. Goldberg, and J. B. Herman, Union Rep-
resentation Elections: Law and Reality (New York: Russell Sage Foundation, 1976), Table 4-2; N = 33 representation
election campaigns.
As Table 14.8 indicates, employers use a variety of methods to oppose unions in orga-

nizing campaigns, some of which may go beyond what the law permits, especially in the
eyes of union organizers. This perception is supported by our earlier discussion, which
noted a significant increase in employer unfair labor practices since the late 1960s. (See
Figure 14.4.)
Table 14.8
Survey of employers Percentage of
Consultants used 41% Firms Using Various
Unfair labor practice charges filed against employer 24 Methods to Oppose
Survey of union organizers Union Organizing
Consultants and/or lawyers used 70 Campaigns
Unfair labor practices by employer
Charges filed 36
Discharges or discriminatory layoffs 42a
Company leaflets 80
Company letters 91
Captive audience speech 91b
Supervisor meetings with small groups of employees 92
Supervisor intensity in opposing union
Low 14
Moderate 34
High 51
aThispercentage is larger than the figure for charges filed because it includes cases in which no unfair labor practice
charge was actually filed against the employer.
bRefers to management’s requiring employees to attend a session on company time at which the disadvantages of
union membership are emphasized.

SOURCE: R. B. Freeman and M. M. Kleiner, “Employer Behavior in the Face of Union Organizing Drives,” Industrial and
Labor Relations Review 43, no. 4 (April 1990), pp. 351–65. © Cornell University.
Why would employers increasingly break the law? Fossum suggests that the con-
sequences (like back pay and reinstatement of workers) of doing so are “slight.”36 His
review of various studies suggests that discrimination against employees involved in
union organizing decreases union organizing success significantly and that the cost
of back pay to union activists reinstated in their jobs is far smaller than the costs that
would be incurred if the union managed to organize and gain better wages, benefits,
and so forth.
Still, the NLRB attempts to maintain a noncoercive atmosphere under which
employees feel they can exercise free choice. It will set aside an election if it believes
that either the union or the employer has created “an atmosphere of confusion or fear
of reprisals.”37 Examples of conduct that may lead to an election result being set aside
include
∙ Threats of loss of jobs or benefits by an employer or union to influence votes or
organizing activities.
∙ A grant of benefits or a promise of benefits as a means of influencing votes or orga-
nizing activities.
∙ An employer or union making campaign speeches to assembled groups of employees
on company time less than 24 hours before an election.
∙ The actual use or threat of physical force or violence to influence votes or organizing
activities.38
Supervisors have the most direct contact with employees. Thus, as Table 14.9 indi-
cates, it is critical that they be proactive in establishing good relationships with employees
if the company wishes to avoid union organizing attempts. It is also important for super-
visors to know what not to do (Threatening, Interrogating, Promising, Spying—TIPS)
should a drive take place.
Table 14.9
WHAT TO DO:
What Supervisors
Should and Should
Not Do to Stay Report any direct or indirect signs of union activity to a core management group.
Union-Free Deal with employees by carefully stating the company’s response to pro-union
arguments. These responses should be coordinated by the company to maintain
consistency and to avoid threats or promises.
Take away union issues by following effective management practice all the time:
Deliver recognition and appreciation.
Solve employee problems.
Protect employees from harassment or humiliation.
Provide business-related information.
Be consistent in treatment of different employees.
Accommodate special circumstances where appropriate.
Ensure due process in performance management.
Treat all employees with dignity and respect.
WHAT TO AVOID:
Threatening employees with harsher terms and conditions of employment or

employment loss if they engage in union activity.
Interrogating employees about pro-union or anti-union sentiments that they or others
may have or reviewing union authorization cards or pro-union petitions.
Promising employees that they will receive favorable terms or conditions of employment
if they forgo union activity.
Spying on employees known to be, or suspected of being, engaged in pro-union
activities.
SOURCE: From J. A. Segal, HR Magazine. Reproduced with permission of Society for Human Resource Management
(www.shrm.org), Alexandria, VA, publisher of HR Magazine.
In response to organizing difficulties, the union movement has tried alternative

Associate Union approaches. Associate union membership is not linked to an employee’s workplace and
Membership does not provide representation in collective bargaining. Instead the union provides other
A form of union services, such as discounts on health and life insurance or credit cards.39 In return, the
membership by which
the union receives
union receives membership dues and a broader base of support for its activities. Associ-
dues in exchange for ate membership may be attractive to employees who wish to join a union but cannot
services (e.g., health because their workplace is not organized by a union. Supervisors and their employers
insurance, credit cards) must also recognize that social media is increasingly used as a tool in union organization
but does not provide drives and understand how to effectively and legally respond to such communications.
representation in col-
lective bargaining.
See the “Competing through Technology” box for more on this point.
Corporate campaigns seek to bring public, financial, or political pressure on employ-
ers during the organizing (and negotiating) process.40 For example, the Building and
Corporate
Campaigns Construction Trades Department of the AFL-CIO successfully lobbied Congress to
Union activities designed eliminate $100 million in tax breaks for a Toyota truck plant in Kentucky until Toyota
to exert public, financial, agreed to use union construction workers and pay union wages.41 The Amalgamated
or political pressure Clothing and Textile Workers Union (ACTWU) corporate campaign against J. P. Stevens
on employers during
during the late 1970s was one of the first and best known. The ACTWU organized a
the union-organizing
process. boycott of J. P. Stevens products and threatened to withdraw its pension funds from
financial institutions where J. P. Stevens officers acted as directors. J. P. Stevens subse-
quently agreed to a contract with the ACTWU.42
Using Social Media for Union-Related Communications
The title of a recent blog post- broad (i.e., such that they pro- that employees
ing was “Social Media: The New hibit almost any topics or any had the right
Big Tool for Union Organizing.” concerted action) and allow to use the employer e-mail sys-
No longer do workers need to discussion of clearly legitimate tem for “an initial organizational
go door to door to contact pro- topics such as wages, hours, campaign” when attempting to
spective union members and and working conditions. Employ- form a union. Although techni-
no longer do they need to find ers may (though it depends on cally this activity is not to be
physical gathering places to the circumstances) prohibit the done during working time, as a
discuss organizing strategies or use of social media (for any practical matter, it may be diffi-
to air grievances. That can now purpose) by employees when cult to tell whether an employee
be done online via e-mail, Face- they are scheduled to be work- was on work time or break
book, Twitter, and other social ing. Employers can also prohibit time when the e-mail was sent.
media platforms. harassment of colleagues. Finally, it should be noted that an
Employers need to be aware Employers also need to employer is typically permitted
of how employee communica- be aware that the National to monitor employee e-mail com-
tions have changed to be able Labor Relations Board recently munications as long as it does
to respond effectively and changed its rules on employee not increase the intensity of such
legally. As noted in the open- use of employer e-mail systems monitoring in response to union-
ing to this chapter, the National for the purpose of labor organiz- related activity.
Labor Relations Act has always ing. Its new rule states that use
protected concerted action by of e-mail for union-related com- DISCUSSION QUESTIONS
employees. One challenge is munications must be permitted 1. From a union’s perspective,
that when employees go online by employers in cases where what are some advantages
to criticize their company or employers allow employees of using social media for its
supervisor, unlike when it was general access to the employer’s communications?
a discussion around the water e-mail system. Although the 2. From a company’s perspec-
cooler, such complaints can now Board said a total ban was pos- tive, what are some disad-
reach millions of people, includ- sible, it also stated that “it will vantages of union-related
ing customers and/or clients. be the rare case.” As such, in communications being sent
Companies have sought to pre- general, the Board stated that via social media?
vent such actions by developing employees are permitted to use SOURCES: W. Welkowitz, “Social Media: The
policies for use of social media e-mail to engage in “statutorily New Big Tool for Union Organizing,” Labor and
and to protect against dispar- protected discussions about the Employment Blog, Bloomberg BNA, February
3, 2015, www.bna.com; T. Puckett, “NLRB Rul-
agement. Such policies are likely terms and conditions of their ings Have Far-reaching Impact on Employers
to be less subject to challenge employment while on nonwork- and Policies,” Oklahoma Employment Law Let-
to the extent they are not overly ing time.” The Board also stated ter, February 4, 2015, www.hrhero.com.
Unions also hope to use their financial assets to influence companies. Unions
directly control billions in pension funds and share control with employers of
billions more. All told, unions may have an influence over about $3 trillion in such
investments.43
In some success stories unions have eschewed elections in favor of strikes and neg-
ative publicity to pressure corporations to accept a union. Several years ago, the Hotel
Employees and Restaurant Employees (HERE) organized 9,000 workers, with 80%
599
of these memberships resulting from pressure on employers rather than a vote. The
Union of Needletrade, Industrial, and Textile Employees (UNITE), also succeeded
with this approach. After losing an election by just two votes among employees of
Up-to-Date Laundry, which cleans linens for Baltimore hotels and hospitals, UNITE
decided to try other tactics, including a corporate campaign. It called a strike to
demand that Up-to-Date recognize the union. It also persuaded several major custom-
ers of the laundry to threaten to stop using the laundry’s services, shared claims of
racial and sexual harassment with state agencies and the National Association for the
Advancement of Colored People (NAACP), and convinced the Baltimore city council
to require testimony from Up-to-Date. Eventually, the company gave in, recognized
the union, and negotiated a contract that raised the workers’ $6-an-hour wages and
gave them better benefits.
Another winning union organizing strategy is to negotiate employer neutrality
and card-check provisions into a contract. Under a neutrality provision, the employer
pledges not to oppose organizing attempts elsewhere in the company. A card-check
provision is an agreement that if a certain percentage—by law, at least a majority—of
employees sign an authorization card, the employer will recognize their union repre-
sentation. An impartial outside agency, such as the American Arbitration Association,
counts the cards. The Communication Workers of America negotiated these provi-
sions in its dispute with Verizon. Evidence suggests that this strategy can be very
effective for unions.
However, unions must avoid running afoul of the Racketeer Influenced and Corrupt
Organizations Act (RICO). For example, the Service Employees International Union
(SEIU) waged a corporate campaign beginning in 2009 against Sodexo, a French-
owned food service company operating in the United States. The SEIU’s campaign,
“Clean Up Sodexo,” focused on bringing to the public’s attention food safety and
other concerns at Sodexo, something that could damage its business. Sodex sued the
SEIU, claiming the campaign was an attempt to conspire to extort Sodexo with the
threat of financial damage unless Sodexo agreed to a card-check provision for recog-
nizing the union (rather than requiring that workers vote in a secret-ballot election).
Sodexo alleged that the SEIU engaged in blackmail, vandalism, and other prohibited
actions in an effort to prevent Sodexo from winning food contracts. In 2011, a legal
settlement was reached before trial, under which the SEIU agreed to end its campaign
against Sodexo.44
Union and Management Interactions:

Contract Negotiation
The majority of contract negotiations take place between unions and employers that have
been through the process before. In most cases, management has come to accept the
union as an organization that it must work with. But when the union has just been certi-
fied and is negotiating its first contract, the situation can be very different. In fact, unions
are unable to negotiate a first contract in 27% to 37% of the cases.45 As noted previously,
more than half of all unfair labor practice charges filed against employers pertain to the
refusal to negotiate.
Labor–management contracts differ in their bargaining structures—that is, the range
of employees and employers that are covered. As Table 14.10 indicates, the contracts
differ, first, according to whether narrow (craft) or broad (industrial) employee interests
are covered. Second, they differ according to whether they cover multiple employers or
Table 14.10
Types and Examples of Bargaining Structures
EMPLOYER INTERESTS COVERED

EMPLOYEE SINGLE-EMPLOYER—
INTERESTS MULTIEMPLOYER SINGLE-EMPLOYER— SINGLE PLANT
COVERED (CENTRALIZED) MULTIPLANT (DECENTRALIZED)
Craft (Narrow) Construction trades Airline Craft union in small

Interstate trucking Teacher manufacturing plant
Longshoring Police Hospital
Hospital association Firefighters
Railroad
Industrial or Coal mining (underground) Automobiles Industrial union in
Multiskill (Broad) Basic steel (pre-1986) Steel (post-1986) small manufacturing
Hotel association Farm equipment plant
State government
Textile
SOURCE: From H. C. Katz and T. A. Kochan, An Introduction to Collective Bargaining and Industrial Relations 4E, 2008. Reprinted with permission of
The McGraw-Hill Companies, Inc.
multiple plants within a single employer. (A single employer may have multiple plants, Distributive
some union and some nonunion.) Different structures have different implications for Bargaining
The part of the
bargaining power and the number of interests that must be incorporated in reaching an
labor–management
agreement. negotiation process
that focuses on dividing
a fixed economic “pie.”
THE NEGOTIATION PROCESS
Richard Walton and Robert McKersie suggested that labor–management negotiations Integrative
could be broken into four subprocesses: distributive bargaining, integrative bargain- Bargaining
The part of the
ing, attitudinal structuring, and intraorganizational bargaining.46 Distributive bargaining labor–management
focuses on dividing a fixed economic “pie” between the two sides. A wage increase, negotiation process
for example, means that the union gets a larger share of the pie, management a smaller that seeks solutions
share. It is a win–lose situation. Integrative bargaining has a win–win focus; it seeks beneficial to both sides.
solutions beneficial to both sides. So if management needs to reduce labor costs, it could
Attitudinal
reach an agreement with the union to avoid layoffs in return for the union agreeing to
Structuring
changes in work rules that might enhance productivity. The aspect of the labor–
Attitudinal structuring refers to the relationship and trust between labor and manage- management negotia-
ment negotiators. Where the relationship is poor, it may be difficult for the two sides tion process that refers
to engage in integrative bargaining because each side hesitates to trust the other side to the relationship and
level of trust between
to carry out its part of the deal. For example, the union may be reluctant to agree to
the negotiators.
productivity-enhancing work-rule changes to enhance job security if, in the past, it has
made similar concessions but believes that management did not stick to its assurance of Intraorganizational
greater job security. Thus the long-term relationship between the two parties can have a Bargaining
very important impact on negotiations and their outcomes. The part of the labor–
management negotiation
Intraorganizational bargaining reminds us that labor–management negotiations
process that focuses on
involve more than just two parties. Within management, and to an even greater extent the conflicting objectives
within the union, different factions can have conflicting objectives. High-seniority work- of factions within labor
ers, who are least likely to be laid off, may be more willing to accept a contract that and management.
has layoffs (especially if it also offers a significant pay increase for those whose jobs
are not at risk). Less senior workers would likely feel very differently. Thus negotiators
and union leaders must simultaneously satisfy both the management side and their own
internal constituencies. If they do not, they risk the union membership’s rejecting the
contract, or they risk being voted out of office in the next election. Management, too, is
unlikely to be of one mind about how to approach negotiations. Some will focus more
on long-term employee relations, others will focus on cost control, and still others will
focus on what effect the contract will have on stockholders.
MANAGEMENT’S PREPARATION FOR NEGOTIATIONS

Clearly, the outcome of contract negotiations can have important consequences for labor
costs and labor productivity and, therefore, for the company’s ability to compete in the
product market. Adapting Fossum’s discussion, we can divide management preparation
into the following seven areas, most of which have counterparts on the union side.47
1. Establishing interdepartmental contract objectives: The employer’s industrial
relations department needs to meet with the accounting, finance, production, mar-
keting, and other departments and set contract goals that will permit each depart-
ment to meet its responsibilities. As an example, finance may suggest a cost figure
above which a contract settlement would seriously damage the company’s financial
health. The bargaining team needs to be constructed to take these various interests
into account.
2. Reviewing the old contract: This step focuses on identifying provisions of the
contract that might cause difficulties by hindering the company’s productivity or
flexibility or by leading to significant disagreements between management and
the union.
3. Preparing and analyzing data: Information on labor costs and the productivity of
competitors, as well as data the union may emphasize, needs to be prepared and
analyzed. The union data might include cost-of-living changes and agreements
reached by other unions that could serve as a target. Data on employee demograph-
ics and seniority are relevant for establishing the costs of such benefits as pen-
sions, health insurance, and paid vacations. Finally, management needs to know
how much it would be hurt by a strike. How long will its inventory allow it to keep
meeting customer orders? To what extent are other companies positioned to step
in and offer replacement products? How difficult would it be to find replacement
workers if the company decided to continue operations during a strike?
4. Anticipating union demands: Recalling grievances over the previous contract, hav-
ing ongoing discussions with union leaders, and becoming aware of settlements
at other companies are ways of anticipating likely union demands and developing
potential counterproposals.
5. Establishing the cost of possible contract provisions: Wages have not only a direct
influence on labor costs but often an indirect effect on benefit costs (such as Social
Security and paid vacation). Recall that benefits add about 46 cents to every dol-
lar’s worth of wages. Also, wage or benefit increases that seem manageable in the
first year of a contract can accumulate to less manageable levels over time.
6. Preparing for a strike: If management intends to operate during a strike, it may
need to line up replacement workers, increase its security, and figure out how
to deal with incidents on the picket line and elsewhere. If management does not
intend to operate during a strike (or if the company will not be operating at normal
levels), it needs to alert suppliers and customers and consider possible ways to
avoid the loss of their business. This could even entail purchasing a competitor’s
product in order to have something to sell to customers.
7. Determining strategy and logistics: Decisions must be made about the amount of
authority the negotiating team will have. What concessions can it make on its own,
and which ones require it to check with top management? On which issues can
it compromise, and on which can it not? Decisions regarding meeting places and
times must also be made.
NEGOTIATION STAGES AND TACTICS

Negotiations go through various stages.48 In the early stages, many more people are often
present than in later stages. On the union side, this may give all the various internal interest
groups a chance to participate and voice their goals. This, in turn, helps send a message to
management about what the union feels it must do to satisfy its members, and it may also
help the union achieve greater solidarity. Union negotiators often present an extensive list of
proposals at this stage, partly to satisfy their constituents and partly to provide themselves
with issues on which they can show flexibility later in the process. Management may or
may not present proposals of its own; sometimes it prefers to react to the union’s proposals.
During the middle stages, each side must make a series of decisions, even though the
outcome is uncertain. How important is each issue to the other side? How likely is it that
disagreement on particular issues will result in a strike? When and to what extent should
one side signal its willingness to compromise on its position?
In the final stage, pressure for an agreement increases as the deadline for a strike
approaches. Public negotiations may be only part of the process. Negotiators from each
side may have one-on-one meetings or small-group meetings where public relations
pressures are reduced. In addition, a neutral third party may become involved, someone
who can act as a go-between or facilitator. In some cases, the only way for the parties to
convince each other of their resolve (or to convince their own constituents of the other
party’s resolve) is to allow an impasse to occur.
Various books suggest how to avoid impasses by using mutual gains or integra-
tive bargaining tactics. For example, Getting to Yes, by Roger Fisher and William Ury,
describes four basic principles:49
1. Separate the people from the problem.
2. Focus on interests, not positions.
3. Generate a variety of possibilities before deciding what to do.
4. Insist that the results be based on some objective standard.
BARGAINING POWER, IMPASSES, AND IMPASSE RESOLUTION

Employers’ and unions’ conflicting goals are resolved through the negotiation process
just described. An important determinant of the outcome of this process is the relative
bargaining power of each party, which can be defined as the “ability of one party to
achieve its goals when faced with opposition from some other party to the bargaining
process.”50 In collective bargaining, an important element of power is the relative abil-
ity of each party to withstand a strike. Although strikes in the United States are rare, the
threat of a strike often looms large in labor–management negotiations. The relative abil-
ity to take a strike, whether one occurs or not, is an important determinant of bargaining
power and, therefore, of bargaining outcomes.
MANAGEMENT’S WILLINGNESS TO TAKE A STRIKE

Management’s willingness to take a strike comes down to two questions:
1. Can the company remain profitable over the long run if it agrees to the union’s
demands? The answer is more likely to be yes to the extent that higher labor costs
can be passed on to consumers without losing business. This, in turn, is most likely
when the price increase is small because labor costs are a small fraction of total
costs or there is little price competition in the industry. Low price competition can
result from regulated prices, from competition based on quality (rather than price),
or from the union’s organizing all or most of the employers in the industry, which
eliminates labor costs as a price factor.
Unions share part of management’s concern with long-term competitiveness
because a decline in competitiveness can translate into a decline in employment
levels. On the other hand, the majority of union members may prefer to have higher
wages, despite employment declines, particularly if a minority of the members
(those with low seniority) suffer more employment loss and the majority keep their
employment with higher wages.
2. Can the company continue to operate in the short run despite a strike? Although
“hanging tough” on its bargaining goals may pay off for management in the long
run, the short-run concern is the loss of revenues and profits from production
being disrupted. The cost to strikers is a loss of wages and possibly a permanent
loss of jobs.
Under what conditions is management most able to take a strike? The following fac-
tors are important:51
1. Product demand: Management is less able to afford a strike when the demand for
its product is strong because that is when more revenue and profits are lost.
2. Product perishability: A strike by certain kinds of employees (farm workers at
harvest time, truckers transporting perishable food, airline employees at peak
travel periods) will result in permanent losses of revenue, thus increasing the cost
of the strike to management.
3. Technology: An organization that is capital intensive (versus labor intensive) is less
dependent on its employees and more likely to be able to use supervisors or others
as replacements. Telephone companies are typically able to operate through strikes,
even though installing new equipment or services and repair work may take signifi-
cantly longer than usual.
4. Availability of replacement workers: When jobs are scarce, replacement work-
ers are more available and perhaps more willing to cross picket lines. Using
replacement workers to operate during a strike raises the stakes considerably for
strikers who may be permanently replaced. Most strikers are not entitled to rein-
statement until there are job openings for which they qualify. If replacements
were hired, such openings may not occur for some time (if at all). In some cases,
companies can use managers to temporarily replace striking workers. For exam-
ple, decades ago, the third author of this text recalls his father, a manager at
Ohio Bell in Cleveland, going to New York Bell in New York State to cover for
jobs left open by striking workers. (Years before that, he was walking the picket
line on strike before he got promoted.) More recently, Caterpillar prepared for a
possible strike by “training managerial and support staff for production jobs” at
one of its plants.52
5. Multiple production sites and staggered contracts: Mul-

tiple sites and staggered contracts permit employers to shift
production from the struck facility to facilities that, even if
unionized, have contracts that expire at different times (so
they are not able to strike at the same time).
6. Integrated facilities: When one facility produces some-
thing that other facilities need for their products, the
employer is less able to take a strike because the disrup-
tion to production goes beyond that single facility. The
just-in-time production system, which provides very little
stockpiling of parts, further weakens management’s ability
to take a strike.
7. Lack of substitutes for product: A strike is more costly to
the employer if customers have a readily available alterna-
tive source from which to purchase the goods or services the
company provides.
As we see in the “Competing through Sustainability” box, Boeing
has gone to great lengths to give itself the option of building aircraft
in a nonunion plant and has used that capability as leverage in nego-
tiations with its unions.
Bargaining outcomes also depend on the nature of the bar-
gaining process and relationship, which includes the types of
tactics used and the history of labor relations. The vast major- © McGraw-Hill Education/Andrew Resek, Photographer
ity of labor–management negotiations do not result in a strike Management has several factors to consider
because a strike is typically not in the best interests of either before taking a strike. Most negotiations do
not result in a strike since it is often not in
party. Furthermore, both the union and management usually
the best interests of either party.
realize that if they wish to interact effectively in the future, the
experience of a strike can be difficult to overcome. When strikes
do occur, the conduct of each party during the strike can also have a lasting effect on
labor–management relations. Violence by either side or threats of job loss by hiring
replacements can make future relations difficult.
IMPASSE RESOLUTION PROCEDURES: ALTERNATIVES TO STRIKES Mediation

A procedure for
Given the substantial costs of strikes to both parties, procedures that resolve conflicts resolving collective
without strikes have arisen in both the private and public sectors. Because many public bargaining impasses
sector employees do not have the right to strike, alternatives are particularly important by which a mediator
in that arena. with no formal author-
ity acts as a facilitator
Three often-used impasse resolution procedures are mediation, fact finding, and and go-between in the
arbitration. All of them rely on the intervention of a neutral third party, most typi- negotiations.
cally provided by the Federal Mediation and Conciliation Service (FMCS), which
must be notified 60 days prior to contract expiration and 30 days prior to a planned Fact Finder
change in contract terms (including a strike). Mediation is the least formal but most A person who reports
widely used of the procedures (in both the public and private sectors). One survey on the reasons for the
found it was used by nearly 40% of all large private sector bargaining units.53 labor–management dis-
pute and the views and
A mediator has no formal authority but, rather, acts as a facilitator and go-between
arguments of both sides
in negotiations. and offers a nonbinding
A fact finder, most commonly used in the public sector, typically reports on the rea- recommendation for
sons for the dispute, the views and arguments of both sides, and (in some cases) a settling the dispute.
The Give and Take of Contract Negotiations
Boeing machinists in Seattle the contract and further raises there. So far, the
voted narrowly (51 % to 49%) to are possible as a function of machinists union
ratify an eight-year collective changes in the cost of living. In (International Association of
bargaining contract with the com- return for these concessions Machinists and Aerospace Work-
pany. Boeing sought to control that help the company control its ers) has made little headway in
costs in the contract to enable it costs, Boeing stopped search- its efforts to organize that South
to compete in what it says is the ing for alternative locations to Carolina plant.
“ultracompetitive world of sell- produce the 777X jetliner and
ing jetliners.” Under the contract, promised it will produce it in DISCUSSION QUESTIONS
employees will take deep cuts to Seattle, thus keeping worker 1. How do you think workers at
their health care and retirement jobs there. The jetliner is due Boeing feel about taking cuts
benefits. The latter is the most to begin rolling off the line for to their health care and retire-
controversial, as it will follow delivery starting in the year ment? Why did they (narrowly)
an economy wide trend in the 2020. Boeing some years ago agree to the contract? What
United States over the past sev- opened its first nonunion plant was their alternative?
eral decades by freezing its pen- in South Carolina, a state with 2. Why did Boeing build the
sion (defined benefit) plan and very low unionization rates, and plant in South Carolina?
transferring workers to a 401(k) has used the plant as leverage SOURCES: J. Ostrower, “Union Cancels
(defined contribution) plan. in its negotiations with its union Boeing Vote,” The Wall Street Journal, April
Boeing was also success- workers. Recently, it upgraded 18–19, 2015, p. B3; J. Ostrower, “New Dreamliner
to Be Built at Nonunion Plant,” The Wall Street
ful in negotiating limited wage the production capabilities of Journal, July 31, 2014, www.wsj.com; J. Ostrower,
increases. It will provide a 1% the plant and will build its 787 “New Boeing Pact Wins Cost Controls,” The Wall
pay increase every other year of Dreamliner aircraft exclusively Street Journal, January 5, 2014, p. B3.
recommended settlement, which the parties are free to decline. That these recommenda-
tions are made public may give rise to public pressure for a settlement. Even if a fact
finder’s settlement is not accepted, the hope is that he or she will identify or frame issues
in such a way as to facilitate an agreement. Sometimes, for the simple reason that fact
finding takes time, the parties reach a settlement during the interim.
Arbitration The most formal type of outside intervention is arbitration, under which a solution is
A procedure for resolv- actually chosen by an arbitrator (or arbitration board). In some instances the arbitrator
ing collective bargain- can fashion a solution (conventional arbitration). In other cases the arbitrator must
ing impasses by which
an arbitrator chooses a
choose either the management’s or union’s final offer (final offer arbitration) on either
solution to the dispute. the contract as a whole or on an issue-by-issue basis. Traditionally, arbitrating the
enforcement or interpretation of contract terms (rights arbitration) has been widely
accepted, whereas arbitrating the actual writing or setting of contract terms (interest
arbitration, our focus here) has been reserved for special circumstances. These include
some public sector negotiations, where strikes may be especially costly (such as those by
police or firefighters) and a very few private-sector situations, where strikes have been
especially debilitating to both sides (the steel industry in the 1970s).54 One reason for
avoiding greater use of interest arbitration is a strong belief that the parties closest to the
situation (unions and management, not an arbitrator) are in the best position to effec-
tively resolve their conflicts.
606
Union and Management Interactions:

Contract Administration
GRIEVANCE PROCEDURE
Although the negotiation process (and the occasional resulting strike) receive the
most publicity, the negotiation process typically occurs only about every three
years, whereas contract administration goes on day after day, year after year. The
two processes—negotiation and administration—are linked, of course. Vague or
incomplete contract language developed in the negotiation process can make admin-
istration of the contract difficult. Such difficulties can, in turn, create conflict that
can spill over into the next negotiation process.55 Furthermore, events during the
negotiation process—strikes, the use of replacement workers, or violence by either
side—can lead to management and labor difficulties in working successfully under
a contract.
A key influence on successful contract administration is the grievance procedure
for resolving labor–management disputes over the interpretation and execution of the
contract. During World War II, the War Labor Board helped institutionalize the use of
arbitration as an alternative to strikes to settle disputes that arose during the term of the
contract. The soon-to-follow Taft-Hartley Act further reinforced this preference. Today
the great majority of grievance procedures have binding arbitration as a final step, and
only a minority of strikes occur during the term of a contract. (Most occur during the
negotiation stage.) Strikes during the term of a contract can be especially disruptive
because they are more unpredictable than strikes during the negotiation phase, which
occur only at regular intervals.
Beyond its ability to reduce strikes, a grievance procedure can be judged using three
criteria.56 First, how well are day-to-day contract questions resolved? Time delays and
heavy use of the procedure may indicate problems. Second, how well does the grievance
procedure adapt to changing circumstances? For example, if the company’s business
turns downward and the company needs to cut costs, how clear are the provisions relat-
ing to subcontracting of work, layoffs, and so forth? Third, in multiunit contracts, how
well does the grievance procedure permit local contract issues (like work rules) to be
included and resolved?57
From the employees’ perspective, the grievance procedure is the key to fair treat-
ment in the workplace, and its effectiveness rests both on the degree to which
employees feel they can use it without fear of recrimination and whether they believe
their case will be carried forward strongly enough by their union representative. The
duty of fair representation is mandated by the NLRA and requires that all bargaining Duty of Fair
unit members, whether union members or not, have equal access to and representa- Representation
tion by the union in the grievance procedure. Too many grievances may indicate a The National Labor
Relations Act require-
problem, but so may too few. A very low grievance rate may suggest a fear of filing ment that all bargaining
a grievance, a belief that the system is not effective, or a belief that representation is unit members have
not adequate. equal access to and
As Table 14.11 suggests, most grievance procedures have several steps prior to arbitra- representation by the
tion. Moreover, the majority of grievances are settled during the earlier steps of the pro- union.
cess, which is desirable both to reduce time delays and to avoid the costs of arbitration.
If the grievance does reach arbitration, the arbitrator makes the final ruling in the matter.
A series of Supreme Court decisions in 1960, commonly known as the Steelworkers’
Trilogy, established that the courts should essentially refrain from reviewing the merits
of arbitrators’ decisions and, instead, limit judicial review to the question of whether the
Table 14.11
Steps in a Typical Employee-initiated grievance
Grievance Procedure Step 1
a. Employee discusses grievance or problem orally with supervisor.
b. Union steward and employee may discuss problem orally with supervisor.
c. Union steward and employee decide (1) whether problem has been resolved or (2) if
not resolved, whether a contract violation has occurred.
Step 2
a. Grievance is put in writing and submitted to production superintendent or other
designated line manager.
b. Steward and management representative meet and discuss grievance. Manage-
ment’s response is put in writing. A member of the industrial relations staff may be
consulted at this stage.
Step 3
a. Grievance is appealed to top line management and industrial relations staff repre-
sentatives. Additional local or international union officers may become involved in
discussions. Decision is put in writing.
Step 4
a. Union decides on whether to appeal unresolved grievance to arbitration according
to procedures specified in its constitution and/or bylaws.
b. Grievance is appealed to arbitration for binding decision.
Discharge grievance
a. Procedure may begin at step 2 or step 3.
b. Time limits between steps may be shorter to expedite the process.
Union or group grievance
a. Union representative initiates grievance at step 1 or step 2 on behalf of affected
class of workers or union representatives.
SOURCE: From H. C. Katz, T. A. Kochan, and A. J. S. Colvin, An Introduction to Collective Bargaining and Industrial
Relations, 2008. Reprinted with permission of The McGraw-Hill Companies, Inc.
issue was subject to arbitration under the contract.58 Furthermore, unless the contract
explicitly states that an issue is not subject to arbitration, it will be assumed that arbitra-
tion is an appropriate means of deciding the issue. Giving further strength to the role of
arbitration is the NLRB’s general policy of deferring to arbitration.
What types of issues most commonly reach arbitration? Data from the FMCS on
a total of 2,473 grievances show that discharge and disciplinary issues topped the
list with 913 cases.59 Other frequent issues include the use of seniority in promotion,
layoffs, transfers, work assignments, and scheduling (309 cases); wages (178); and
benefits (127).
What criteria do arbitrators use to reach a decision? In the most common case—
discharge or discipline—the following due process questions are important:60
1. Did the employee know what the rule or expectation was and what the conse-
quences of not adhering to it were?
2. Was the rule applied in a consistent and predictable way? In other words, are all
employees treated the same?
3. Are facts collected in a fair and systematic manner? An important element of this
principle is detailed record keeping. Both employee actions (such as tardiness) and
management’s response (verbal or written warnings) should be carefully documented.
4. Does the employee have the right to question the facts and present a defense? An
example in a union setting is a hearing with a shop steward present.
5. Does the employee have the right to appeal a decision? An example is recourse to
an impartial third party, such as an arbitrator.
6. Is there progressive discipline? Except perhaps for severe cases, an arbitrator will
typically look for evidence that an employee was alerted as early as possible that
behavior was inappropriate and the employee was given a chance to change prior to
some form of severe discipline, such as discharge.
7. Are there unique mitigating circumstances? Although discipline must be consis-
tent, individuals differ in terms of their prior service, performance, and discipline
record. All of these factors may need to be considered.
COOPERATIVE LABOR–MANAGEMENT STRATEGIES

Jack Barbash described the nature of the traditional relationship between labor and man- LO 14-5
agement (during both the negotiation and administration phases) as follows: Describe new, less
adversarial approaches
Bargaining is a love–hate, cooperation–conflict relationship. The parties have a common to labor–management
interest in maximizing the total revenue which finances their respective returns. But they take relations.
on adversarial postures in debating how the revenue shall be divided as between wages and
profits. It is the adversarial posture which has historically set the tone of the relationship.61
Although there had always been exceptions to the adversarial approach, one read-
ing is that there has been a general trend toward less adversarial workplace relations
(at least where the union’s role is accepted by management).62 This transformation has
two basic objectives: (1) to increase the involvement of individuals and work groups
in overcoming adversarial relations and increasing employee commitment, motivation,
and problem solving and (2) to reorganize work so that work rules are minimized and
flexibility in managing people is maximized. These objectives are especially important
for companies that need to be able to shift production quickly in response to changes
in markets and customer demands. The specific programs aimed at achieving these
objectives include employee involvement in decision making, self-managing employee
teams, labor–management problem-solving teams, broadly defined jobs, and sharing of
financial gains and business information with employees. Examples include the labor–
management relationships at Ford, Harley-Davidson, and Chrysler’s engine plant in
Dundee, Michigan.63
The Dundee engine plant is not only an example of a new approach to labor rela-
tions. It also has the blessing of the United Auto Workers (UAW). Why? According
to the president of the UAW local, “It’s a question of survival.” Hourly workers at
the plant are highly educated and skilled and rotate through different jobs to provide
skill flexibility to support production flexibility, engage workers, and reduce repeti-
tive motion injuries. Unlike a traditional plant where there can be scores of hourly job
classifications/titles, the Dundee plant has only two: team member of team leader.
There are no supervisors. Team leaders, rather than only observing, work alongside
teams of six team members. The guiding principles are captured by what are called
the “four As”: “anyone can do anything anytime, anywhere.” That is much different
from the more typical idea of “if it’s not in my job description, I don’t have to do
it, I won’t do it, and if I did do it, I would probably get in trouble.” The UAW was
concerned at first with the “four As” approach because without narrow job descrip-
tions, management has more discretion, workers less discretion, in what workers do
each day. As the UAW put it, it could allow management to “pull out anybody, any-
time.” However, the need for flexibility in production is so central to the success of
the plant in a global competitive environment and to Chrysler being willing to make
future investments (the key to jobs) in the plant that the UAW leadership agreed. The
team approach, job rotation, and flexibility expectations translate into higher skill and
education requirements. Hourly workers at the plant must have a two-year technical
degree, hold a skilled journeyman’s card, or have had several years of experience in
advanced manufacturing.64
Union resistance to such programs has often been substantial, precisely because the
programs seek to change workplace relations and the role that unions play. Without the
union’s support, these programs are less likely to survive and less likely to be effective
if they do survive.65 Union leaders have often feared that such programs will weaken
unions’ role as an independent representative of employee interests. Indeed, according to
the NLRA, to “dominate or interfere with the formation or administration of any labor
organization or contribute financial or other support to it” is an unfair labor practice. An
example of a prohibited practice is “taking an active part in organizing a union or com-
mittee to represent employees.”66
One case that has received much attention is that of Electromation, a small electrical
parts manufacturer. In 1992 the NLRB ruled that the company had violated Section 8(a)
(2) of the NLRA by setting up worker–management committees (typically about six work-
ers and one or two managers) to solve problems having to do with absenteeism and pay
scales.67 The original complaint was filed by the Teamsters union, which was trying to
organize the (nonunion) company and felt that the committees were, in effect, illegally com-
peting with them to be workers’ representatives. Similarly, Polaroid dissolved an employee
committee that had been in existence for over 40 years in response to the U.S. Department
of Labor’s claim that it violated the NLRA. The primary functions of the employee com-
mittee had been to represent employees in grievances and to advise senior management
on issues such as pay and company rules and regulations. In a third case, the NLRB ruled
in 1993 that seven worker–management safety committees at DuPont were illegal under
the NLRB because they were dominated by management. The committee members were
chosen by management and their decisions were subject to the approval of the management
members of the committees. Finally, the committees made decisions about issues that were
mandatory subjects of bargaining with the employees’ elected representative—the chemi-
cal workers’ union.68 The impact of such cases will be felt both in nonunion companies, as
union organizers move to fill the worker representation vacuum, and in unionized compa-
nies, as managers find they must deal more directly and effectively with their unions.
Employers must take care that employee involvement meets the legal test, but the
NLRB has clearly supported the legality of involvement in important cases. For exam-
ple, in a 2001 ruling, the NLRB found that the use of seven employee participation
committees at a Crown Cork & Seal aluminum can manufacturing plant did not violate
federal labor law. The committees in question make and implement decisions regarding
a wide range of issues, including production, quality, training, safety, and certain types
of worker discipline. The NLRB determined that these committees were not employer-
dominated labor organizations, which would have violated federal labor law. Instead of
“dealing with” management in a bilateral manner where proposals are made that are
either rejected or accepted by management, the teams and committees exercise author-
ity, delegated by management, to operate the plant within certain parameters. Indeed, the
NLRB noted that rather than “dealing with management,” the evidence indicated that
within delegated areas of authority, the teams and committees “are management.” This
authority was found to be similar to that delegated to a first-line supervisor. Thus the
charge that the teams and committees did not have final decision-making authority (and
so were not acting in a management capacity) did not weigh heavily with the NLRB,
which noted, “Few, if any, supervisors in a conventional plant have authority that is final
Table 14.12
Primary factors to look for that could mean a team violates national labor law: When Teams May Be
Representation Does the team address issues affecting nonteam Illegal
employees? (Does it represent other workers?)
Subject matter Do these issues involve matters such as wages, griev-
ances, hours of work, and working conditions?
Management involvement Does the team deal with any supervisors, managers, or
executives on any issue?
Employer domination Did the company create the team or decide what it
would do and how it would function?
SOURCE: From BusinessWeek, January 25, 1993.
and absolute.” Instead, it was noted that managers typically make recommendations that
move up through “the chain of command.”69 (Table 14.12)
Although there are legal concerns to address, some evidence suggests that these new
approaches to labor relations—incorporating greater employee participation in decisions,
using employee teams, multiskilling, rotating jobs, and sharing financial gains—can con-
tribute significantly to an organization’s effectiveness,70 as well as to workers’ wages and
job satisfaction.71 Indeed, these practices are now often referred to as “high performance
work practices” or systems. One study, for example, compared the features of traditional
and transformational approaches to labor relations at Xerox.72 As Table 14.13 indicates,
the transformational approach was characterized by better conflict resolution, more shop-
floor cooperation, and greater worker autonomy and feedback in decision making. Fur-
thermore, compared with the traditional approach, transformational labor relations were
found to be associated with lower costs, better product quality, and higher productivity.
Several years ago, a presidential commission concluded that the evidence is “overwhelm-
ing that employee participation and labor–management partnerships are good for workers,
Table 14.13
PATTERN
Patterns in Labor–
DIMENSION TRADITIONAL TRANSFORMATIONAL Management
Relations Using
Conflict resolution Traditional and
Frequency of conflicts High Low Transformational
Speed of conflict resolution Slow Fast Approaches
Informal resolution of grievances Low High
Third- and fourth-step grievances High Low
Shop-floor cooperation
Formal problem-solving groups Low High
(such as quality, reducing scrap,
employment security)
Informal problem-solving activity Low High
Worker autonomy and feedback
Formal autonomous work groups Low High
Informal worker autonomous activity Low High
Worker-initiated changes in work design Low High
Feedback on cost, quality, and schedule Low High
SOURCE: Adapted from J. Cutcher-Gershenfeld, “The Impact on Economic Performance of a Transformation in Work-
place Relations,” Industrial and Labor Relations Review 44 (1991), pp. 241–60. Reprinted with permission.
firms, and the national economy.” National survey data also indicate that most employees
want more influence in workplace decisions and believe that such influence leads to more
effective organizations.73 Further evidence (see the Evidence-Based HR box) suggests that
these “high performance work practices” work well across countries.
EVIDENCE-BASED HR
A recent study provided a review of the effect of “high performance work systems”
(HPWSs) on business performance at the level of the plant and the firm. HPWSs are
human resource practices (e.g., selective hiring, strong training/development, worker
involvement in decision, pay for performance) that aim to increase worker contributions
to business performance. Conventional wisdom is that these practices are best-suited to
the United States or perhaps a few other countries (e.g., the United Kingdom) whose
organizations are seen as having an “Anglo-Saxon” approach to management and are not
likely to work as well in other countries due to the greater strength of unions, different
legal frameworks, and/or cultural differences. However, many global companies global-
ize their employment policies despite these differences and feel that they can be success-
ful. That is not to say that policies are executed in the exact same manner in all countries,
but the broad policies are consistent. For example, a company may involve workers in
decisions, but in Germany, it may be mandated in certain sectors of the economy, whereas
in the United States it is not, but done according to the employer’s choice. So, what does
the evidence from the study say? The following table reports the mean correlation, mean
r, between use of HPWSs and business performance, as well as the number of studies
conducted in each country, K, and the number of firms/establishments included, N, in
those k studies in each country. The 95% confidence interval is also reported. Results for
the four countries with the largest k outside of the United States are reported separately.
COUNTRY OR 95% CONFIDENCE

REGION K N MEAN r INTERVAL FOR MEAN r
United States 48 11,309 .23 .20 to .26

Non-United States 108 24,458 .22 .18 to .26
China 16 3,692 .35 .26 to .43
Korea 8 1,899 .26 .17 to .36
Spain 13 3,430 .20 .14 to .26
United Kingdom 13 2,758 .16 .06 to .26
These countries differ significantly in terms of national culture (see Chapter 15) and
in terms of union strength. (For example, in Spain, 70% of employees are covered by
collective bargaining agreements versus 13% in the United States.) In looking at this
pattern of results, ask yourself the following questions: (1) Is the mean r different in the
United States versus outside the United States? (2) Is the mean r negative in any country?
(3) Does the confidence interval include .00 for any country? Keeping in mind the caveat
that policies can (and sometimes must) be implemented differently in different countries,
what do these results say about the claim that policies must be tailored to the country?
SOURCE: T. Rabl, M. Jayasinghe, B. Gerhart, T. M. Kühlmann, “A Meta-Analysis of Country Differences in the High-
Performance Work System–Business Performance Relationship: The Roles of National Culture and Managerial
Discretion,” Journal of Applied Psychology 99, no. 6 (2014), pp. 1011–41.
Labor Relations Outcomes

The effectiveness of labor relations can be evaluated from management, labor, and
societal perspectives. Management seeks to control costs and enhance productivity and
quality. Labor unions seek to raise wages and benefits and exercise control over how
employees spend their time at work (such as through work rules). Each of the three par-
ties typically seeks to avoid forms of conflict (like strikes) that impose significant costs
on everyone. In this section we examine several outcomes.
STRIKES
Table 14.14 presents data on strikes in the United States that involved 1,000 or more
employees. Of the 11 large strikes in 2014, five were in health care (nurses) and two
were in education (teachers, professors). So most of the strikes involved white-collar
employees. Because strikes are more likely in large units, the lack of data on smaller
units is probably not a major concern, although such data would, of course, raise the
figure on the estimated time lost to strikes. For example, for the 1960s, this estimate
is 0.12% using data on strikes involving 1,000 or more employees versus 0.17% for
all strikes. Although strikes impose significant costs on union members, employers,
and society, it is clear from Table 14.14 that strikes are the exception rather than the
rule. Very little working time is lost to strikes in the United States (with annual work
hours of 1,800, less than 6 minutes per worker and less than one hour per unionized
worker in 2014) and their frequency in recent years is generally low by historical
standards. Does this mean that the industrial relations system is working well? Not
necessarily. Some would view the low number of strikes as another sign of labor’s
weakness.
Table 14.14
NUMBER OF PERCENTAGE
Work Stoppages
WORKERS OF TOTAL
Involving 1,000 or
YEAR STOPPAGES (THOUSANDS) WORKING TIME
More Workers
1950 424 1,698 0.26%

1955 363 2,055 0.16
1960 222 896 0.09
1965 268 999 0.10
1970 381 2,468 0.29
1975 235 965 0.09
1980 187 795 0.09
1985 54 324 0.03
1990 44 185 0.02
1995 31 192 0.02
2000 39 394 0.06
2005 22 100 <0.005
2010 11 45 <0.005
2011 19 113 <0.005
2012 19 148 <0.005
2013 15 55 <0.005
2014 11 34 <0.005
SOURCE: http://stats.bls.gov.
WAGES AND BENEFITS

Union workers receive higher wages and benefits. Table 14.15 provides a comparison
of union members to nonunion members using both a survey of working individuals
(CPS) and a survey of employers/establishments (NCS). In 2014, private-sector union-
ized workers received, on average, wages 26% higher than their nonunion counterparts.74
The effect of unions on total compensation is even higher because of an even larger
effect of unions on benefits.75 However, these are raw differences. To assess the net
effect of unions on wages more accurately, adjustments must be made.76 We now briefly
highlight a few of these.
The union wage effect is likely to be overestimated to the extent that unions can more
easily organize workers who are already highly paid or who are more productive. The
gap is likely to be underestimated to the extent that nonunion employers raise wages and
benefits in response to the perceived “union threat” in the hope that their employees will
then have less interest in union representation. When these and other factors are taken
into account, the net union advantage in wages, though still substantial, is reduced by
Table 14.15
Compensation, Union versus Nonunion Employees, United States, Worker Survey and Employer Survey
MEDIAN WEEKLY EARNINGS AND % IN UNION

(WORKER SURVEY)
MEDIAN WEEKLY EARNINGS
UNION UNION/
% IN UNION REPRESENTED NONUNION NONUNION
All 11.3 965 763 1.26

Men 11.9 1,013 840 1.21
Women 10.5 899 687 1.31
Occupation
Management & Professional 11.9 1,132 1,139 0.99
Service 10.6 751 482 1.56
Sales & Office 6.6 788 654 1.20
Natural Resources, Construction, 16.7 1,062 705 1.51
and Maintenance Operations
Production, Transportation, 15.1 830 614 1.35
and Material Moving
WAGES/SALARIES, BENEFITS, AND TOTAL COMPENSATION
(EMPLOYER SURVEY)
UNION UNION/
MEMBERS NONUNION NONUNION
Wages and Salaries 27.76 21.13 1.31

Benefits 18.74 8.70 2.15
Total Compensation 46.50 29.83 1.56
SOURCES: Median weekly earnings and percentages in union data are from U. S. Bureau of Labor Statistics, “Current Population Survey (CPS),” News
Release USDL-15-0072: Union Members – 2014, www.bls.gov. Wages/salaries, benefits, and total compensation data are from U. S. Bureau of Labor
Statistics, National Compensation Survey (NCS), “Employer Costs for Employee Compensation—December 2014,” News Release USDL-15-0386. The
worker survey includes civilian (private sector and public sector employees). The employer survey includes private sector employees only.
as much as one-half. The union benefits advantage is also reduced, but it remains larger
than the union wage effect, and the union effect on total compensation is therefore larger
than the wage effect alone.77
Beyond differences in pay and benefits, unions typically influence the way pay and
promotions are determined. Whereas management often seeks to deal with employees
as individuals, emphasizing performance differences in pay and promotion decisions,
unions seek to build group solidarity and avoid the possibly arbitrary treatment of
employees. To do so, unions focus on equal pay for equal work. Any differences among
employees in pay or promotions, they say, should be based on seniority (an objective
measure) rather than on performance (a subjective measure susceptible to favoritism). It
is very common in union settings for there to be a single rate of pay for all employees in
a particular job classification.
Although wages and benefits are higher for union members, job satisfaction is lower,
on average.78 Reasons include less positive perceptions of supervision, promotion oppor-
tunities, and the interest and discretion in their work.
PRODUCTIVITY
There has been much debate regarding the effects of unions on productivity.79 Unions
are believed to decrease productivity in at least three ways: (1) the union pay advan-
tage causes employers to use less labor and more capital per worker than they would
otherwise, which reduces efficiency across society; (2) union contract provisions may
limit permissible workloads, restrict the tasks that particular workers are allowed to per-
form, and require employers to use more employees for certain jobs than they otherwise
would; and (3) strikes, slowdowns, and working-to-rule (slowing down production by
following every workplace rule to an extreme) result in lost production.80
On the other hand, unions can have positive effects on productivity.81 Employees,
whether members of a union or not, communicate to management regarding how good a
job it is doing by either the “exit” or “voice” mechanisms. “Exit” refers to simply leaving
the company to work for a better employer. “Voice” refers to communicating one’s con-
cerns to management without necessarily leaving the employer. Unions are believed to
increase the operation and effectiveness of the voice mechanism.82 This, in turn, is likely
to reduce employee turnover and its associated costs. More broadly, voice can be seen
as including the union’s contribution to the success of labor–management cooperation
programs that make use of employee suggestions and increased involvement in deci-
sions. A second way that unions can increase productivity is (perhaps ironically) through
their emphasis on the use of seniority in pay, promotion, and layoff decisions. Although
management typically prefers to rely more heavily on performance in such decisions,
using seniority has a potentially important advantage—namely, it reduces competition
among workers. As a result, workers may be less reluctant to share their knowledge with
less senior workers because they do not have to worry about less senior workers taking
their jobs. Finally, the introduction of a union may have a “shock effect” on manage-
ment, pressuring it into tightening standards and accountability and paying greater heed
to employee input in the design and management of production.83
Although there is evidence that unions have both positive and negative effects on pro-
ductivity, most studies have found that union workers are more productive than nonunion
workers. Nevertheless, it is generally recognized that most of the findings on this issue
are open to a number of alternative explanations, making any clear conclusions diffi-
cult. For example, if unions raise productivity, why has union representation of employ-
ees declined over time, even within industries?84 A related concern is that unionized
establishments are more likely to survive where there is some inherent productivity
advantage unrelated to unionism that actually offsets a negative impact of unionism. If
so, these establishments would be overrepresented, whereas establishments that did not
survive the negative impact of unions would be underrepresented. Consequently, any
negative impact of unions on productivity would be underestimated.
PROFITS AND STOCK PERFORMANCE

Even if unions do raise productivity, a company’s profits and stock performance may still
suffer if unions raise costs (such as wages) or decrease investment by a greater amount.
Evidence shows that unions have a large negative effect on profits and that union coverage
tends to decline more quickly in firms experiencing lower shareholder returns, suggest-
ing that some firms become more competitive partly by reducing union strength.85 Simi-
larly, one study finds that each dollar of unexpected increase in collectively bargained
labor costs results in a dollar reduction in shareholder wealth. Another study estimates
that if policies were changed to encourage the unionization rate in the United States to
double, the value of shareholder equity in newly organized firms would be decreased by
4.3%.86 Other research suggests that investment in research and development is lower
in unionized firms.87 Strikes, although infrequent, lower shareholder returns in both the
struck companies and firms (like suppliers) linked to those companies.88 These research
findings describe the average effects of unions. The consequences of more innovative
union–management relationships for profits and stock performance are less clear.
The International Context

LO 14-6 Except for China, Russia, and Ukraine, the United States has more union members than
Explain how changes in any other country. (If one were to include only countries where workers can freely elect
competitive challenges union leaders of their own choosing, then the United States would arguably rank first in
(e.g., product market
union membership.) Yet, as Table 14.16 indicates, aside from France and Korea, the United
competition and global-
ization) are influencing States has the lowest unionization rate (union density) of any country in the table. Even
labor–management more striking are differences in union coverage, the percentage of employees whose terms
interactions. and conditions of employment are governed by a union contract. (See Table 14.16.) In
parts of western and northern Europe, it is not uncommon to have coverage rates of 80% to
90%, meaning that the influence of labor unions far outstrips what would be implied by
their membership levels.89 Why are the unionization rate and coverage comparatively low?
One explanation is that the United States does not have as strong a history of deep class-
based divisions in society as other countries do. For example, labor and social democratic
political parties are commonplace in western Europe, and they are major players in the
political process. Furthermore, the labor movement in western and northern Europe is
broader than that in the United States. It extends not just to the workplace but—through its
own or closely related political parties—directly into the national political process.
What is the trend in union membership rates and coverage? In the United States, we saw
earlier that the trend is clearly downward, at least in the private sector. Although there have
also been declines in membership rates in many other countries, coverage rates have stayed
high in many of these countries. In the United States, deregulation and competition from
foreign-owned companies have forced companies to become more efficient. Combined
with the fact that the union wage premium in the United States is substantially larger than
in other advanced industrialized countries, it is not surprising that management opposition
would be higher in the United States than elsewhere.90 This, in turn, may help explain why
the decline in union influence has been especially steep in the United States.
Table 14.16
MEMBERSHIP COVERAGE
Union Membership
PERCENTAGE OF PERCENTAGE OF and Union Coverage,
COUNTRY EMPLOYMENT (DENSITY)a EMPLOYMENTd Selected Countries
United States 10.8 13.3

Canada 27.2 31.5
Japan 17.8 —
Korea 9.9b —
Germany 17.7 48.0
Australia 17.0 39.8
Netherlands 17.6 —
France 7.7c 97.7e
United Kingdom 25.4 34.6
aData from 2013, unless noted otherwise.

b2011.
c2012.
dData from 2011, unless noted otherwise.

e2007.
SOURCES: OECD, StatExtracts: Labour, Trade Union, Trade Union Density, http://stats.oecd.org, extracted May 9,
2015; OECD, Employment Outlook 2012: Trade Union Density and Collective Bargaining Coverage, 1990 and Latest
Year, http://stats.oecd.org, extracted May 9, 2015.
It seems likely that—with the growing globalization of markets—labor costs and pro-
ductivity will continue to be key challenges. The European Union (EU) added 10 new
member countries in 2004, 2 more in 2007, and 1 more in 2013, bringing its total to 28
countries and more than 500 million people, or about 63% larger than the United States.
The newer EU countries (e.g., Bulgaria, Croatia, the Czech Republic, Poland, Romania,
Slovakia) have much lower wages than the existing EU countries. Closer to home, we
have the North American Free Trade Agreement among the United States, Canada, and
Mexico. These common market agreements mean that goods, services, and production
will continue to move more freely across international borders. Where substantial dif-
ferences in wages, benefits, and other costs of doing business (such as regulation) exist,
there will be a tendency to move to areas that are less costly, unless skills are unavail-
able or productivity is significantly lower there. Unless labor unions can increase their
productivity sufficiently or organize new production facilities, union influence is likely
to decline.
In addition to membership and coverage, the United States differs from western Europe
in the degree of formal worker participation in decision making. Works’ councils (joint
labor–management decision-making institutions at the enterprise level) and worker rep-
resentation on supervisory boards of directors (codetermination) are mandated by law in
countries such as Germany. The Scandinavian countries, Austria, and Luxembourg have
similar legislation. German works’ councils make decisions about changes in work or the
work environment, discipline, pay systems, safety, and other human resource issues. The
degree of codetermination on supervisory boards depends on the size and industry of
the company. For example, in German organizations having more than 2,000 employees,
half of the board members must be worker representatives. (However, the chairman of
the board, a management representative, can cast a tie-breaking vote.) In contrast, worker
representation on boards of directors in the United States is still rare.91
The works’ councils exist in part because collective bargaining agreements in coun-
tries such as Germany tend to be oriented toward industrywide or regional issues,
When in Germany, Do as the Germans Do?
The role of labor unions is much (This is not meant as a compli- belonged to did
larger in Germany than in the ment but rather indicates the nothing to help
United States. As Table 14.16 belief that there is a lack of con- him when his
shows, unions cover 48% of cern for worker welfare.) previous company closed and “All
employees in Germany versus McDonald’s originally I got were reminders to pay my
13% in the United States. Ger- resisted unionization in [union] dues.” He says “Verdi is
man unions hold seats on the Germany but eventually suc- striking itself to death” and that he
supervisory boards of major cumbed and now abides by enjoys working at Amazon. But he
German companies. Thus, industrywide wage agreements. observes, “If you’re anti-American,
German unions are used to hav- Amazon, however, is different it might not be the right place to
ing a great deal of influence. On in some ways. For example, it work.”
the other hand, Amazon, a U.S. opened warehouses in areas
company, has a goal of staying having high unemployment, DISCUSSION QUESTIONS
union free, whether it is in the making them perhaps more 1. Do you think the Verdi trade
United States or in Germany. focused on having a job than on union is anti-American? Do
This strategy has led to a clash having a trade union represent its goals for workers differ
of philosophies in Germany, them. Also, some say that as according to whether they are
Amazon’s second largest mar- an Internet-based firm, Amazon employed by an American or
ket after the United States and is relatively invisible and more German company?
where it employs more than difficult to pressure using the 2. We often read that companies
9,000 people. usual tactics. Further, given the must adapt their manage-
Amazon has a works council seasonal nature of its business, ment practices to the host
(required by German law), and Amazon uses many temporary country environment. Look-
it deals with worker representa- workers, who are more difficult ing at Amazon’s philosophy
tives “directly” (i.e., without the to organize. and its experience to date in
presence of a union). Verdi, a One standard union-organizing Germany, comment on the
major German labor union, has tactic being used (much as it is in degree to which that claim
been trying to change that, say- the United States), is the use of seems accurate.
ing that Amazon has “a culture strikes. Amazon says, however, 3. Do you think that Amazon
that we see as foreign.” Amazon they have not disrupted their will eventually follow the path
similarly says that, “Verdi and operations because “the over- of McDonald’s and agree to
Amazon do not go together.” whelming majority of employees labor union representation for
Amazon and its “U.S. way of showed up for work as usual.” its employees in Germany?
doing business” are sometimes One former union member, Ulrich
SOURCE: S. Sloat, “In Germany, Amazon
referred to as using a “Wild Kleinschmidt, who works at Keeps Unions at Bay,” The Wall Street Journal,
West” approach to management. Amazon, says the union he September 24, 2014, p. A1.
with less emphasis on local issues. However, competitive forces have led employers to
increasingly opt out of centralized bargaining, even in the countries best known for cen-
tralized bargaining, like Sweden and Germany.92
What happens when a company from a country with low union strength operates in
a country with high union strength? As the “Competing through Globalization” box
describes, in the case of Amazon, an American company operating in Germany, the
answer for now is that it is following its American strategy toward unions in Germany.
618
Another interesting example is Volkswagen, a German company operating an auto-

mobile production plant in Chattanooga, Tennessee, in the United States. It has a
strong, formal relationship with unions in Germany, but has no union in the United
States. Volkswagen has not actively opposed unionization at its U.S. plant (in contrast
to the opposition unions would face from many U.S. companies). The United Auto
Workers did not receive the necessary 50% + 1 votes in a recent representation elec-
tion to become the sole representative of workers at VW’s Chattanooga plant. More
recently, Volkswagen, it is said under pressure from its unions in Germany, announced
a new labor policy for its Chattanooga plant. Any labor group that receives (based
on an independent outside audit) support from at least 15% of workers can have on-
site space to post announcements and hold regular meetings with the plant’s human
resources department. Any group that receives support from at least 45% of workers
would additionally be able to meet every two weeks with plant managers. Note that
unlike in Germany, Volkswagen is thought to be unable to use a works council at the
Chattanooga plant because under U.S. labor law, it might be deemed an employer-
dominated labor organization. (See our earlier discussion of the Electromation case
and the closely related Table 14.12.)93
China is now the world’s second largest economy and one of its fastest growing.
Workers increasingly want to share in economic growth through higher wages and
more purchasing power. That means collective action can be expected to increase.
Indeed, recent research finds that the level of strike activity and labor unrest has
increased dramatically in China. Moreover, strikes, which were once predominantly
defensive/reactive (to protect what workers already had), have become increasingly
offensive/proactive (with the aim of achieving new gains for workers such as higher
wages). In some sense, China, on its economic development path, may be now going
through what the United States economy and labor relations went through many
decades ago.94
The Public Sector LO 14-7

Explain how labor
Unlike the private sector, union membership in the public sector grew in the 1960s and
relations in the public
1970s and remained fairly stable through the 1980s. As we saw earlier in Figure 14.3, sector differ from labor
in 2014 some 35.7% of government employees were union members. Like the NLRA relations in the private
in the private sector, changes in the legal framework contributed significantly to sector.
union growth in the public sector. One early step was the enactment in Wisconsin of
collective bargaining legislation in 1959 for its state employees.95 (However, things
change. A few years ago, Wisconsin’s governor signed a bill that stripped most state
and local employees of most of their collective bargaining rights.) Executive Order
10988 provided collective bargaining rights for federal employees in 1962. By the
end of the 1960s, most states had passed similar laws. The Civil Service Reform Act
of 1978, Title VII, later established the Federal Labor Relations Authority (modeled
after the NLRB). Many states have similar administrative agencies to administer their
own laws.
An interesting aspect of public sector union growth is that much of it has occurred in
the service industry and among white-collar employees—groups that have traditionally
been viewed as difficult to organize. The American Federation of State, County, and
Municipal Employees (AFSCME), with more than 1.6 million members, has several
hundred thousand members in health care and in white-collar occupations.96
In contrast to the private sector, strikes are illegal at the federal level of the public
sector and in most states. At the local level, all states prohibit strikes by police (Hawaii
being a partial exception) and firefighters (Idaho being the exception). Teachers and
state employees are somewhat more likely to have the right to strike, depending on the
state. In 2012, of the 19 work stoppages involving 1,000 or more workers, four were in
the public sector (local government—teachers, health care workers).
Nonunion Representation Systems

With unions now representing just 11.1% of U.S. workers, the question is to what degree
are forms of nonunion representation operating to cover the remaining 88.9% of work-
ers? Table 14.17 indicates that in one survey, about one-third (274 of 823) of nonunion
workers were covered by a representation system established by management. In other
words, more workers in this survey (274) were covered by nonunion representation sys-
tems than were covered by union-management collective bargaining contracts (170).
In addition, the perceptions of workers regarding how strongly worker representatives
“stand up” for them and how actively they consult with them about their ideas and con-
cerns were remarkably similar under management-established systems to those covered
under union collective bargaining agreements. That, of course, does not mean that a
nonunion representation system, which ordinarily does not have the same independence
and leverage as an elected labor union, is equivalent to having a collective bargaining
agreement and union. But, clearly, nonunion representation systems play an important
role in the workplace.97
Table 14.17
Worker Representation Systems, Union and Nonunion
NO COLLECTIVE BARGAINING
AGREEMENT (N = 823)
COLLECTIVE MANAGEMENT
BARGAINING ESTABLISHED
AGREEMENT SYSTEMa NO SYSTEM
(N = 170) (N = 274) (N = 549)
Representatives can be counted on to stand up for 84% 84% NA

workers, even if it means disagreeing with managementb
Representatives actively consult with workers about 77% 89% NA
their ideas and concernsb
Representatives actively consult with management over 100%c 77% NA
wages and benefits
N = 993 U.S. workers

aCovered by a “nonunion, management established system, where worker representatives meet with management.”
bSum of those responding either “To Some Extent” or “To a Great Extent.”
cEstimated.
SOURCE: John Godard and Carola Frege, “Labor Unions, Alternative Forms of Representation, and the Exercise of Authority Relations in U.S. Work-
places,” Industrial and Labor Relations Review, 6 (2013), pp. 142–168.
A LOOK BACK
The membership rate, and thus influence, of labor unions in the United States and
in many other long-industrialized countries has been on the decline in the private
sector. However, even in the United States, there continue to be companies (e.g.,
automobiles, health care, education, airlines) where labor unions represent a large
share of employees and thus play a major role in the operation and success of
those companies. In each of these situations, effective labor relations are crucial for
both companies and workers, as well as for society. Also, as we saw in the chapter
opening, workers can take collective action without formal union representation as
a possible means of improving their jobs.
QUESTIONS
1. many people picture labor union members as being men in blue-collar jobs in
manufacturing plants. is that accurate? are there certain types of jobs where
an employer can be fairly certain that employees will not join a union? Give
examples.
2. why do people join labor unions? would you be interested in joining a labor
union if given the opportunity? why or why not? As a manager, would you pre-
fer to work with a union or would you prefer that employees be unrepresented
by a union? Explain.
3. what led to a change in labor relations at Chrysler’s Dundee engine plant?
What was the nature of the change and do you think it is an important and sus-
tainable change?
4. what role do (or can) labor unions play in low-wage countries such as
Bangladesh?
SUMMARY
Labor unions seek to represent the interests of their mem- to actively resist the unionization of its employees. This,
bers in the workplace. Although this may further the cause together with a host of economic, legal, and other factors,
of industrial democracy, management often finds that has contributed to union losses in membership and bar-
unions increase labor costs while setting limits on the com- gaining power in the private sector. There are some indica-
pany’s flexibility and discretion in decision making. As a tions, however, that managements and unions are seeking
result, the company may witness a diminished ability to new, more effective ways of working together to enhance
compete effectively in a global economy. Not surprisingly, competitiveness while giving employees a voice in how
management in nonunion companies often feels compelled workplace decisions are made.
KEY TERMS
Checkoff provision, 586 Taft-Hartley Act, 592 Intraorganizational
Closed shop, 586 Associate union membership, 598 bargaining, 601
Union shop, 586 Corporate campaigns, 598 Mediation, 605
Agency shop, 586 Distributive bargaining, 601 Fact finder, 605
Maintenance of membership, 586 Integrative bargaining, 601 Arbitration, 606
Right-to-work laws, 586 Attitudinal structuring, 601 Duty of fair representation, 607
1. Why do employees join unions? 5. What are the features of traditional and nontraditional
2. What has been the trend in union membership in the labor relations? What are the potential advantages of the
United States, and what are the underlying reasons for “new” nontraditional approaches to labor relations?
the trend? 6. How does the U.S. industrial and labor relations system
3. What are the consequences for management and owners compare with systems in other countries, such as those in
of having a union represent employees? western Europe?
4. What are the general provisions of the National Labor
Relations Act, and how does it affect labor–management
interactions?
Would you join a union? Each of the following phrases

5. Better work hours 1 2 3 4 5
expresses an opinion about the effects of a union on employ-
ees’ jobs. For each phrase, circle a number on the scale to 6. Improved productivity 1 2 3 4 5
indicate whether you agree that a union would affect your 7. Better working conditions 1 2 3 4 5
job as described by the phrase. 8. Fewer accidents at work 1 2 3 4 5
9. More interesting work 1 2 3 4 5
Having a union Strongly Strongly 10. Easier handling of employee
would result in . . . Disagree Agree problems 1 2 3 4 5
1. Increased wages 1 2 3 4 5 11. Increased work disruptions 5 4 3 2 1
2. Improved benefits 1 2 3 4 5 12. More disagreements between
3. Protection from being fired 1 2 3 4 5 employees and management 5 4 3 2 1
4. More promotions 1 2 3 4 5 13. Work stoppages 5 4 3 2 1
Add up your total score. The highest score possible is SOURCE: Based on S. A. Youngblood, A. S. DeNisi, J. L. Molleston, and
W. H. Mobley, “The Impact of Work Environment, Instrumentality Beliefs,
65, the lowest 13. The higher your score, the more you see
Perceived Union Image, and Subjective Norms on Union Voting Intentions,”
value in unions, and the more likely you would be to join Academy of Management Journal 27 (1984), pp. 576–90.
a union.
EXERCISING STRATEGY
Board Rules That McDonald’s Is a Joint Employer with Its Franchisees
As we have seen, workers at McDonald’s and other fast food employ workers in the other 90% of stores. The NLRB stated
companies have been protesting to achieve a $15 minimum that “through its franchise relationship and its use of tools,
wage. We also saw that McDonald’s, while not raising its min- resources, and technology,” McDonald’s “engages in suffi-
imum wage that high, did raise it to at least $1 above the pre- cient control over its franchisees’ operations.”
vailing local (national, state, or municipal) minimum wage. It The ruling poses a threat to McDonald’s and other
said it did that in response to tightening labor conditions, not companies that use a franchise model. McDonald’s could
in response to the Fight for 15 protests. Some workers brought become at least partly responsible (including for the cost
a complaint against McDonald’s for retaliating against work- of litigation-related expenses) for any labor and/or employ-
ers who went out on strike to join the protests. Importantly, the ment law violations committed by its franchisees and there
National Labor Relations Board (NLRB) ruled in the case that are many (14,000) of them in far-flung places. The Service
McDonald’s, which owns only 10% of McDonald’s stores, is Employees International Union (SEIU) hopes the ruling will
a joint employer with its franchisees, which own, operate, and put pressure on large companies like McDonald’s to take
more responsibility for the actions of its franchisees, leading 3. Would having a union have been attractive to you as a
to better treatment of workers. way to improve the work environment?
4. Why, if the workers in the case are nonunion, would
QUESTIONS
they be bringing their case in front of the National Labor
1. Have you worked in a franchise store at McDonald’s or
Relations Board, which enforces the National Labor
someplace similar? If so, what was your impression of
Relations Act, the statute that gives employees the right
the amount of control exercised over the franchisee by
to form and join unions of their own choosing?
the parent company? How much coordination was there?
Should the parent be deemed a joint employer? SOURCES: “Obama’s Union McDouble,” (Editorial), The Wall Street Journal,
December 22, 2014, www.wsj.com; M. Trottman and J. Jargon, “NLRB Names
2. Again, if you had such a job, what were the working con-
McDonald’s as ‘Joint-Employer’ at Its Franchisees,” The Wall Street Journal,
ditions like? Were you satisfied with the job? Why or December 19, 2014, www.wsj.com.
why not?
MANAGING PEOPLE
Twinkies, HoHos, and Ding Dongs: No Treat for Labor Unions
Let’s talk about Twinkies, HoHos and Ding Dongs. They have according to the company, crippled its operations, ultimately
long been found in the snack food aisle and have even been leading the company to shut down.
described as having “a legendary history” (!). One fun fact: The company and the Bakers union expressed differ-
The cream inside a Twinkie was banana flavored for many ent views on the importance of the unionized bakers. The
years. But when World War II brought rationing, including of president of the Bakers union, David Durkee, stated that
bananas, Hostess changed the flavor of the cream to vanilla. because only members of the Bakers union knew how to run
OK, one more fun fact: Although there is an urban legend that the equipment in the plants used to bake snacks, the Bakers
Twinkies never go bad, it seems that the reality is they have union members would be hired back to work. In contrast,
a shelf life of about 25 days. That is considered quite a long the new owners of Hostess have said that they will be able
shelf life for a baked good product. What is the secret? It may to find capable nonunion workers in the areas where plants
be that Twinkies lack any dairy products. are re-opening, which are all located in areas where unem-
Unfortunately, whatever the flavor of the “cream” inside ployment is high. Prior to bankruptcy, Hostess plants had
or the shelf life of a Twinkie, the company that makes them, been running at less than 50% of capacity. Going forward,
Hostess Brands, recently declared bankruptcy. However, the plants are expected to run at 85% to 90% capacity, mak-
Metropoulos & Co. and Apollo Global, the new owners of ing production much more efficient and, presumably, allow-
Hostess Brands, will be reopening four bakery/plants, in hopes ing the company to make an adequate profit. Of course, if
of getting snacks to Twinkie-deprived consumers shortly. the nonunion workers to be used going forward are also less
One thing Hostess will not do going forward after re- costly, that will further bring costs down and profits up. The
opening plants is to use union workers. The 86-year-old caveat is that it remains to be seen whether new nonunion
company closed down and entered bankruptcy, in part, due bakers can quickly learn how to efficiently do the work in
to a nationwide strike by one of its unions. Chief Executive the plants. To avoid hiring Teamsters as drivers, Hostess
C. Dean Metropoulos said $60 million in capital investments plans to outsource driving/delivery and related tasks. It will
will be spent on the plants and that the plan is to hire at least also outsource sales.
1,500 workers. But Mr. Metropoulos in an interview made
his views on the role of unions clear: There will be no role. QUESTIONS
Hostess Brands Inc. once employed 19,000 workers. Of 1. Why did Hostess Brands Inc. go into bankruptcy?
those, 15,000 were represented by unions. The Teamsters 2. Did unions act in the best interests of the workers they
union, which represented the largest share of Hostess Brands represented? Did the two unions involved follow the
workers, after difficult negotiations, agreed to a new collective same strategy?
bargaining contract following the bankruptcy trial in court. In 3. Will the new company, Hostess Brands LLC, perform
contrast, the second-largest union, the Bakery, Confectionery, better? Why or why not?
Tobacco Workers & Grain Millers International Union, began
SOURCE: Rachel Feintzeig, “New Twinkie Maker Shuns Union Labor,” Wall
a nationwide work stoppage after failing to agree on a con- Street Journal, April 24, 2013; www.huffingtonpost.com/2012/11/16/twinkie-
tract with the company, which led to the company imposing a facts-12-things_n_2144143.html, accessed July 2, 2013; www.snopes.com/
new, less favorable contract on the union. The resulting strike, food/ingredient/twinkies.asp, accessed July 2, 2013.
Republic Gets Serious
announced plans to reopen the plant and rehire all the
When Serious Materials acquired Republic Windows and
300 employees who had been laid off when Republic closed
Doors, union–management relations got a much-needed breath
its doors. The resulting publicity quickly brought in inqui-
of fresh air. Republic had nearly vanished amidst economic
ries and even some paying customers.
meltdown and accusations of mismanagement and corruption.
Since the acquisition, the Republic story may be nearing
Serious Materials, by contrast, is a firm with a high-minded
its end. County prosecutors brought charges against Gillman
business strategy and a commitment to fair-mindedness.
for looting the business and stealing machinery for the Iowa
The problems became public when workers at Repub-
enterprise (which also failed, less than two months after it
lic staged a six-day sit-in at the Chicago factory, which had
launched). Because Republic had been in bankruptcy, the
been one of the largest window-glass factories in the United
equipment was not Gillman’s but belonged to his creditor,
States. When orders from construction companies stopped
GE. State’s Attorney Anita Alvarez said, “Just two weeks
coming in, management, after just three days’ warning,
before Christmas, in a dire economy, the company shut the
closed the plant without granting workers any severance pay
doors of their business and deserted their workers and all of
or giving the legally required 60 days’ notice, and filed for
their families.” Gillman denied the charges.
bankruptcy. Bowing to public pressure, the company’s lend-
A sign of Surace’s very different attitude toward his work-
ers, including Bank of America, reached an agreement to
force came a few months after the acquisition by Serious
give the workers $6,000 apiece in severance pay.
Materials, when Vice President Joe Biden came to visit the
But that wasn’t the end. The workers turned to the
Chicago facility. Biden was there to represent how the Obama
National Labor Relations Board with another complaint.
administration’s economic stimulus plan was supporting
They said Republic’s owner, Richard Gillman, had secretly
“green” initiatives. Surace noticed that onstage for the press
begun transferring the company’s machinery to a (non-
conference were various dignitaries but no representatives of
union) window-manufacturing facility he bought in Iowa
the workers. In spite of the Secret Service’s reluctance to add
just before closing the Chicago factory. In fact, all the equip-
last-minute guests, Surace insisted that workers have a face at
ment would have been gone, they said, except that their six-
the press conference. By the time the TV cameras were roll-
day occupation of the factory interfered with the plan—they
ing, the cast of dignitaries included Armando Robles, a main-
wouldn’t allow Gillman to enter. Employees also followed
tenance worker and the president of the employees’ union.
trucks carrying machinery to learn where it was being taken.
The union demanded that the machinery be returned to the
Chicago plant, so a new owner could operate it. QUESTIONS
Meanwhile, a hero arrived on the scene: Kevin Surace, 1. Richard Gillman attempted to stay in business by trans-
founder and chief executive of Serious Materials, a maker ferring work to a nonunion facility, and Kevin Surace
of eco-friendly building products, including energy-efficient plans to make the operation profitable as a union shop.
windows. Surace saw acquisition of the Republic facility as Do you think the decision to rely on union or nonunion
a chance to expand into the Chicago region with a ready- labor spells the difference between the success and fail-
made plant and equipment, not to mention trained people ure of this enterprise? Why or why not?
eager to work. 2. How (if at all) do you think Kevin Surace’s initial
When he decided to make an offer, Surace did something approach to the union when acquiring the company will
unusual: instead of talking first to the firms’ main creditors, influence the business success of the window factory?
he made his first visit to the employees’ union, the United 3. Imagine that Serious Materials has hired you as an HR
Electrical, Radio, and Machine Workers of America. He met consultant for the Chicago window factory. Suggest how
with the union’s president, Carl Rosen, as well as several the company can build on its initial goodwill with work-
Republic workers. Rosen recalled that Surace’s reasoning ers to create positive labor relations and a highly moti-
was that for the deal to work, he needed a skilled workforce. vated workforce for the long run.
The parties agreed that Serious Materials would make the SOURCES: Robert Mitchum, “Republic Workers File Labor Charges,”
facility a union shop, and employees would be paid their for- Chicago Tribune, January 7, 2009, NewsBank, http://infoweb.newsbank.com;
mer salaries and receive credit for their seniority at Repub- Robert Mitchum, “Former Republic Workers Find Hope,” Chicago Tribune,
lic. Only then did Surace approach Bank of America. The January 15, 2009, NewsBank, http://infoweb.newsbank.com; Annie Sweeney
and Matthew Walberg, “Tables Turn on Man Who Shut Republic Windows,”
bank initially wasn’t interested, so Surace went to General Chicago Tribune, September 11, 2009, NewsBank, http://infoweb.newsbank.
Electric, owner of the lease on the equipment, and bought com; and Leigh Buchanan, “Entrepreneur of the Year: Kevin Surace of Serious
out the lease, a coup that convinced the bank to sell. Surace Materials,” Inc., December 2009, www.inc.com.
NOTES
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Effects on Productivity”; Katz and Kochan, An Introduction to Col- (Ithaca, NY: ILR Press/Cornell University, 2004).
lective Bargaining; Lineneman et al., “Evaluating the Evidence.” 93. A. Young, “UAW Welcomes Volkswagen Policy Shift After Years
85. B. E. Becker and C. A. Olson, “Unions and Firm Profits,” Indus- of Failing to Gain Traction in Anti-Union South,” International
trial Relations 31, no. 3 (1992), pp. 395–415; B. T. Hirsch and Business Times, accessed May 13, 2015, www.ibtimes.com.
B. A. Morgan, “Shareholder Risks and Returns in Union and 94. M. Elfstrom and S. Kuruvilla, “The Changing Nature of Unrest
Nonunion Firms,” Industrial and Labor Relations Review 47, in China,” Industrial and Labor Relations Review April 2014,
no. 2 (1994), pp. 302–18. Hristos Doucouliagos and Partice pp. 453–80.
Laroche, “Unions and Profits: A Meta-Regression Analysis,” 95. J. F. Burton and T. Thomason, “The Extent of Collective Bar-
Industrial Relations 48, no. 1 (January 2008), p. 146. gaining in the Public Sector,” in Public Sector Bargaining, ed.
86. David S. Lee and Alexandre Mas, “Long-run Impacts of Unions B. Aaron, J. M. Najita, and J. L. Stern (Washington, DC: Bureau
on Firms: New Evidence from Financial Markets, 1961–1999,” of National Affairs, 1988).
Quarterly Journal of Economics, 127 (2012), pp. 333–378. 96. www.afscme.org.
87. Addison and Hirsch, “Union Effects on Productivity.” See also 97. John Godard and Carola Frege, “Labor Unions, Alternative
B. T. Hirsch, Labor Unions and the Economic Performance of Forms of Representation, and the Exercise of Authority Rela-
Firms (Kalamazoo, MI: W. E. Upjohn Institute, 1991); J. M. tions in U.S. Workplaces,” Industrial and Labor Relations
Abowd, “The Effect of Wage Bargains on the Stock Market Review, 66 (2013), pp. 142–168; Paul J. Gollan and David
Value of the Firm,” American Economic Review 79 (1989), pp. Lewin, “Employee Representation in Non-Union Firms: An
774–800; Hirsch, Labor Unions. Overview,” Industrial Relations, 52 (2013), pp. 173–193.
Managing Human
Resources Globally
15
C H A P T E R
LEARNING OBJECTIVES
LO 15-1 Identify the recent changes that have caused companies

to expand into international markets. page 631
LO 15-2 Discuss the four factors that most strongly influence

HRM in international markets. page 633
LO 15-3 List the different categories of international employees. page 642

LO 15-4 Identify the four levels of global participation and the
HRM issues faced within each level. page 642
LO 15-5 Discuss the ways companies attempt to select, train, compensate,

and reintegrate expatriate managers. page 646
628
>>>
Walmart’s Global Strategy
Walmart’s international division has an important job.
With 80% of the retail industry’s growth coming from
outside of the United States, Wal-Mart international’s
$137 billion in sales in 2014, 29% of sales overall, is a
key driver of overall revenue growth. In order to drive
this performance, David Cheesewright, CEO of Wal-
Mart’s international division, is focusing on current
operations in growth markets and e-commerce.
Shopping trends indicate that what customers buy
is changing fast, and that they are quickly switching
to online shopping platforms. After decades of work
trying to develop a foundation in the Chinese market, © Bloomberg/Contributor
Walmart is consolidating its portfolio of stores in that
country, closing nonperforming retail stores and invest-
ing in successful ones. To enter the Chinese e-grocery
market, Walmart holds a 51% stake in Yihaodian, which International expansion comes with country-
has posted triple-digit growth—twice the market rate. specific challenges. After experiencing too many reg-
The company’s operations in Brazil and Mexico ulatory difficulties in India, Walmart canceled plans
are experiencing slowing growth, in part a result of to open retail stores there. Instead, Walmart India is
economic cycles and their brand’s lifecycle, but they focusing on business-to-business sales.
still offer the opportunity to develop strong, mature SOURCE: S. Banjo, “Wal-Mart’s Strategy to Jump Start Growth in China,”
businesses. The Wall Street Journal, August 5, 2014, www.wsj.com.
Introduction
The environment in which business competes is rapidly becoming globalized. More and
more companies are entering international markets by exporting their products overseas,
building plants in other countries, and entering into alliances with foreign companies. Back
in the middle of the 1980s, 61 of the top 100 organizations had their headquarters in the
United States. By 2004 that number had dropped to 35, and as you can see in Table 15.1, of
the world’s largest 25 organizations in 2014, only 7 were headquartered in the United States,
with 10 in Europe and 7 in Asia. Of Fortune magazine’s Global 500 (the 500 largest com-
panies by revenues), 128 are headquartered in the United States, with 95 headquartered in
China. In addition, in 2014 Toyota maintained its lead as the world’s top automobile manu-
facturer, selling 10.23 million vehicles worldwide, closely followed by Volkswagen with
10.14 million vehicles, and General Motors with sales of 9.92 million vehicles.1
Forbes magazine lists its top 2000 global companies, and identifies a subset that exhib-
its exceptional growth rates which they dub “Global High Performers.” In 2011, 69 of
the 130 high-performer companies (those standing out from their peers in growth, return
to investors, and future prospects) were headquartered outside of the United States.2
629
630 CHAPTER 15 Managing Human Resources Globally
Table 15.1
REVENUES PROFITS
2014 Fortune
RANK COMPANY ($ MILLIONS) ($ MILLIONS)
Global 500
1 Wal-Mart Stores 476,294 16,022
2 Royal Dutch Shell 459,599 16,371
3 Sinopec Group 457,201 8,932
4 China National Petroleum 432,007 18,504
5 Exxon Mobil 407,666 32,580
6 BP 396,217 23,451
7 State Grid 333,386 7,982
8 Volkswagen 261,539 12,071
9 Toyota Motor 256,454 18,198
10 Glencore 232,694 –7402
11 Total 227,882 11,204
12 Chevron 220,356 21,423
13 Samsung Electronics 208,938 27,245
14 Berkshire Hathaway 182,150 19,476
15 Apple 170,910 37,037
16 AXA 165,893 5,950
17 Gazprom 165,016 35,769
18 E.ON 162,560 2,843
19 Phillips 66 161,175 3,726
20 Daimler 156,628 9,083
21 General Motors 155,427 5,346
22 ENI 154,108 6,850
23 Japan Post Holdings 152,125 4,782
24 EXOR Group 150,996 2,768
25 Industrial & Commercial Bank of China 148,802 42,718
SOURCE: From Fortune. © 2014 Time Inc. Used under license.
In addition, cross-border mergers (e.g., Merck/Schering-Plough, New York Stock

Exchange/Deutche Bourse, etc.) are increasing. In fact, in 2011, 30% of all mergers were
of companies headquartered in different countries, and the total value of cross-border
mergers was up by 56%.3
Most organizations now function in the global economy. U.S. businesses are entering
international markets at the same time foreign companies are entering the U.S. market.
What is behind the trend toward expansion into global markets? Companies are attempt-
ing to gain a competitive advantage, which can be provided by international expansion in
a number of ways. First, these countries are new markets with large numbers of potential
customers. For companies that are producing below their capacity, they provide a means
of increasing sales and profits. Second, many companies are building production facili-
ties in other countries as a means of capitalizing on those countries’ lower labor costs for
relatively unskilled jobs. For example, many of the maquiladora plants (foreign-owned
plants located in Mexico that employ Mexican laborers) provide low-skilled labor at con-
siderably lower cost than in the United States. In 2011 the average hourly compensation
cost in Mexico was $6.48, versus $35.53 in the United States.4 Third, the rapid increase in
telecommunications and information technology enables work to be done more rapidly,
efficiently, and effectively around the globe. With the best college graduates available
Staying Connected to Work 24/7: Good or Bad?
In order to better enable that this resulted in them work- Technology
employees (particularly execu- ing more hours. has changed the
tives) to stay connected to the Determining if the time nature of work and is now chang-
office, many companies have requires compensation is nei- ing the nature of work time. Com-
issued them smartphones. How- ther easy nor cut and dried, panies face numerous challenges
ever, staying connected may particularly given how new the in managing this emerging trend.
make the blurring of work and issue is. For instance, an hourly
nonwork problematic from a Verizon sales employee who DISCUSSION QUESTION
legal perspective. Some employ- frequently gets calls from cus- Do you think employees who
ees now claim that if they have tomers asking for help during have company-issued phones
to stay connected and do work nonwork hours may be eligible should be compensated when
via their phones, this is compen- for pay. On the other hand, an using them for work during non-
sable time at work. executive making $100,000 per work hours? What if they are
According to a Pew Research year and working 70 hours a using their personal phones?
poll, about 44% of Internet users week probably does not need to
reported that they regularly per- be compensated for using her SOURCE: L. Weber, “Can You Sue the Boss
for Making You Answer Late-Night Email?”
formed work tasks outside of phone on work-related activities The Wall Street Journal, May 20, 2015, www.
work hours, and 35% reported during nonwork hours. wsj.com.
for $2.00 an hour in India versus $12–$18 an hour in the United States, companies can
hire the best talent (resulting in better work) at a lower cost. And because their day is our
night, work done in the United States can be handed off to those in India for a 24/7 work
process.5 The “Competing through Technology” box illustrates some of the pitfalls of the
constant use of technology to stay linked to the workplace.
Deciding whether to enter foreign markets and whether to develop plants or other
facilities in other countries, however, is no simple matter, and many human resource
issues surface.
This chapter discusses the human resource issues that must be addressed to gain com-
petitive advantage in a world of global competition. This is not a chapter on international
human resource management (the specific HRM policies and programs companies use to
manage human resources across international boundaries).6 The chapter focuses instead
on the key factors that must be addressed to strategically manage human resources in an
international context. We discuss some of the important events that have increased the
global nature of business over the past few years. We then identify some of the factors
that are most important to HRM in global environments. Finally, we examine particular
issues related to managing expatriate managers. These issues present unique opportuni-
ties for firms to gain competitive advantage.
LO 15-1
Current Global Changes Identify the recent
changes that have
Several recent social and political changes have accelerated the movement toward inter- caused companies to
national competition. The effects of these changes have been profound and far-reaching. expand into interna-
Many are still evolving. In this section we discuss the major developments that have tional markets.
631
accentuated the need for organizations to gain a competitive advantage through effec-
tively managing human resources in a global economy.
EUROPEAN UNION
European countries have managed their economies individually for years. Because of the
countries’ close geographic proximity, their economies have become intertwined. This
created a number of problems for international businesses; for example, the regulations of
one country, such as France, might be completely different from those of another country,
such as Germany. In response, most of the European countries agreed to participate in the
European Economic Community (EEC), which began in 1992. The EEC is a confedera-
tion of most of the European nations that agree to engage in free trade with one another,
with commerce regulated by an overseeing body called the European Commission (EC).
Under the EEC, legal regulation in the participating countries has become more, although
not completely, uniform. Assuming the EEC’s trend toward free trade among members
continues, Europe has become one of the largest free markets in the world. In addition,
as of 1999, all of the members of the European Economic Community share a common
currency, the euro. This ties the members’ economic fates even more closely with one
another. In addition to the previous 15 EU states, as of May 1, 2004, 12 EU accession
states—Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,
Poland, Romania, Slovakia, and Slovenia—were added to the EU, expanding the economic
zone covered by the European Union. In 2013, Croatia was added to the EU, and Iceland,
Montenegro, Serbia, Macedonia and Turkey are candidates to be admitted into the EU.
NORTH AMERICAN FREE TRADE AGREEMENT

The North American Free Trade Agreement (NAFTA) is an agreement among Canada,
the United States, and Mexico that has created a free market even larger than the Euro-
pean Economic Community. The United States and Canada already had a free trade
agreement since 1989, but NAFTA brought Mexico into the consortium. The agreement
was prompted by Mexico’s increasing willingness to open its markets and facilities in an
effort to promote economic growth.7 As previously discussed, the maquiladora plants
exemplify this trend. In addition, some efforts have been made to expand the member-
ship of NAFTA to other Latin American countries, such as Chile.
NAFTA has increased U.S. investment in Mexico because of Mexico’s substantially
lower labor costs for low-skilled employees. This has had two effects on employment in
the United States. First, many low-skilled jobs went south, decreasing employment oppor-
tunities for U.S. citizens who lack higher-level skills. Second, it has increased employment
opportunities for Americans with higher-level skills beyond those already being observed.8
THE GROWTH OF ASIA

An additional global market that is of economic consequence to many firms lies in Asia.
Whereas Japan has been a dominant economic force for over 20 years, recently countries
such as Singapore, Hong Kong, and Malaysia have become significant economic forces.
In addition, China, with its population of more than 1 billion and trend toward open-
ing its markets to foreign investors, presents a tremendous potential market for goods.
In fact, a consortium of Singaporean companies and governmental agencies has jointly
developed with China a huge industrial township in eastern China’s Suzhou City that
will consist of ready-made factories for sale to foreign companies.9 While Asia has been
affected by the recent recession, the main impact has only been to slow its rate of growth.
CHAPTER 15 Managing Human Resources Globally 633
GENERAL AGREEMENT ON TARIFFS AND TRADE

The General Agreement on Tariffs and Trade (GATT) is an international framework of
rules and principles for reducing trade barriers across countries around the world. It cur-
rently consists of more than 100 member-nations. The most recent round of GATT negotia-
tions resulted in an agreement to cut tariffs (taxes on imports) by 40%, reduce government
subsidies to businesses, expand protection of intellectual property such as copyrights and
patents, and establish rules for investing and trading in services. It also established the
World Trade Organization (WTO) to resolve disputes among GATT members.
These changes—the European Economic Community, NAFTA, the growth of Asia,
and GATT—all exemplify events that are pushing companies to compete in a global
economy. These developments are opening new markets and new sources of technology
and labor in a way that has never been seen in history. However, this era of increasing
international competition accentuates the need to manage human resources effectively to
gain competitive advantage in a global marketplace. This requires understanding some of
the factors that can determine the effectiveness of various HRM practices and approaches.
Factors Affecting HRM in Global Markets

Companies that enter global markets must recognize that these markets are not simply LO 15-2
mirror images of their home country. Countries differ along a number of dimensions that Discuss the four factors
influence the attractiveness of direct foreign investment in each country. These differ- that most strongly influ-
ence HRM in interna-
ences determine the economic viability of building an operation in a foreign location,
tional markets.
and they have a particularly strong impact on HRM in that operation. Researchers in
international management have identified a number of factors that can affect HRM in
global markets, and we focus on four factors, as depicted in Figure 15.1: culture,
education–human capital, the political–legal system, and the economic system.10 The
“Competing through Globalization” box provides an example of the kinds of things
firms must address before deciding whether or not to set up operations in parts of Africa.
Figure 15.1
Culture Education– Factors Affecting
human capital Human Resource
Management in
International Markets
Human resource
management
Economic Political–
system legal system
Risks and Rewards of Doing Business in Africa
One reason companies expand currencies. Nigeria, Africa’s larg- China and India.
internationally is to escape the est economy, is highly depen- As more of the
slowing economies of their dent on oil, so that when global continent’s popu-
home country and to capture oil prices dropped, so did its lation enters the middle class,
some of the profits available currency. A lack of existing infra- they will demand and be able to
in rapid-growth regions. Com- structure and the presence of afford more goods and services.
panies in Africa know this militant groups make continued With so much to gain, avoid-
particularly well. Companies growth difficult and dangerous. ing these countries may be the
that have enjoyed the devel- Yet the old adage states, “more riskier option.
oped and wealthier economy risk, more reward.”
of South Africa now complain The search for this reward DISCUSSION QUESTION
of its slow (2.2%) GDP growth and the need for growth to What risks and opportunities
and seek opportunities in the power increased profitability is should a company weigh
faster-growing, less-developed what has encouraged Nampak when deciding whether it
countries of Nigeria (5.5%) and Ltd, a packaging company, should expand into another
Angola (6.6%). to buy a $300 million fac- country?
There are risks doing busi- tory in Nigeria and to build a
ness in these regions, such $180 million factory in Angola. SOURCE: M. Stevis and P. McGroarty,
“Businesses Seek Out New African Frontiers,”
as insurgent attacks by Boko Africa’s economy as a whole is The Wall Street Journal, March 31, 2015,
Haram, and rapidly declining growing at 5%, not far behind www.wsj.com.
CULTURE
By far the most important factor influencing international HRM is the culture of
the country in which a facility is located. Culture is defined as “the set of important
assumptions (often unstated) that members of a community share.”11 These assump-
tions consist of beliefs about the world and how it works and the ideals that are worth
striving for.12
Culture is important to HRM for two reasons. First, it often determines the other three
factors affecting HRM in global markets. Culture can greatly affect a country’s laws, in
that laws are often the codification of right and wrong as defined by the culture. Culture
also affects human capital, because if education is greatly valued by the culture, then
members of the community try to increase their human capital. Finally, as we discuss
later, cultures and economic systems are closely intertwined.13
However, the most important reason that culture is important to HRM is that it often
determines the effectiveness of various HRM practices. Practices found to be effective in
the United States may not be effective in a culture that has different beliefs and values.14
For example, U.S. companies rely heavily on individual performance appraisal, and
rewards are tied to individual performance. In Japan, however, individuals are expected
to subordinate their wishes and desires to those of the larger group. Thus, individual-
based evaluation and incentives are not nearly as effective there and, in fact, are seldom
observed among Japanese organizations.15
In this section we examine a model that attempts to characterize different cultures.
This model illustrates why culture can have a profound influence on HRM.
634
Hofstede’s Cultural Dimensions

In a classic study of culture, Geert Hofstede identified four dimensions on which various
cultures could be classified.16 In a later study he added a fifth dimension that aids in
characterizing cultures.17 The relative scores for 10 major countries are provided in
Table 15.2. Individualism–collectivism describes the strength of the relation between an Individualism–
individual and other individuals in the society—that is, the degree to which people act as Collectivism
individuals rather than as members of a group. In individualist cultures, such as the One of Hofstede’s
cultural dimensions;
United States, Great Britain, and the Netherlands, people are expected to look after their describes the strength
own interests and the interests of their immediate families. The individual is expected to of the relation between
stand on her own two feet rather than be protected by the group. In collectivist cultures, an individual and other
such as Colombia, Pakistan, and Taiwan, people are expected to look after the interest of individuals in a society.
the larger community, which is expected to protect people when they are in trouble.
The second dimension, power distance, concerns how a culture deals with hierarchi- Power Distance
cal power relationships—particularly the unequal distribution of power. It describes the One of Hofstede’s
degree of inequality among people that is considered to be normal. Cultures with small cultural dimensions;
describes how a culture
power distance, such as those of Denmark and Israel, seek to eliminate inequalities in deals with hierarchical
power and wealth as much as possible, whereas countries with large power distances, power relationships.
such as India and the Philippines, seek to maintain those differences.
Differences in power distance often result in miscommunication and conflicts
between people from different cultures. For example, in Mexico and Japan individuals
are always addressed by their titles (Señor Smith or Smith-san, respectively). Individuals
from the United States, however, often believe in minimizing power distances by using
first names. Although this is perfectly normal, and possibly even advisable in the United
States, it can be offensive and a sign of disrespect in other cultures.
The third dimension, uncertainty avoidance, describes how cultures seek to deal with Uncertainty
the fact that the future is not perfectly predictable. It is defined as the degree to which Avoidance
One of Hofstede’s
people in a culture prefer structured over unstructured situations. Some cultures, such as
those of Singapore and Jamaica, have weak uncertainty avoidance. They socialize indi- describes how cultures
viduals to accept this uncertainty and take each day as it comes. People from these cultures seek to deal with an
tend to be rather easygoing and flexible regarding different views. Other cultures, such as unpredictable future.
Table 15.2
PDa ID MA UA LT
Cultural Dimension
Scores for 10
United States 40 Lb 91 H 62 H 46 L 29 L Countries
Germany 35 L 67 H 66 H 65 M 31 M
Japan 54 M 45 M 95 H 92 H 80 H
France 68 H 71 H 43 M 86 H 30c L
Netherlands 38 L 80 H 14 L 53 M 44 M
Hong Kong 68 H 25 L 57 H 29 L 96 H
Indonesia 78 H 14 L 46 M 48 L 25c L
West Africa 77 H 20 L 46 M 54 M 16 L
Russia 95c H 50c M 40c L 90c H 10c L
China 80c H 20c L 50c M 60c M 118 H
aPD = power distance; ID = individualism; MA = masculinity; UA = uncertainty avoidance; LT = long-term orientation.

bH = top third; M = medium third; L = bottom third (among 53 countries and regions for the first four dimensions;
among 23 countries for the fifth).
cEstimated.
SOURCE: From Geert Hofstede, “Cultural Constraints in Management Theories,” Academy of Management Executive,
February 1993, Vol. 7, No. 1, p. 91. Reproduced with permission of Academy of Management, via Copyright Clearance Center.
those of Greece and Portugal, socialize their people to seek security through technology,
law, and religion. Thus these cultures provide clear rules as to how one should behave.
Masculinity– The masculinity–femininity dimension describes the division of roles between the
Femininity sexes within a society. In “masculine” cultures, such as those of Germany and Japan,
Dimension what are considered traditionally masculine values—showing off, achieving something
One of Hofstede’s
visible, and making money—permeate the society. These societies stress assertiveness,
describes the division performance, success, and competition. “Feminine” cultures, such as those of Sweden
of roles between the and Norway, promote values that have been traditionally regarded as feminine, such as
sexes within a society. putting relationships before money, helping others, and preserving the environment.
These cultures stress service, care for the weak, and solidarity.
Finally, the fifth dimension comes from the philosophy of the Far East and is referred
Long-Term–Short- to as the long-term–short-term orientation. Cultures high on the long-term orientation
Term Orientation focus on the future and hold values in the present that will not necessarily provide an
One of Hofstede’s immediate benefit, such as thrift (saving) and persistence. Hofstede found that many Far
describes how a culture
Eastern countries such as Japan and China have a long-term orientation. Short-term
balances immediate orientations, on the other hand, are found in the United States, Russia, and West Africa.
benefits with future These cultures are oriented toward the past and present and promote respect for tradition
rewards. and for fulfilling social obligations.
The current Japanese criticism of management practices in the United States illus-
trates the differences in long-term–short-term orientation. Japanese managers, tradition-
ally exhibiting a long-term orientation, engage in 5- to 10-year planning. This leads them
to criticize U.S. managers, who are traditionally much more short-term in orientation
because their planning often consists of quarterly to yearly time horizons.
These five dimensions help us understand the potential problems of managing
employees from different cultures. Later in this chapter we will explore how these cul-
tural dimensions affect the acceptability and utility of various HRM practices. However,
it is important to note that these differences can have a profound influence on whether
a company chooses to enter a given country. One interesting finding of Hofstede’s
research was the impact of culture on a country’s economic health. He found that coun-
tries with individualist cultures were more wealthy. Collectivist cultures with high
power distance were all poor.18 Cultures seem to affect a country’s economy through
their promotion of individual work ethics and incentives for individuals to increase their
human capital.
Implications of Culture for HRM

Cultures have an important impact on approaches to managing people. As we discuss
later, the culture can strongly affect the education–human capital of a country, the
political–legal system, and the economic system. As Hofstede found, culture also has a
profound impact on a country’s economic health by promoting certain values that either
aid or inhibit economic growth.
More important to this discussion, however, is that cultural characteristics influence
the ways managers behave in relation to subordinates, as well as the perceptions of the
appropriateness of various HRM practices. First, cultures differ strongly on such things
as how subordinates expect leaders to lead, how decisions are handled within the hierar-
chy, and (most important) what motivates individuals. For example, in Germany, manag-
ers achieve their status by demonstrating technical skills, so employees look to them to
assign their tasks and resolve technical problems. In the Netherlands, on the other hand,
managers focus on seeking consensus among all parties and must engage in an open-
ended exchange of views and balancing of interests.19 Clearly, these methods have differ-
ent implications for selecting and training managers in the different countries.
Second, cultures may influence the appropriateness of HRM practices. For example,
as previously discussed, the extent to which a culture promotes an individualistic versus
a collectivist orientation will impact the effectiveness of individually oriented human
resource management systems. In the United States, companies often focus selection
systems on assessing an individual’s technical skill and, to a lesser extent, social skills.
In collectivist cultures, on the other hand, companies focus more on assessing how well
an individual will perform as a member of the work group.
Culture often influences how employees value certain aspects of their work envi-
ronment. In an interesting study comparing call center workers in India (a collectiv-
ist culture) and the United States (an individualistic culture), researchers found that in
the United States person–job fit was the stronger predictor of turnover relative to India,
where person–organization fit, links to the organization, and links to the community
were the stronger predictors of turnover.20
Similarly, cultures can influence compensation systems. Individualistic cultures such
as those found in the United States often exhibit great differences between the highest-
and lowest-paid individuals in an organization, with the highest-paid individual often
receiving 200 times the salary of the lowest. Collectivist cultures, on the other hand, tend
to have much flatter salary structures, with the top-paid individual receiving only about
20 times the overall pay of the lowest-paid one.
Cultural differences can affect the communication and coordination processes in orga-
nizations. Collectivist cultures, as well as those with less of an authoritarian orientation,
value group decision making and participative management practices more highly than
do individualistic cultures. When a person raised in an individualistic culture must work
closely with those from a collectivist culture, communication problems and conflicts
often appear. Much of the emphasis on “cultural diversity” programs in organizations
focuses on understanding the cultures of others in order to better communicate with them.
EVIDENCE-BASED HR
While national culture is important, recent research also suggests that its importance
may be overstated. Researchers reexamining Hofstede’s original work found that
while differences existed across nations, significant cultural differences also existed
within nations. They further found that the differences in cultures across organiza-
tions within countries was larger than the differences across countries. Their results
imply that while one cannot ignore national culture, one must not think that certain
HR practices may not be effective simply based on a regard for national culture. Peo-
ple of varying cultural backgrounds within a nation will be drawn to organizations
whose cultures better match their individual, as opposed to national, value systems.
In addition, many have suggested that the effectiveness of High Performance Work
Systems (HPWS) depends upon the cultural or institutional constraints, such that they
may be ineffective in cultures that exhibit high power distance and/or high collec-
tivism. However, a recent meta-analysis revealed that the effects of HPWS on firm
performance were positive in all cultures, and contrary to expectations, if anything,
higher in the cultures where the cultural hypothesis suggested they would be lower.
SOURCES: T. Rable, M. Jayasinghe, B. Gerhart, and T. Kuhlmann, “A Meta-Analysis of Country Differences in the
High-Performance Work System–Business Performance Relationship: The Roles of National Culture and Manage-
rial Discretion,” Journal of Applied Psychology 99, no. 6 (2014), pp. 1011–41; B. Gerhart and M. Fang, “National
Culture and Human Resource Management Assumptions and Evidence,” International Journal of Human
Resource Management 16, no. 6 (June 2005), pp. 971–86.
EDUCATION–HUMAN CAPITAL
A company’s potential to find and maintain a qualified workforce is an important con-
sideration in any decision to expand into a foreign market. Thus a country’s human capi-
tal resources can be an important HRM issue. Human capital refers to the productive
capabilities of individuals—that is, the knowledge, skills, and experience that have eco-
nomic value.21
A country’s human capital is determined by a number of variables. A major vari-
able is the educational opportunities available to the labor force. In the Netherlands,
for instance, government funding of school systems allows students to go all the way
through graduate school without paying.22 Similarly, the free education provided to citi-
zens in the former Soviet bloc resulted in high levels of human capital, in spite of the
poor infrastructure and economy that resulted from the socialist economic systems. In
contrast, some Third World countries, such as Nicaragua and Haiti, have relatively low
levels of human capital because of a lack of investment in education.
A country’s human capital may profoundly affect a foreign company’s desire to locate
there or enter that country’s market. Countries with low human capital attract facilities
that require low skills and low wage levels. This explains why U.S. companies desire to
move their currently unionized low-skill–high-wage manufacturing and assembly jobs to
Mexico, where they can obtain low-skilled workers for substantially lower wages. Simi-
larly, Japan ships its messy, low-skill work to neighboring countries while maintaining
its high-skill work at home.23 Countries like Mexico, with relatively low levels of human
capital, might not be as attractive for operations that consist of more high-skill jobs.
Countries with high human capital are attractive sites for direct foreign investment
that creates high-skill jobs. In Ireland, for example, more than 25% of 18-year-olds
attend college, a rate much higher than other European countries. In addition, Ireland’s
economy supports only 1.1 million jobs for a population of 3.5 million. The combination
of high education levels, a strong work ethic, and high unemployment makes the country
attractive for foreign firms because of the resulting high productivity and low turnover.
The Met Life insurance company set up a facility for Irish workers to analyze medical
insurance claims. It has found the high levels of human capital and the high work ethic
provide such a competitive advantage that the company is currently looking for other
work performed in the United States to be shipped to Ireland. Similarly, as already dis-
cussed, the skills of newly graduated technology workers in India are as high or higher
than those found among their counterparts in the United States. In addition, because jobs
are not as plentiful in India, the worker attitudes are better in many of these locations.24
POLITICAL–LEGAL SYSTEM
The regulations imposed by a country’s legal system can strongly affect HRM. The
political–legal system often dictates the requirements for certain HRM practices, such
as training, compensation, hiring, firing, and layoffs. In large part, the legal system is an
outgrowth of the culture in which it exists. Thus the laws of a particular country often
reflect societal norms about what constitutes legitimate behavior.25 The “Integrity in
Action” box raises a question about U.S. airlines that profited from the government’s
temporary inability to collect airline transportation taxes.
For example, the United States has led the world in eliminating discrimination in
the workplace. Because of the importance this has in our culture, we also have legal
safeguards such as equal employment opportunity laws (discussed in Chapter 3) that
strongly affect the hiring and firing practices of firms. As a society, we also have strong
beliefs regarding the equity of pay systems; thus the Fair Labor Standards Act (discussed
INTEGRITY IN ACTION
Airlines Pocket Tax Money During Government Shutdown
When you buy an airline ticket, this time, the FAA was unable Spirit, and
do you pay attention to all the to collect the usual taxes on air- Alaska Air
parts that go into the price such line tickets, which should have passed along the savings to their
as the fare itself, the fuel taxes, meant that customers would customers.
the airport taxes, etc.? If not, you save money when they bought
DISCUSSION QUESTION
might have overpaid for your tickets. However, airlines such as
Do you think the airlines that
tickets a few summers ago. Delta, USAirways, Continental,
raised their rates were acting
In the summer of 2011, a fight and JetBlue immediately raised
with integrity? Why or why not?
between Congress and President their ticket prices to make up the
Obama resulted in a partial shut- tax, thus pocketing the money SOURCE: J. Martin, “FAA Shutdown to
Continue as Congress Leaves,” USA Today,
down of the Federal Aviation themselves. On the other hand, accessed June 19, 2015, http://usatoday30.
Authority’s (FAA) budget. During airlines such as Virgin America, usatoday.com.
in Chapter 11), among other laws and regulations, sets the minimum wage for a variety
of jobs. We have regulations that dictate much of the process for negotiation between
unions and management. These regulations profoundly affect the ways human resources
are managed in the United States.
Similarly, the legal regulations regarding HRM in other countries reflect their societal
norms. For example, in Germany employees have a legal right to “codetermination” at the
company, plant, and individual levels. At the company level, a firm’s employees have direct
influence on the important decisions that affect them, such as large investments or new strat-
egies. This is brought about through having employee representatives on the supervisory
council (Aufsichtsrat). At the plant level, codetermination exists through works councils.
These councils have no rights in the economic management of the company, but they can
influence HRM policies on such issues as working hours, payment methods, hirings, and
transfers. Finally, at the individual level, employees have contractual rights, such as the right
to read their personnel files and the right to be informed about how their pay is calculated.26
The EEC provides another example of the effects of the political–legal system on
HRM. The EEC’s Community Charter of December 9, 1989, provides for the funda-
mental social rights of workers. These rights include freedom of movement, freedom to
choose one’s occupation and be fairly compensated, guarantee of social protection via
Social Security benefits, freedom of association and collective bargaining, equal treat-
ment for men and women, and a safe and healthful work environment, among others.
ECONOMIC SYSTEM
A country’s economic system influences HRM in a number of ways. As previously dis-
cussed, a country’s culture is integrally tied to its economic system, and these systems
provide many of the incentives for developing human capital. In socialist economic sys-
tems there are ample opportunities for developing human capital because the educa-
tion system is free. However, under these systems, there is little economic incentive to
develop human capital because there are no monetary rewards for increasing human
capital. In addition, in former Soviet bloc countries, an individual’s investment in human
capital did not always result in a promotion. Rather, it was investment in the Communist
Party that led to career advancements.
639
In capitalist systems the opposite situation exists. There is less opportunity to develop
human capital without higher costs. (You have probably observed tuition increases at
U.S. universities.) However, those who do invest in their individual human capital, par-
ticularly through education, are more able to reap monetary rewards, thus providing
more incentive for such investment. In the United States, individuals’ salaries usually
reflect differences in human capital (high-skill workers receive higher compensation
than low-skill workers). In fact, research estimates that an individual’s wages increase by
between 10% and 16% for each additional year of schooling.27
In addition to the effects of an economic system on HRM, the health of the system
can have an important impact. For example, we referred earlier to lower labor costs in
India. In developed countries with a high level of wealth, labor costs tend to be quite
high relative to those in developing countries. While labor costs are related to the human
capital of a country, they are not perfectly related, as shown by Figure 15.2. This chart
provides a good example of the different hourly labor costs for manufacturing jobs in
various countries.
An economic system also affects HRM directly through its taxes on compensation
packages. Thus, the differential labor costs shown in Figure 15.2 do not always reflect
the actual take-home pay of employees. Socialist systems are characterized by tax sys-
tems that redistribute wealth by taking a higher percentage of a person’s income as she
moves up the economic ladder. Capitalist systems attempt to reward individuals for their
Figure 15.2 70
Hourly
Compensation Costs
($63.66)
in Manufacturing, 60
U.S. Dollars, 2012
(57.79)
Average Gross Hourly Compensation
50
(49.80)
(48.47)
(47.68)
(45.79)
40
(41.53)
(39.81)
(39.62)
(36.59)
(35.67)
(35.34)
(34.18)
30
(31.23)
(26.83)
(24.16)
20
(6.36)
10
(2.10)
(9.46)
0
Norway
Switzerland
Sweden
Denmark
Australia
Germany
Austria
France
Netherlands
Canada
United States
Japan
Italy
United Kingdom
Spain
Singapore
Taiwan
Mexico
Philippines
SOURCE: U.S. Bureau of Labor Statistics, www.bls.gov/news.release/pdf/ichcc.pdf.

Economic System Can Help Reduce Poverty
As Vietnam, China, and India also implemented the “General the percent-
have moved away from a state- Principles of Civil Law,” which age of its population
controlled economy, the stan- outlined private-property owner- that lived on less than $1.25 a
dard of living of their poor has ship, creditor rights, and intellec- day drop from 66% in 1979 to
improved. Over the last three tual property rights. According to 24% in 2011. If a country wants
decades, Vietnam has imple- the World Bank, in 1981, 84% of to improve the lives of the poor-
mented free-market programs China’s population earned less est sections of its society, these
such as eliminating collective than $1.25 a day. In 2011 that three countries offer some les-
farming and reducing the num- figure shrank to 6%. sons in the benefits of the free
ber of state-controlled facilities. The International Monetary market.
As a result, from 1993 to 2008, Fund had to bail out India in
the percentage of its population the early 1990s. It required that DISCUSSION QUESTION
living in poverty has decreased India reduce tariffs, taxes, and What steps can a government
from 64% (of 70 million people) regulation. Tariffs fell from 87% take to help improve the quality
to 17% (of 85 million people), to 26% in six years. Most indus- of life of its poorest citizens?
according to the World Bank. tries eliminated the requirement SOURCE: E. Lazear, “Want to Reduce
In the 1980s, China began for licenses, encouraging new Inequality? Consult China, Vietnam and India,”
allowing farms to retain surplus entrants, and India’s capital The Wall Street Journal, March 31, 2015,
www.wsj.com.
crops and companies to retain markets opened themselves to
profits above their quota. It foreign investment. India saw
efforts by allowing them to keep more of their earnings. Companies that do business in
other countries have to present compensation packages to expatriate managers that are
competitive in take-home, rather than gross, pay. HRM responses to these issues affect-
ing expatriate managers will be discussed in more detail later in this chapter.
These differences in economies can have a profound impact on pay systems, par-
ticularly among global companies seeking to develop an international compensation and
reward system that maintains cost controls while enabling local operations to compete in
the war for talent. One recent study examining how compensation managers design these
systems indicates that they look at a number of factors including the global firm strategy,
the local regulatory/political context, institutions and stakeholders, local markets, and
national culture. While they try to learn from the best practices that exist globally, they
balance these approaches with the constraints imposed by the local environment.28 How-
ever, not just the hourly labor costs, but also the total cost of employees, affect decisions
about where to locate workers. The “Competing through Sustainability” box explains
how the economic system of a country can lift people out of poverty.
In conclusion, every country varies in terms of its culture, human capital, legal sys-
tem, and economic system. These variations directly influence the types of HRM sys-
tems that must be developed to accommodate the particular situation. The extent to
which these differences affect a company depends on how involved the company is in
global markets. In the next sections we discuss important concepts of global business
and various levels of global participation, particularly noting how these factors come
into play.
641
Managing Employees in a Global Context

TYPES OF INTERNATIONAL EMPLOYEES
LO 15-3 Before discussing the levels of global participation, we need to distinguish between par-
List the different cat- ent countries, host countries, and third countries. A parent country is the country in
egories of international which the company’s corporate headquarters is located. For example, the United States
employees.
is the parent country of General Motors. A host country is the country in which the par-
ent country organization seeks to locate (or has already located) a facility. Thus Great
Parent Country Britain is a host country for General Motors because GM has operations there. A third
The country in which a
company’s corporate
country is a country other than the host country or parent country, and a company may or
headquarters is located. may not have a facility there.
There are also different categories of employees. Expatriate is the term generally used
Host Country for employees sent by a company in one country to manage operations in a different
The country in which country. With the increasing globalization of business, it is now important to distinguish
the parent country among different types of expatriates. Parent-country nationals (PCNs) are employees
organization seeks to who were born and live in the parent country. Host-country nationals (HCNs) are those
locate or has already
employees who were born and raised in the host, as opposed to the parent, country.
located a facility.
Finally, third-country nationals (TCNs) are employees born in a country other than the
parent country and host country but who work in the host country. Thus, a manager born
Third Country
A country other than a and raised in Brazil employed by an organization located in the United States and
host or parent country. assigned to manage an operation in Thailand would be considered a TCN.
Research shows that countries differ in their use of various types of international
Expatriate employees. One study revealed that Japanese multinational firms have more ethnocentric
An employee sent by HRM policies and practices (they tend to use Japanese expatriate managers more than
his or her company in local host-country nationals) than either European or U.S. firms. This study also found
one country to manage that the use of ethnocentric HRM practices is associated with more HRM problems.29
operations in a different
country.
LEVELS OF GLOBAL PARTICIPATION
Parent-Country We often hear companies referred to as “multinational” or “international.” However, it
Nationals (PCNs)
Employees who were
is important to understand the different levels of participation in international markets.
born and live in a par- This is especially important because as a company becomes more involved in interna-
ent country. tional trade, different types of HRM problems arise. In this section we examine Nancy
Adler’s categorization of the various levels of international participation from which a
Host-Country company may choose.30 Figure 15.3 depicts these levels of involvement.
Nationals (HCNs)
Employees who were
born and raised in the
host, not the parent,
Domestic
country. Most companies begin by operating within a domestic marketplace. For example, an
entrepreneur may have an idea for a product that meets a need in the U.S. marketplace.
Third-Country This individual then obtains capital to build a facility that produces the product or ser-
Nationals (TCNs) vice in a quantity that meets the needs of a small market niche. This requires recruiting,
Employees born in a hiring, training, and compensating a number of individuals who will be involved in the
country other than the production process, and these individuals are usually drawn from the local labor market.
parent or host country.
The focus of the selection and training programs is often on the employees’ technical
competence to perform job-related duties and to some extent on interpersonal skills. In
LO 15-4 addition, because the company is usually involved in only one labor market, determining
Identify the four levels
of global participation
the market rate of pay for various jobs is relatively easy.
and the HRM issues As the product grows in popularity, the owner might choose to build additional facili-
faced within each level. ties in different parts of the country to reduce the costs of transporting the product over
Figure 15.3
Levels of Global Participation
Domestic International Multinational Global
Corporate Corporate Corporate Corporate

Parent
headquarters headquarters headquarters headquarters
country
Host Foreign Foreign Foreign Foreign Foreign

countries subsidiary subsidiary subsidiary subsidiary subsidiary
Increasing participation in global markets
large distances. In deciding where to locate these facilities, the owner must consider the
attractiveness of the local labor markets. Various parts of the country may have different
cultures that make those areas more or less attractive according to the work ethics of the
potential employees. Similarly, the human capital in the different areas may vary greatly
because of differences in educational systems. Finally, local pay rates may differ. It is for
these reasons that the U.S. economy in the past 10 years has experienced a movement of
jobs from northern states, which are characterized by strong unions and high labor costs,
to the Sunbelt states, which have lower labor costs and are less unionized.
Incidentally, even domestic companies face problems with cultural diversity. In the
United States, for example, the representation of women and minorities is increasing
within the workforce. These groups come to the workplace with worldviews that differ
from those of the traditional white male. Thus, we are seeing more and more emphasis
on developing systems for managing cultural diversity within single-country organiza-
tions, even though the diversity might be on a somewhat smaller scale than the diversity
of cultures across national boundaries.31
In a recent meta-analysis of the effects of cultural diversity on the functioning of mul-
ticultural work groups, Stahl et al. (2010) found that cultural diversity leads to process
losses through increased task conflict and decreased social integration. On the other
hand, it leads to process gains through increasing creativity and satisfaction.32
It is important to note that companies functioning at the domestic level face an envi-
ronment with very similar cultural, human capital, political–legal, and economic situ-
ations, although some variation might be observed across states and geographic areas.
International
As more competitors enter the domestic market, companies face the possibility of losing
market share; thus they often seek other markets for their products. This usually requires
entering international markets, initially by exporting products but ultimately by build-
ing production facilities in other countries. The decision to participate in international
competition raises a host of human resource issues. All the problems regarding locating
facilities are magnified. One must consider whether a particular location provides an
environment where human resources can be successfully acquired and managed.
Now the company faces an entirely different situation with regard to culture, human
capital, the political–legal system, and the economic system. For example, the availabil-
ity of human capital is of utmost importance, and there is a substantially greater variabil-
ity in human capital between the United States and other countries than there is among
the various states in the United States.
A country’s legal system may also present HRM problems. For example, France has a
relatively high minimum wage, which drives labor costs up. In addition, regulations make
it extremely difficult to fire or lay off an employee. In Germany companies are legally
required to offer employees influence in the management of the firm. Companies that
develop facilities in other countries have to adapt their HRM practices to conform to the
host country’s laws. This requires the company to gain expertise in the country’s HRM
legal requirements and knowledge about how to deal with the country’s legal system, and
it often requires the company to hire one or more HCNs. In fact, some countries legally
require companies to hire a certain percentage of HCNs for any foreign-owned subsidiary.
Finally, cultures have to be considered. To the extent that the country’s culture is vastly
different from that of the parent organization, conflicts, communication problems, and
morale problems may occur. Expatriate managers must be trained to identify these cul-
tural differences, and they must be flexible enough to adapt their styles to those of their
host country. This requires an extensive selection effort to identify individuals who are
capable of adapting to new environments and an extensive training program to ensure that
the culture shock is not devastating.
Multinational
Whereas international companies build one or a few facilities in another country, they
become multinational when they build facilities in a number of different countries,
attempting to capitalize on lower production and distribution costs in different locations.
The lower production costs are gained by shifting production from higher-cost locations
to lower-cost locations. For example, some of the major U.S. automakers have plants all
over the world. They continue to shift their production from the United States, where
labor unions have gained high wages for their members, to maquiladora facilities in
Mexico, where the wages are substantially lower. Similarly, these companies minimize
distribution and labor costs by locating facilities in central and eastern European coun-
tries such as Poland, Hungary, and the Slovak Republic for manufacturing and assem-
bling automobiles to sell in the European market.
The HRM problems multinational companies face are similar to those international
companies face, only magnified. Instead of having to consider only one or two countries’
cultural, human capital, legal, and economic systems, the multinational company must
address these differences for a large number of countries. This accentuates the need to
select managers capable of functioning in a variety of settings, give them necessary
training, and provide flexible compensation systems that take into account the different
market pay rates, tax systems, and costs of living.
Multinational companies now employ many “inpatriates”—managers from different
countries who become part of the corporate headquarters staff. This creates a need to
integrate managers from different cultures into the culture of the parent company. In
addition, multinational companies now take more expatriates from countries other than
the parent country and place them in facilities of other countries. For example, a man-
ager from Scotland, working for a U.S. company, might be assigned to run an operation
in South Africa. This practice accentuates the need for cross-cultural training to provide
managerial skills for interaction with individuals from different cultures.
Global
Many researchers now propose a fourth level of integration: global organizations. Global
organizations compete on state-of-the-art, top-quality products and services and do so
with the lowest costs possible. Whereas multinational companies attempt to develop
identical products distributed worldwide, global companies increasingly emphasize
flexibility and mass customization of products to meet the needs of particular clients.
Multinational companies are usually driven to locate facilities in a country as a means
of reaching that country’s market or lowering production costs, and the company must
deal with the differences across the countries. Global firms, on the other hand, choose
to locate a facility based on the ability to effectively, efficiently, and flexibly produce a
product or service and attempt to create synergy through the cultural differences.
This creates the need for HRM systems that encourage flexible production (thus
presenting a host of HRM issues). These companies proactively consider the cultures,
human capital, political–legal systems, and economic systems to determine where pro-
duction facilities can be located to provide a competitive advantage. Global companies
have multiple headquarters spread across the globe, resulting in less hierarchically struc-
tured organizations that emphasize decentralized decision making. This results in the
need for human resource systems that recruit, develop, retain, and use managers and
executives who are competent transnationally.
A transnational HRM system is characterized by three attributes.33 Transnational scope Transnational Scope
refers to the fact that HRM decisions must be made from a global rather than a national or A company’s ability to
regional perspective. This creates the need to make decisions that balance the need for uni- make HRM decisions
from an international
formity (to ensure fair treatment of all employees) with the need for flexibility (to meet the perspective.
needs of employees in different countries). Transnational representation reflects the multi-
national composition of a company’s managers. Global participation does not necessarily
Transnational
ensure that each country is providing managers to the company’s ranks. This is a prerequi- Representation
site if the company is to achieve the next attribute. Transnational process refers to the extent Reflects the multina-
to which the company’s planning and decision-making processes include representatives tional composition of a
and ideas from a variety of cultures. This attribute allows for diverse viewpoints and knowl- company’s managers.
edge associated with different cultures, increasing the quality of decision making.
These three characteristics are necessary for global companies to achieve cultural synergy. Transnational
Rather than simply integrating foreigners into the domestic organization, a successful trans- Process
The extent to which a
national company needs managers who will treat managers from other cultures as equals. company’s planning
This synergy can be accomplished only by combining selection, training, appraisal, and and decision-making
compensation systems in such a way that managers have a transnational rather than a paro- processes include
chial orientation. However, a survey of 50 companies in the United States and Canada found representatives and
that global companies’ HRM systems are far less transnational in scope, representation, and ideas from a variety of
cultures.
process than the companies’ strategic planning systems and organizational structures.34
In conclusion, entry into international markets creates a host of HRM issues that must be
addressed if a company is to gain competitive advantage. Once the choice has been made to
compete in a global arena, companies must seek to manage employees who are sent to foreign
countries (expatriates and third-country nationals). This causes the need to shift from focus-
ing only on the culture, human capital, political–legal, and economic influences of the host
country to examining ways to manage the expatriate managers who must be located there.
Selection systems must be developed that allow the company to identify managers capa-
ble of functioning in a new culture. These managers must be trained to identify the impor-
tant aspects of the new culture in which they will live as well as the relevant legal–political
and economic systems. Finally, these managers must be compensated to offset the costs of
uprooting themselves and their families to move to a new situation vastly different from their
previous lives. In the next section we address issues regarding management of expatriates.
MANAGING EXPATRIATES IN GLOBAL MARKETS

LO 15-5 We have outlined the major macro-level factors that influence HRM in global markets.
Discuss the ways These factors can affect a company’s decision whether to build facilities in a given coun-
companies attempt to try. In addition, if a company does develop such facilities, these factors strongly affect
select, train, compen-
the HRM practices used. However, one important issue that has been recognized over
sate, and reintegrate
expatriate managers. the past few years is the set of problems inherent in selecting, training, compensating,
and reintegrating expatriate managers.
According to a study by the National Foreign Trade Council (NFTC), there were
250,000 Americans on assignments overseas and that number was expected to increase.
In addition, the NFTC estimates that the average one-time cost for relocating an expa-
triate is $60,000.35 The importance to the company’s profitability of making the right
expatriate assignments should not be underestimated. Expatriate managers’ average
compensation package is approximately $250,000,36 and the cost of an unsuccessful
expatriate assignment (that is, a manager returning early) is approximately $100,000.37
The failure rate for expatriate assignments among U.S. firms had been estimated at
between 15% and 40%. However, more recent research suggests that the current figure is
much lower. Some recent studies of European multinationals put the rate at 5% for most
firms. While the failure rate is generally recognized as higher among U.S. multination-
als, it is doubtful that the number reaches the 15% to 40% range.38
In the final section of the chapter, we discuss the major issues relevant to the manage-
ment of expatriate managers. These issues cover the selection, training, compensation,
and reacculturation of expatriates.
Selection of Expatriate Managers

One of the major problems in managing expatriate managers is determining which indi-
viduals in the organization are most capable of handling an assignment in a different
culture. Expatriate managers must have technical competence in the area of operations;
otherwise they will be unable to earn the respect of subordinates. However, technical
competence has been almost the sole variable used in deciding who to send on overseas
assignments, despite the fact that multiple skills are necessary for successful perfor-
mance in these assignments.39
A successful expatriate manager must be sensitive to the country’s cultural norms,
flexible enough to adapt to those norms, and strong enough to make it through the inevita-
ble culture shock. In addition, the manager’s family must be similarly capable of adapting
to the new culture. These adaptive skills have been categorized into three dimensions:40
(1) the self dimension (the skills that enable a manager to maintain a positive self-image
and psychological well-being), (2) the relationship dimension (the skills required to foster
relationships with the host-country nationals), and (3) the perception dimension (those
skills that enable a manager to accurately perceive and evaluate the host environment).
One study of international assignees found that they considered the following five factors
to be important in descending order of importance: family situation, flexibility and adapt-
ability, job knowledge and motivation, relational skills, and extracultural openness.41
Table 15.3 presents a series of considerations and questions to ask potential expatriate
managers to assess their ability to adapt to a new cultural environment.
One construct that has been emerging in the expatriate literature is cultural intelli-
gence (CQ). This characteristic refers to an individual’s ability to adapt across cultures
through sensing the different cues regarding appropriate behavior across cultural settings
or in multicultural settings. In fact, one set of researchers found that CQ was related to
cultural adjustment and task performance among a sample of international executives.42
Table 15.3
Select Topics for Assessing Candidates for Overseas Assignments
Motivation
Health
-
seas assignment?
Language ability
Family considerations
were encountered?
-
seas assignment?
Resourcefulness and initiative
facilities are available regardless of challenges that might arise in a foreign business environment?
Adaptability
move forward after setbacks?

Career planning
the company?
Financial
purchase, college expenses)?
assignment?
SOURCES: P. Caligiuri, Cultural Agility: Building a Pipeline of Successful Global Professionals (San Francisco: Jossey-Bass, 2012); P. Caligiuri, D. Lepak,
and J. Bonache, Managing the Global Workforce (West Sussex, United Kingdom: John Wiley & Sons, 2010); M. Shaffer, D. Harrison, H. Gregersen,
S. Black, and L. Ferzandi, “You Can Take It with You: Individual Differences and Expatriate Effectiveness,” Journal of Applied Psychology 91(2006),
pp. 109–25; P. Caligiuri, “Developing Global Leaders,” Human Resource Management Review 16 (2006), pp. 219–28; P. Caligiuri, M. Hyland, A. Joshi,
and A. Bross, “Testing a Theoretical Model for Examining the Relationship between Family Adjustment and Expatriates’ Work Adjustment,” Journal of
Applied Psychology 83(1998), pp. 598–614; David M. Noer, Multinational People Management: A Guide for Organizations and Employees (Arlington,
VA: Bureau of National Affairs, 1975).
Little evidence suggests that U.S. companies have invested much effort in attempting
to make correct expatriate selections. One researcher found that only 5% of the firms
surveyed administered any tests to determine the degree to which expatriate candidates
possessed cross-cultural skills.43 More recent research reveals that only 35% of firms
choose expatriates from multiple candidates and that those firms emphasize only techni-
cal job-related experience and skills in making these decisions.44 These findings glaringly
demonstrate that U.S. organizations need to improve their success rate in overseas assign-
ments. As discussed in Chapter 6, the technology for assessing individuals’ knowledge,
skills, and abilities has advanced. The potential for selection testing to decrease the fail-
ure rate and productivity problems of U.S. expatriate managers seems promising. For
instance, recent research has examined the “Big Five” personality dimensions as predic-
tors of expatriate success (remember these from Chapter 6). For instance, one study dis-
tinguished between expatriate success as measured by not terminating the assignment and
success as measured by supervisory evaluations of the expatriate. The researcher found
that agreeableness, emotional stability, and extraversion were negatively related to the
desire to terminate the assignment (i.e., they wanted to stay on the assignment longer), and
conscientiousness was positively related to supervisory evaluations of the expatriate.45
A final issue with regard to expatriate selection is the use of women in expatriate
assignments. For a long time U.S. firms believed that women would not be successful
managers in countries where women have not traditionally been promoted to manage-
ment positions (such as in Japan and other Asian countries). However, recent evidence
indicates that this is not true. Robin Abrams, an expatriate manager for Apple Comput-
er’s Hong Kong office, states that nobody cares whether “you are wearing trousers or a
skirt if you have demonstrated core competencies.” In fact, some women believe that the
novelty of their presence among a group of men increases their credibility with locals. In
fact, some research suggests that male and female expatriates can perform equally well
in international assignments, regardless of the country’s cultural predispositions toward
women in management. However, female expatriates self-rate their adjustment lower in
countries that have few women in the workforce.46 Also research has shown that female
expatriates were perceived as being effective regardless of the cultural toughness of the
host country.47 And the fact is that female expatriates feel more strongly than their super-
visors that prejudice does not limit women’s ability to be successful.48
Training and Development of Expatriates

Once an expatriate manager has been selected, it is necessary to prepare that manager
for the upcoming assignment. Because these individuals already have job-related skills,
some firms have focused development efforts on cross-cultural training. A review of the
cross-cultural training literature found support for the belief that cross-cultural train-
ing has an impact on effectiveness.49 However, in spite of this, cross-cultural training is
hardly universal. According to one 1995 survey, nearly 40% of the respondents offered
no cross-cultural preparation to expatriates.50
What exactly is emphasized in cross-cultural training programs? The details regard-
ing these programs were discussed in Chapter 7. However, for now, it is important to
know that most attempt to create an appreciation of the host country’s culture so that
expatriates can behave appropriately.51 This entails emphasizing a few aspects of cultural
sensitivity. First, expatriates must be clear about their own cultural background, particu-
larly as it is perceived by the host nationals. With an accurate cultural self-awareness,
managers can modify their behavior to accentuate the effective characteristics while
minimizing those that are dysfunctional.52
Second, expatriates must understand the particular aspects of culture in the new
work environment. Although culture is an elusive, almost invisible phenomenon, astute
expatriate managers must perceive the culture and adapt their behavior to it. This entails
identifying the types of behaviors and interpersonal styles that are considered acceptable
in both business meetings and social gatherings. For example, Germans value prompt-
ness for meetings to a much greater extent than do Latin Americans. Table 15.4 displays
some ways body language conveys different messages in different countries.
Finally, expatriates must learn to communicate accurately in the new culture. Some
firms attempt to use expatriates who speak the language of the host country, and a few
Table 15.4
International Body Language
COUNTRY NONVERBAL MESSAGES
Argentina If the waiter approaches pointing to the side of his head and making a spinning gesture with
their finger, don’t think they’ve lost it—they’re trying to say you have a phone call.
Bangladesh Bursting to go to the toilet? Hold it. It is considered very rude to excuse yourself from the table
to use the bathroom.
Bolivia Don’t make “the sign of the fig” (thumb protruding between index and middle finger),
historically a sign that you couldn’t care less—it is very insulting.
Bulgaria Bulgarians nod the head up and down to mean no, not yes. To say yes, a Bulgarian nods the
head back and forth.
China In Eastern culture, silence really can be golden. So don’t panic if long periods of silence form
part of your meeting with Chinese clients. It simply means they are considering your proposal
carefully.
Egypt As across the Arab world the left hand is unclean, use your right to accept business cards and
to greet someone. Use only your right hand for eating.
Fiji To show respect to your Fijian hosts when addressing them, stand with your arms folded
behind your back.
France The French don’t like strong handshakes, preferring a short, light grip or air kissing. If your
French colleague is seen to be playing an imaginary flute, however, it means he thinks you are
not being truthful.
Germany When Germans meet across a large conference table and it is awkward to reach over and
shake hands, they will instead rap their knuckles lightly on the table by way of a greeting.
Greece Beware of making the okay sign to Greek colleagues as it signifies bodily orifices. A safer bet
is the thumbs-up sign. The thumbs-down, however, is the kind of gesture reserved for when a
Greek motorist cuts you off on the highway.
Hong Kong When trying to attract someone’s attention, don’t use your index finger with palm extended
upward. This is how the Cantonese call their dogs.
India Beware of whistling in public—it is the height of rudeness here.
Japan Japan is a real minefield for Western businesspeople, but one that always gets to them is the
way the Japanese heartily slurp their noodles at lunch. Far from being rude, it actually shows
appreciation of the food in Japanese culture.
Jordan No matter how hungry you are, it is customary to refuse seconds from your host twice before
finally accepting a third time.
Lebanon Itchy eyebrow? Don’t scratch it. Licking your little finger and brushing it across your eyebrow is
provocative.
Malaysia If you find a Malaysian standing with hands on hips before you, you’ve clearly said
something wrong. It means he’s livid.
Mexico Mexicans are very tactile and often perform a bizarre handshake whereby, after pressing
together the palms, they will slide their hands upward to grasp each other’s thumbs.
(continued)
Table 15.4
International Body Language (concluded)
COUNTRY NONVERBAL MESSAGES
Netherlands The Dutch may seem open-minded, but if Dutch people tap the underside of their elbow,
it means they think you’re unreliable.
Pakistan The overt display of a closed fist is an incitement to war.
Philippines The “Roger Moore” is a common greeting here—a quick flash of the eyebrows supersedes the
need for handshakes.
Russia The Russians are highly tactile meet and greeters, with bear hugs and kisses directly on the
lips commonplace. Don’t take this habit to nearby Uzbekistan, however. They’d probably
shoot you.
Saudi Arabia If a Saudi man takes another’s hand on the street, it’s a sign of mutual respect.
Samoa When your new Samoan host offers you a cup of the traditional drink, kava, make sure to
deliberately spill a few drops on the ground before taking your first sip.
Turkey Be careful not to lean back on your chair and point the sole of your foot at anyone in a
meeting in Istanbul. Pointing with the underside of the foot is highly insulting.
SOURCES: K. Elkins and M. Nudelman, “The Shocking Differences in Basic Body Language Around the World,” Business Insider, March 17, 2015, www.
businessinsider.com; www.businesstravelerusa.com/articles.php?articleID=490 Business Traveler Center; R. Axtell, Gestures: The Dos and Taboos of
Body Language Around the World, (New York: John Wiley and Sons, 1991); P. Harris and R. Moran, Managing Cultural Differences, 3rd ed. (Houston, TX:
Gulf Publishing Company, 1991); R. Linowes, “The Japanese Manager’s Traumatic Entry into the United States: Understanding the American-Japanese
Cultural Divide,” Academy of Management Executive 7, no. 4 (1993), p. 26; D. Doke, “Perfect Strangers,” HR Magazine, December 2004, pp. 62–68.
provide language training. However, most companies simply assume that the host-
country nationals all speak the parent-country’s language. Although this assumption
might be true, seldom do these nationals speak the parent-country language fluently.
Thus, expatriate managers must be trained to communicate with others when language
barriers exist.
Effective cross-cultural training helps ease an expatriate’s transition to the new work
environment. It can also help avoid costly mistakes, such as the expatriate who attempted
to bring two bottles of brandy into the Muslim country of Qatar. The brandy was dis-
covered by customs; not only was the expatriate deported, the company was also “disin-
vited” from the country.53
Compensation of Expatriates
One of the more troublesome aspects of managing expatriates is determining the com-
pensation package. As previously discussed, these packages average $250,000, but it is
necessary to examine the exact breakdown of these packages. Most use a balance sheet
approach to determine the total package level. This approach entails developing a total
compensation package that equalizes the purchasing power of the expatriate manager
with that of employees in similar positions in the home country and provides incen-
tives to offset the inconveniences incurred in the location. Purchasing power includes
all of the expenses associated with the expatriate assignment. Expenses include goods
and services (food, personal care, clothing, recreation, and transportation), housing (for
a principal residence), income taxes (paid to federal and local governments), reserve
(savings, payments for benefits, pension contributions), and shipment and storage (costs
associated with moving and/or storing personal belongings). A typical balance sheet is
shown in Figure 15.4.
Figure 15.4
Home-
and The Balance Sheet
host- for Determining
country Expatriate
income Income Compensation
taxes taxes Premiums
and
incentives
Housing
Income Income
taxes Housing taxes
Housing Housing
Goods
Goods and Goods Goods
and services and and
services services services
Reserve Reserve Reserve Reserve
Home- Host- Host-country Home-country

country country costs paid by equivalent
salary costs company and purchasing
from salary power
Additional costs
paid by company
SOURCE: From C. Reynolds, “Compensation of Overseas Personnel,” in J. J. Famulari, ed., Handbook of Human
Resource Administration, 2nd ed., 1986. Copyright © 1986. Reproduced with permission of The McGraw-Hill
Companies, Inc.
As you can see from this figure, the employee starts with a set of costs for taxes,
housing, goods and services, and reserve. However, in the host country, these costs are
significantly higher. Thus the company must make up the difference between costs in the
home and those in the host country, and then provide a premium and/or incentive for the
employee to go through the trouble of living in a different environment.
Total pay packages have four components. First, there is the base salary. Determin-
ing the base salary is not a simple matter, however. Fluctuating exchange rates between
countries may make an offered salary a raise some of the time, a pay cut at other times.
In addition, the base salary may be based on comparable pay in the parent country, or it
may be based on the prevailing market rates for the job in the host country. Expatriates
are often offered a salary premium beyond that of their present salary as an inducement
to accept the expatriate assignment.
Tax equalization allowances are a second component. They are necessary because of
countries’ different taxation systems in high-tax countries. For example, a senior execu-
tive earning $100,000 in Belgium (with a maximum marginal tax rate of 70.8%) could
cost a company almost $1 million in taxes over five to seven years.54 Under most tax
equalization plans, the company withholds the amount of tax to be paid in the home
country, then pays all of the taxes accrued in the host country.
A third component, benefits, presents additional compensation problems. Most of
the problems have to do with the transportability of the benefits. For example, if an
expatriate contributing to a pension plan in the United States is moved to a different
Table 15.5 RANK MOVEMENT

The 10 Most CITY, COUNTRY WCOL INDEX RANK (SINCE 2014)
Expensive Cities
(New York = 100)
Singapore, Singapore 129 1 0
Paris, France 126 2 0
Oslo, Norway 124 3 0
Zurich, Switzerland 121 4 0
Sydney, Australia 120 5 0
Melbourne, Australia 118 6 0
Geneva, Switzerland 116 7 –1
Copenhagen, Denmark 115 8 2
Hong Kong, Hong Kong 113 9 4
Seoul, South Korea 113 9 6
SOURCE: Economist Intelligence Unit (2015), “Worldwide Cost of Living 2015.” www.eiu.com.
country, does the individual have a new pension in the host country, or should the
individual be allowed to contribute to the existing pension in her home country? What
about health care systems located in the United States? How does the company ensure
that expatriate employees have equal health care coverage? For example, in one com-
pany, the different health care plans available resulted in situations where it might cost
significantly less to have the employee fly to the United States to have a procedure
performed rather than to have it done in the host country. However, the health plans did
not allow this alternative.
Finally, allowances are often offered to make the expatriate assignment less unattract-
ive. Cost-of-living allowances are payments that offset the differences in expenditures
on day-to-day necessities between the host country and the parent country. For instance,
Table 15.5 shows the differences in cost of living among some of the larger interna-
tional cities. Housing allowances ensure that the expatriate can maintain the same home-
country living standard. Education allowances reimburse expatriates for the expense of
placing their children in private English-speaking schools. Relocation allowances cover
all the expenses of making the actual move to a new country, including transportation
to and from the new location, temporary living expenses, and shipping and/or storage of
personal possessions. Figure 15.5 illustrates a typical summary sheet for an expatriate
manager’s compensation package.
The cost of a U.S. expatriate working in another country is approximately three to
four times that of a comparable U.S. employee.55 In addition, “about 38% of multina-
tional companies surveyed by KPMG LLP for its 2006 Global Assignment Policies and
Practices say overseas assignment programs are ‘more generous than they need to be.’ ”56
These two facts combined have put pressure on global organizations to rethink their tax
equalization strategy and expatriate packages.
Reacculturation of Expatriates
A final issue of importance to managing expatriates is dealing with the reaccultura-
tion process when the managers reenter their home country. Reentry is no simple feat.
Culture shock takes place in reverse. The individual has changed, the company has
changed, and the culture has changed while the expatriate was overseas. According to
Figure 15.5
John H. Doe 1 October 2015 International
Name Effective date Assignment
Allowance Form
Singapore Manager, SLS./Serv. AP/ME
Location of assignment Title
Houston, Texas 1234 202 202

Home base Emp. no. LCA code Tax code
Reason for Change: International Assignment
Old New
Monthly base salary $5,000.00
Living cost allowance $1,291.00
Foreign service premium $ 750.00
Area allowance -0-
Gross monthly salary $7,041.00
Housing deduction $ 500.00
Hypothetical tax $ 570.00
Other
Net monthly salary $5,971.00
Prepared by Date
Vice President, Human Resources Date
one source, 60% to 70% of expatriates did not know what their position would be upon
their return, and 46% ended up with jobs that gave them reduced autonomy and author-
ity.57 Twenty percent of workers want to leave the company when they return from
an overseas assignment, and this presents potentially serious morale and productivity
problems.58 In fact, the most recent estimates are that 25% of expatriate managers leave
the company within one year of returning from their expatriate assignments.59 If these
repatriates leave, the company has virtually no way to recoup its substantial investment
in human capital.60
Companies are increasingly making efforts to help expatriates through reaccultura-

tion. Two characteristics help in this transition process: communication and validation.61
Communication refers to the extent to which the expatriate receives information and
recognizes changes while abroad. The closer the contact with the home organization
while abroad, the more proactive, effective, and satisfied the expatriate will be upon
reentry. Validation refers to the amount of recognition received by the expatriate upon
return home. Expatriates who receive recognition from their peers and their bosses for
their foreign work and their future potential contribution to the company have fewer
troubles with reentry compared with those who are treated as if they were “out of the
loop.” Given the tremendous investment that firms make in expatriate employees, usu-
ally aimed at providing global experience that will help the company, firms certainly do
not want to lose expatriates after their assignments have concluded.
Finally, one research study noted the role of an expatriate manager’s expectations
about the expatriate assignment in determining repatriation adjustment and job perfor-
mance. This study found that managers whose job expectations (constraints and demands
in terms of volume and performance standards) and nonwork expectations (living and
housing conditions) were met exhibited a greater degree of repatriation adjustment and
higher levels of job performance.62 Monsanto has an extensive repatriation program
that begins long before the expatriate returns. The program entails providing extensive
information regarding the potential culture shock of repatriation and information on
how family members, friends, and the office environment might have changed. Then, a
few months after returning, expatriate managers hold “debriefing” sessions with several
colleagues to help work through difficulties. Monsanto believes that this program pro-
vides them with a source of competitive advantage in international assignments.63
In sum, a variety of HR practices can support effective expatriation. In general, the
selection system must rigorously assess potential expatriates’ skills and personalities
and even focus on the candidate’s spouse. Training should be conducted prior to and
during the expatriate assignment, and the assignment itself should be viewed as a career
development experience. Effective reward systems must go beyond salary and benefits,
and while keeping the employee “whole” and even offering a monetary premium, should
also provide access to career development and learning opportunities. Finally, serious
efforts should be made to manage the repatriation process.64 A summary of the key
points is provided in Table 15.6.
A LOOK BACK
While Wal-Mart has successfully dominated the U.S. market, it has found that
expanding its reach across the globe does not always fit with its strengths. In addi-
tion, navigating the variety of economic and regulatory requirements across dif-
ferent countries adds significant complexity to the company’s operations. Finally,
gaining access to and managing workforces with different values, cultures, and lan-
guages present tremendous challenges.
QUESTIONS
1. What criteria should a company use to determine which countries it should
expand into?
2. How can a company assess how cultural and economic differences might
impede its ability to succeed in different countries?
3. What things can companies do to manage a global workforce more effectively?
Table 15.6
Staffing and Selection Human Resource
Practices That
Support Effective
Expatriation
international experience.
Training and Career Development
Performance Appraisal and Compensation
Expatriation and Repatriation Activities
of the assignment.
home location.
learned while on the international assignment.
SOURCE: From P. Evans, V. Pucik and J. Barsoux, The Global Challenge: Framework for International Human
Resource Management, 2002. Reproduced with permission of The McGraw-Hill Companies, Inc.
SUMMARY
Today’s organizations are more involved in international and the political–legal and economic systems, and that they
commerce than ever before, and the trend will continue. understand how these factors come into play in the various
Recent historic events such as the development of the EEC, levels of global participation. Finally, it requires that they be
NAFTA, the economic growth of Asia, and GATT have adept at developing HRM systems that maximize the effec-
accelerated the movement toward a global market. Compa- tiveness of all human resources, particularly with regard
nies competing in the global marketplace require top-quality to expatriate managers. Managers cannot overestimate the
people to compete successfully. This requires that managers importance of effectively managing human resources to gain
be aware of the many factors that significantly affect HRM competitive advantage in today’s global marketplace.
in a global environment, such as culture, human capital,
KEY TERMS
Individualism–collectivism, 635 Parent country, 642 Host-country nationals (HCNs), 642
Power distance, 635 Host country, 642 Third-country nationals (TCNs), 642
Uncertainty avoidance, 635 Third country, 642 Transnational scope, 645
Masculinity–femininity dimension, 636 Expatriate, 642 Transnational representation, 645
Long-term–short-term orientation, 636 Parent-country nationals (PCNs), 642 Transnational process, 645
1. What current trends and/or events (besides those men- 3. The chapter notes that political–legal and economic sys-
tioned at the outset of the chapter) are responsible for the tems can reflect a country’s culture. The former Eastern
increased internationalization of the marketplace? bloc countries seem to be changing their political–legal
2. According to Hofstede (in Table 15.2), the United States and economic systems. Is this change brought on by their
is low on power distance, high on individuality, high cultures, or will culture have an impact on the ability to
on masculinity, low on uncertainty avoidance, and low change these systems? Why?
on long-term orientation. Russia, on the other hand, is 4. Think of the different levels of global participation. What
high on power distance, moderate on individuality, low companies that you are familiar with exhibit the different
on masculinity, high on uncertainty avoidance, and low levels of participation?
on long-term orientation. Many U.S. managers are trans- 5. Think of a time when you had to function in another cul-
planting their own HRM practices into Russia while com- ture (on a vacation or job). What were the major obsta-
panies seek to develop operations there. How acceptable cles you faced, and how did you deal with them? Was
and effective do you think the following practices will be this a stressful experience? Why? How can companies
and why? (a) Extensive assessments of individual abili- help expatriate employees deal with stress?
ties for selection? (b) Individually based appraisal sys- 6. What types of skills do you need to be able to manage in
tems? (c) Suggestion systems? (d) Self-managing work today’s global marketplace? Where do you expect to get
teams? those skills? What classes and/or experiences will you need?
The following list includes a number of qualities that have _____ Cultural empathy/sensitivity
been identified as being associated with success in an expa- _____ Tolerance of others’ views, especially when they dif-
triate assignment. Rate the degree to which you possess each fer from your own
quality, using the following scale: _____ Sensitivity to feelings and attitudes of others
1 = very low _____ Good health and wellness
2 = low Add up your total score for the items. The higher your score,
3 = moderate the greater your likelihood of success. Qualities that you rated
4 = high low would be considered weaknesses for an expatriate assign-
5 = very high ment. Keep in mind that you will also need to be technically
_____ Resourcefulness/resilience competent for the assignment, and your spouse and family (if
_____ Adaptability/flexibility applicable) must be adaptable and willing to live abroad.
_____ Emotional stability SOURCE: Based on “Rating Scale on Successful Expatriate Qualities,”
_____ Ability to deal with ambiguity/uncertainty/differences from P. R. Harris and R. T. Moran, Managing Cultural Differences, 3rd ed.
_____ Desire to work with people who are different (Houston: Gulf, 1991), p. 569.
EXERCISING STRATEGY
Terrorism and Global Human Resource Management
Globalization has continued to increase as companies network) hijacked four U.S. planes, crashing two of them
expand their operations in a number of countries, employing into the World Trade Center’s twin towers and one into the
an increasingly global workforce. Although this process has Pentagon (a fourth was crashed in Pennsylvania in a scuf-
resulted in a number of positive outcomes, it has also occa- fle with passengers). President George W. Bush and U.K.
sionally presented new types of problems for firms to face. Prime Minister Tony Blair, after their demands that the
On September 11, 2001, terrorists with Middle Eastern Taliban government in Afghanistan turn over bin Laden and
roots (alleged to be part of Osama bin Laden’s al Qaeda his leaders were ignored, began military action against that
country on October 7, 2001. Both the terrorist acts and the aggression. One executive at a global oil company noted the
subsequent war on terrorism have created a host of issues for difficulty in managing a workforce that is approximately
multinational companies. 25% Arab. He stated that many of the Arab executives
First, companies doing business overseas, particularly have said, “While we know that you are concerned about
in Muslim-dominated countries such as the Arab states and the events of September 11, you should know that we are
Indonesia, must manage their expatriate workforce (particu- equally concerned about the events of October 7 and since.”
larly U.S. and British citizens) in what has the potential to
QUESTIONS
become hostile territory. These employees fear for their secu-
1. How can a global company manage the inevitable con-
rity, and some have asked to return to their home countries.
flicts that will arise among individuals from different
Second, companies with global workforces must manage
religious, racial, ethnic, and national groups who must
across what have become increasingly nationalistic bound-
work together within firms? How can these conflicts be
aries. Those of us in the United States may view the terrorist
overcome to create a productive work environment?
attacks as an act of war and our response as being entirely
2. What will firms have to do differently in managing expa-
justified. However, those in the Arab world, while not jus-
triates, particularly U.S. or British citizens who are asked
tifying the terrorist attacks, may similarly feel that the mili-
to take assignments in predominantly Muslim countries?
tary response toward Afghanistan (and later Iraq) is hostile
MANAGING PEOPLE
The Toyota Way to No. 1
Toyota’s top U.S. executive on how it managed to become Toyota Way is more than just a Japanese Way. It’s about
the world’s No. 1 carmaker and why the company can hang constant improvement. If it was a Japanese Way only,
on to the top spot. then we wouldn’t have Japanese companies that perform
It happened. Toyota passed General Motors in worldwide poorly or go into bankruptcy. Toyota doesn’t monopolize
sales globally in the first quarter. We knew it was coming. this idea. And it has to translate beyond Japanese culture
It’s likely that the trend will continue and hold up for the to be successful. We employ close to 400,000 worldwide,
entire year, and for years to come. excluding dealers. If we include dealers, it might be about
As the baton gets passed this year, there’s a mix of opin- 1 million.
ions and perspectives in the auto industry about whether Of that, a significant number are Japanese. But there are
Toyota is succeeding fairly. Does its lack of health-care people from every culture working for Toyota that share the
and pension responsibilities, which hobble GM, Ford, concept and this way of doing business. From that view-
and DaimlerChrysler’s Chrysler division, allow Toyota an point, growing larger doesn’t suggest that we’re stepping out
advantage on an unlevel playing field? Does Japan’s insu- of anything that’s part of our culture.
lar economy, which has made it so difficult for U.S. auto Someone I know says Toyota really believes and nurtures
makers to achieve sales in Japan, offer an unfair advan- the idea that the company should be able to build a car
tage? Do charges that the Japanese government weakens with no problems or flaws. When this person does busi-
the yen against the dollar to keep prices down and profit up ness with Ford and GM, it’s different, they tell me. Those
abroad hold water? companies strive to be better, but you don’t get the idea
Toyota isn’t accepting the No. 1 position comfortably. they think a perfect car is possible.
It makes some of its executives nervous to be the chased, With the Toyota Way . . . one of the key elements is
rather than the chaser. Yuki Funo is the chairman and CEO kaizen: continuous improvement. There’s no end to it.
of Toyota Motor Sales USA—the top Japanese executive It’s a never-ending journey. Respect for people is another
for Toyota in North America. He recently sat down with important element. Employees. Customers. Suppliers.
BusinessWeek Senior Correspondent David Kiley to discuss When it comes to consumers, they demand changes from
some of the issues confronting Toyota as it achieves top-dog time to time. We have to always keep watching what the
status. Edited excerpts form their conversation follow: consumer wants. If we base our business on what the cus-
Have you been talking among yourselves about protect- tomer wants, there’s no end to the improvement we can
ing your culture, which could be vulnerable to change as achieve.
you become the world’s largest auto maker? I remember a story related to me by a supplier company:
As far as Toyota culture goes . . . we regard ourselves as They entered into a contract to supply axles for pickup
Japanese, but more important than the Japanese nature of trucks. It was the first contract his company had with
our company is the “Toyota Way,” which is embodied in our Toyota. He said he was awarded the contract with no dis-
concepts and systems. cussion of price. It was all based on whether his company’s
processes and quality were acceptable to Toyota. He was to invest in that. So, that’s not a level playing field. It’s very
flabbergasted. Is that a common way Toyota does business? difficult to define what a level playing field is.
Toyota’s thinking based on the Toyota Way is teamwork with You would think that GM and Ford execs, given the fact
suppliers. This teamwork is going to be a long-lasting relation- they all grew up here, should have a better idea of how
ship. Price is only one element. Trust is a more important ele- to design and package a family sedan and minivan, yet
ment. The relationship is a sharing concept, and should always these are two product segments where you and Honda
be win–win. Price is important, too. But trust is perhaps more have done especially well against the Big Three.
so. This is an idea that American business schools have come Increasingly, we’re doing the development of our vehicles
to preach. IBM, General Electric, and other companies talk in the States. The Camry chief engineer is a Japanese man.
about how important the mission of the company is. Toyota is Why the heck does he develop the most favorite car in the
only doing intelligently what the business schools are teaching. United States? That Camry car doesn’t sell in Japan. It’s a
In the church when you get married, the priest or minister failure. Why? He applies himself to understanding what the
doesn’t ask each partner how much each will get from the customer wants. He visits here and learns things.
other in terms of money. You’re asked about how well you If we talk about the level playing field, what is it? He had
get along. What is your commitment to one another? Now, to overcome such a big handicap being Japanese to create a
in real-life situations, some companies practice this, and car that’s the top seller in America. It’s very difficult to talk
some don’t. Some practice this in the United States. Some about what the level playing field is.
don’t. It’s the same in Japan. So there are fantastic achieve- U.S. companies are saying that while they’re improving
ments in both countries, and there are bankruptcies in both manufacturing processes, costs, etc. they will never out-
countries. So, it isn’t a Japanese issue or an American issue. Toyota Toyota. They have decided the best way to outdo
It’s a company-culture issue. you as they close the gap on those things is by out design-
Growth comes from both new products and boosting vol- ing you. Do you feel a greater pressure to compete on
ume of existing products. Will your sales growth come expressive design than you once did?
more from new products or from existing products in Toyota, if you look at the history, our design hasn’t been
new geographic markets? very expressive. If we aren’t careful, design could fall into
I think 15% global market share isn’t low, but it’s not that the dull category. Our designers have been seeing design
high either. There are a lot of opportunities for our product as a critical challenge. If you look at the last 5 to 10 years,
lineup as it is. But now that we have gone into full-size pick- designers have done a great job of advancing here.
ups with the new product, we fill in a significant segment. Look at the FJ Cruiser. People look at that and say, “Who
I think we need to pursue more niches in the future. We designed that? Toyota? I can’t believe it.” Every organization
had a car at the Detroit Auto Show that could be a replacement has strengths and weaknesses. Twenty years ago, Toyota had
for the former Supra sports car. But what’s more important is no confidence in how we would operate manufacturing in
to keep improving the products we have. Like Camry—what the United States. That’s why we regard the NUMMI joint-
consumers want out of Camry is always changing. That’s my venture plant [where Toyota builds the Matrix and Corolla
understanding of how to keep a product strong for the future. alongside the Pontiac Vibe] with GM as very beneficial.
We will look after Camry customers by looking after Camry GM helped us a great deal.
as a product. Same goes with RAV4 and others. The corporate advertising you have been running seems to
From time to time, a GM or Ford exec will complain about be quite effective. Some of your Detroit rivals resent the fact
an uneven playing field: a health-care advantage for Toy- that you’re acting and talking like an American company.
ota, or monetary policy that favors Japanese products. Do We have a lot of dialogue about what should be the corporate
you and your colleagues read that and pay attention? message. That advertising is what we wanted to accomplish.
We always read the stuff in the newspapers. We know health We knew that many people didn’t know what we have been
care is a very difficult situation for the Big Three. It’s a fact doing in the United States for 50 years. In San Antonio, Texas,
of life that they incur more costs. That’s the political and for example, we gave a lot of money to the local family-literacy
economic history of the United States. A decision was made program. We have been giving money to this organization
some years back on what they would give to workers. To nationally for 20 years. But we had never advertised it. People
some degree, the problem is of their own creation. need to have a clearer and more correct image of Toyota.
Not all the workers in every industry receive as high a Is your decision to advertise more aggressively a response
medical benefit as in the auto industry. Who decided that? to those kinds of remarks by people like Ford President
It’s their management. They complain sometimes about the of the Americas Mark Fields or GM Vice Chairman Bob
currency valuation. It’s very difficult. For example, the big- Lutz?
gest economy in the world is the United States. Bigger than More important than the political consideration, Toyota is
Japan. It’s the Big Three who have an advantage in operating known as a product. No one knows what Toyota is. Toyota is
in the biggest economy in the world. For myself, I invested a faceless organization. It doesn’t have a human element in
in my English education. If you’re born here, there’s no need the eyes of the consumer. Toyota is just a car.
Toyota is bigger than that though. It’s people. We QUESTIONS

have some 40,000 people working for us in the United 1. As you look at how Toyota has surpassed GM and the
States. We need to have more of a face. That we are peo- other U.S. automakers, in what ways do you think its
ple. That’s the most critical thing we have been trying to workforce has provided a competitive advantage?
achieve. 2. What do you think are the major HR issues that Toyota
Perhaps you would like to star in some ads yourself? will face in the future?
DaimlerChrysler Chairman Dieter Zetsche did that last SOURCE: From D. Kiley, “The Toyota Way to No.1,” BusinessWeek, April
year as “Dr. Z.” Do you want to be known as “Dr. T”? 26, 2007. Used with permission of Bloomberg L.P. Copyright © 2013. All
No. We want to show everybody in the company. The heroes. rights reserved.
Not one single person.
Is Translating a Global Business?
One field in which small businesses have recently enjoyed into almost 150 languages. The company not only has to
rapid growth is in the business of providing translations. find qualified translators, it needs experts in technology to
As barriers to international business continue to fall, more make state-of-the-art presentations. To recruit employees,
and more people are encountering language differences in LinguaLinx emphasizes interesting work experiences, rather
the people they work with, sell to, and buy from. At the than fancy perks. The company’s careers website describes
same time, advances in technology are providing avenues to opportunities to work with a diverse, multicultural group,
deliver translations over the phone and over the Internet. including clients at leading corporations and nonprofit
TransPerfect is one of the success stories. The company, organizations.
based in New York, started out when founder Steve Iverson, a
French teacher, began translating documents for clients. Satis- QUESTIONS
fied customers returned, looking for translations of patents and 1. What kinds of challenges would be involved in recruit-
annual reports—even for court reporting in foreign languages. ing and selecting people to translate documents from
The company now provides translations in over 170 languages. Spanish, Polish, and French into English?
It has offices in more than 90 cities spread over six continents. 2. Would those challenges be easier to meet by recruiting
CETRA Language Solutions is headquartered in Elkins within the United States or by looking for talent over-
Park, Pennsylvania. It started with a lawsuit: while founder seas? Explain.
Jiri Stejskal was working on his doctorate degree in Slavic 3. Suppose a small translation business asked you to
languages and literature, a Philadelphia law firm asked him advise the company on how to overcome cultural bar-
to translate thousands of pages of documents related to a riers among a staff drawn from three countries. Suggest
case. Stejskal brought in all the Czech translators he could a few ways the company could use training and perfor-
find, and his company was born. Now CETRA’s employees mance management to achieve this goal.
and hundreds of consultants serve the federal government SOURCES: Tanisha A. Sykes, “Growth in Translation,” Inc., August 4, 2009,
plus companies involved in law, marketing research, and life www.inc.com; Joel Dresang, “Iverson Language Associates Acquired by N.Y.
Firm,” Millwaukee Journal Sentinel, December 2, 2008, Business & Company
sciences. The company’s freelance translators and interpret-
Resource Center, http://galenet.galegroup.com; TransPerfect corporate website,
ers are located throughout the world. www.transperfect.com, accessed June 19, 2015; CETRA Language Solutions
LinguaLinx, based in Troy, New York, handles more than corporate website, www.cetra.com, accessed June 19, 2015, and LinguaLinx
words. It converts documents, websites, and multimedia corporate website, www.lingualinx.com, accessed June 19, 2015.
NOTES
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13. L. Harrison, Who Prospers? How Cultural Values Shape 39. M. Mendenhall, E. Dunbar, and G. R. Oddou, “Expatriate Selec-
Economic and Political Success (New York: Free Press, 1992). tion, Training, and Career-Pathing: A Review and Critique,”
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tries and Three Regions,” in Expectations in Cross-Cultural Relative Importance of Factors Perceived to Contribute to Suc-
Psychology, eds. J. Deregowski, S. Dziurawiec, and R. C. Annis cess,” Personnel Psychology 48 (1995), pp. 99–114.
(Lisse, Netherlands: Swets and Zeitlinger, 1983). 42. K. Ng, and C. Earley, “Culture and Intelligence: Old Constructs,
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Journal of International Business Studies 14 (1983), pp. 75–90. gence: Its Measurement and Effects on Cultural Judgment and
19. G. Hofstede, “Cultural Constraints in Management Theories.” Decision Making, Cultural Adaptation, and Task Performance,”
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Go? The Role of Job Embeddedness in Predicting Turnover in 43. R. Tung, “Selecting and Training of Personnel for Overseas
Individualistic and Collectivistic Cultures,” Journal of Applied Assignments,” Columbia Journal of World Business 16, no. 2
Psychology 95, no. 5 (2010), pp. 807–23. (1981), pp. 68–78.
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22. N. Adler and S. Bartholomew, “Managing Globally Competent dictors of Expatriates’ Desire to Terminate the Assignment
People,” The Executive 6 (1992), pp. 52–65. and Supervisor Rated Performance,” Personnel Psychology 53
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International Compensation and Rewards: Learning from How Academy of Management Review 15 (1990), pp. 113–36.
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Strategically Managing
the HRM Function
16
C H A P T E R
LEARNING OBJECTIVES
LO 16-1 Describe the roles that HRM plays in firms today and
the categories of HRM activities. page 664
LO 16-2 Discuss how the HRM function can define its mission and market. page 667
LO 16-3 Explain the approaches to evaluating the effectiveness of HRM
practices. page 671
LO 16-4 Describe the new structures for the HRM function. page 676
LO 16-5 Describe how outsourcing HRM activities can improve service
delivery efficiency and effectiveness. page 679
LO 16-6 Relate how process reengineering is used to review

and redesign HRM practices. page 680
LO 16-7 Discuss the types of new technologies that can improve

the efficiency and effectiveness of HRM. page 683
LO 16-8 List the competencies the HRM executive needs to become

a strategic partner in the company. page 689
662
>>>
The Need for HR at Tech Start-Ups
Marc Andreessen, one of Netscape’s founders and The situation exemplifies the problems that often
a venture capitalist in the Silicon Valley, tweeted his plague a free-wheeling start-up company. The lack
version of the Top 10 ways that start-ups can dam- of rules and structure create a culture where people
age themselves. One way was “Refuse to take HR can innovate, but sometimes rules exist for a reason.
seriously: allow terrible internal manager & employee An absence of rules combined with young people
behavior to catalyze into catastrophic ethical and inexperienced in office politics and used to a say-
legal crisis.” whatever-you-want mindset with regard to social
The San Francisco–based software start-up media can create a cauldron in which conflict brews.
GitHub exemplifies this potential issue. On an anony- The company brought in an investigator to explore
mous messaging app, an unnamed user posted, the substance of the gender harassment and hostile
“The self proclaimed Queen of GitHub is leaving work environment claims. The investigator found no
her throne. The masses cheer.” Julie Ann Horvath, evidence supporting the claims but did find that a
the subject of the post, responded with a flurry of culture that blurred personal and professional bound-
online allegations regarding gender harassment at aries exacerbated the conflict between Mr. Preston-
the company. A month later, company president and Werner and Ms. Horvath. In addition, with the lack
co-founder Tom Preston-Werner stepped down, in of a substantive HR function, the company seemed
spite of the fact that he was not associated with the ill-equipped to deal with the conflict.
post. He did acknowledge that he had made errors in SOURCE: E. Rusli, “Torment Claims Make GitHub Grow Up,” The Wall
judgment in how he handled the situation. Street Journal, July 17, 2014, www.wsj.com.
Introduction
Throughout this book we have emphasized how human resource management prac-
tices can help companies gain a competitive advantage. We identified specific practices
related to managing the internal and external environment; designing work and mea-
suring work outcomes; and acquiring, developing, and compensating human resources.
We have also discussed the best of current research and practice to show how they may
contribute to a company’s competitive advantage.
As we said in Chapter 1, the role of the HRM function has been evolving over time. As
we see in this chapter’s opening story, it has now reached a crossroads. Although it began
as a purely administrative function, most HR executives now see the function’s major role
as being much more strategic. However, this evolution has resulted in a misalignment
between the skills and capabilities of members of the function and the new requirements
placed on it. Virtually every HRM function in top companies is going through a transfor-
mation process to create a function that can play this new strategic role while successfully
fulfilling its other roles. This transformation process is also going on globally. Managing
this process is the subject of this chapter. First we discuss the various activities of the HRM
function. Then we examine how to develop a market- or customer-oriented HRM function.
We then describe the current structure of most HRM functions. Finally, we explore mea-
surement approaches for assessing the effectiveness of the function.
663
664 CHAPTER 16 Strategically Managing the HRM Function
Activities of HRM
LO 16-1 To understand the transformation going on in HRM, one must understand HRM activi-
Describe the roles that ties in terms of their strategic value. One way of classifying these activities is depicted in
HRM plays in firms Figure 16.1. Transactional activities (the day-to-day transactions such as benefits admin-
today and the catego-
istration, record keeping, and employee services) are low in their strategic value. Tradi-
ries of HRM activities.
tional activities such as performance management, training, recruiting, selection,
compensation, and employee relations are the nuts and bolts of HRM. These activities
have moderate strategic value because they often form the practices and systems to
ensure strategy execution. For instance, one role of HR is often to set policies regarding
what are legitimate activities that salespeople can engage in to make sales in foreign
countries. Transformational activities create long-term capability and adaptability for
the firm. These activities include knowledge management, management development,
cultural change, and strategic redirection and renewal. Obviously, these activities com-
prise the greatest strategic value for the firm.
As we see in the figure, most HRM functions spend the vast majority of their time on
transactional activities, with substantially less on traditional and very little on transfor-
mational activities. However, virtually all HRM functions, in order to add value to the
firm, must increase their efforts in the traditional and transformational activities. To do
Figure 16.1
Categories of HRM Activities and Percentages of Time Spent on Them
Transformational (5–15%)
Knowledge management
Strategic redirection and renewal
Cultural change
Management development
Traditional (15–30%)
Recruitment and selection
Training
Performance management
Compensation
Employee relations
Transactional (65–75%)
Benefits administration
Record keeping
Employee services
SOURCE: P. Wright, G. McMahan, S. Snell, and B. Gerhart, Strategic Human Resource Management: Building Human Capital
and Organizational Capability. Technical report. Cornell University, 1998.
CHAPTER 16 Strategically Managing the HRM Function 665
this, however, requires that HR executives (1) develop a strategy for the HRM function,
(2) assess the current effectiveness of the HRM function, and (3) redesign, reengineer, or
outsource HRM processes to improve efficiency and effectiveness. These issues will be
discussed in the following sections.
Strategic Management of the HRM Function

In light of the various roles and activities of the HRM function, we can easily see that it
is highly unlikely that any function can (or should) effectively deliver on all roles and all
activities. Although this is a laudable goal, resource constraints in terms of time, money,
and head count require that the HR executive make strategic choices about where and
how to allocate these resources for maximum value to the firm.
Chapter 2 explained the strategic management process that takes place at the organiza-
tion level and discussed the role of HRM in this process. HRM has been seen as a strategic
partner that has input into the formulation of the company’s strategy and develops and aligns
HRM programs to help implement the strategy. However, for the HRM function to become
truly strategic in its orientation, it must view itself as a separate business entity and engage
in strategic management in an effort to effectively serve the various internal customers.
In this respect, one recent trend within the field of HRM, consistent with the total
quality management philosophy, is for the HR executive to take a customer-oriented
approach to implementing the function. In other words, the strategic planning process
that takes place at the level of the business can also be performed with the HRM func-
tion. HR executives in more progressive U.S. companies have begun to view the HRM
function as a strategic business unit and have tried to define that business in terms of their
customer base, their customers’ needs, and the technologies required to satisfy custom-
ers’ needs (Figure 16.2). For example, Joe Ruocco, the Chief HR Officer at Goodyear,
Figure 16.2
Customers Customer-Oriented
Line managers Perspective of the
Strategic planners HRM Function
Employees
HRM function
Technology Customers’ needs

Staffing Committed employees
Performance management Competent employees
Rewards
Training and development
has encouraged his HR function to take a customer-centric approach. As you can see in
Figure 16.3, they view the business (line clients) and the employees (associates) as their
main customers. Then, they provide examples of the different tools and processes at their
disposal to meet those customer needs.
A customer orientation is one of the most important changes in the HRM function’s
attempts to become strategic. It entails first identifying customers. The most obvious
example of HRM customers are the line managers who require HRM services. In addi-
tion, the strategic planning team is a customer in the sense that it requires the identi-
fication, analysis, and recommendations regarding people-oriented business problems.
Employees are also HRM customers because the rewards they receive from the employ-
ment relationship are determined and/or administered by the HRM department.
In addition, the products of the HRM department must be identified. Line managers want
to have high-quality employees committed to the organization. The strategic planning team
requires information and recommendations for the planning process as well as programs that
support the strategic plan once it has been identified. Employees want compensation and
benefit programs that are consistent, adequate, and equitable, and they want fair promotion
decisions. At Southwest Airlines, the “People” department administers customer surveys to
all clients as they leave the department to measure how well their needs have been satisfied.
Finally, the technologies through which HRM meets customer needs vary depending on
the need being satisfied. Selection systems ensure that applicants selected for employment
have the necessary knowledge, skills, and abilities to provide value to the organization.
Training and development systems meet the needs of both line managers and employees
by giving employees development opportunities to ensure they are constantly increasing
their human capital and, thus, providing increased value to the company. Performance
Figure 16.3
Goodyear’s
Customer Centric
View of HR
SOURCE: Courtesy of Goodyear Chief HR Officer Joe Ruocco.

management systems make clear to employees what is expected of them and assure line
managers and strategic planners that employee behavior will be in line with the company’s
goals. Finally, reward systems similarly benefit all customers (line managers, strategic plan-
ners, and employees). These systems assure line managers that employees will use their
skills for organizational benefit, and they provide strategic planners with ways to ensure
that all employees are acting in ways that will support the strategic plan. Obviously, reward
systems provide employees with an equitable return for their investment of skills and effort.
Building an HR Strategy
THE BASIC PROCESS
How do HR functions build their HR strategies? Recent research has examined how HR LO 16-2
functions go about the process of building their HR strategies that should support the Discuss how the HRM
business strategies. Conducting case studies on 20 different companies, Wright and col- function can define its
mission and market.
leagues describe the generic approach as somewhat consistent with the process for
developing a business strategy.1
As depicted in Figure 16.4, the function first scans the environment to determine the
trends or events that might have an impact on the organization (e.g., future talent short-
age, increasing immigrant population, aging of the workforce).
It then examines the strategic business issues or needs (e.g., is the company grow-
ing, expanding internationally, needing to develop new technologies?). For instance,
Figure 16.5 displays Goodyear’s major business strategy priorities. As can be seen in this
example, a clear strategic priority is the attraction, motivation, and retention of talent.
From these issues, the HR strategy team needs to identify the specific people issues
that will be critical to address in order for the business to succeed (a potential leader-
ship vacuum, lack of technological expertise, lack of diversity, etc.). All of this informa-
tion is used in designing the HR strategy, which provides a detailed plan regarding the
major priorities and the programs, policies, and processes that must be developed or
executed. Finally, this HR strategy is communicated to the relevant parties, both internal
and external to the function. Again, Goodyear’s talent management strategy, depicted in
Figure 16.6, shows how Goodyear seeks to differentiate itself in the labor market as well
as the major priority areas that the HR strategy seeks to address.
Thus, the HR strategy is a framework that guides individuals in HR by helping them
understand where and how they will impact the company. At Google this four-pronged
People Operations strategy consists of:
1. “Find them, Grow them, Keep them.” The idea is to find great people to work for
Google, grow and develop their skills, and do everything possible to keep them
at Google.
2. “Put our users first.” This goal echoes what Google does as a company, also illus-
trates how those in HR should think about the users of people operations, which
are all the other Google employees.
Figure 16.4
Basic Process for HR Strategy
Scan the Identify Identify Communicate

Develop HR
external strategic people the HR
strategy
environment business issues issues strategy
Figure 16.5
Goodyear’s Strategic
Business Priorities
Figure 16.6
Goodyear’s Global
Talent Management
Process
3. “Put on your own oxygen mask before assisting others.” The thinking behind this
goal is, in many organizations HR is doing all this work in the company for oth-
ers and they forget to grow and develop their own people. Eventually this crip-
ples the function’s ability to serve the rest of the organization because the very
best, most talented people get recruited out of HR to go be heads of HR at other
companies.
4. “This space intentionally left blank.” In Google’s environment things change very,
very quickly and that creates a lot of uncertainty. Uncertainty causes people to
put less discretionary effort into their work, to be less satisfied, less collabora-
tive, more competitive with fellow employees as well as making them more likely
to leave the company. Hence, this goal is an attempt to explicitly recognize the
dynamic nature of Google’s internal and external environment.2
INVOLVING LINE EXECUTIVES

This generic process provides for the potential to involve line executives in a number
of ways. Because the HR strategy seeks to address business issues, involving those in
charge of running the business can increase the quality of information from which the
HR strategy is created. This involvement can occur in a few ways. First, line execu-
tives could simply provide input, by either surveying or interviewing them regarding the
business challenges and strategy. Second, they could be members of the team that actu-
ally develops the HR strategy. Third, once the strategy is developed, they could receive
communications with the HR strategy information. Finally, they could have to formally
approve the strategy, in essence “signing off” that the HR strategy fully supports the
business strategy. The most progressive organizations use all four forms of involvement,
asking a large group of executives for input, having one or two executives on the team,
communicating the HR strategy broadly to executives, and having the senior executive
team formally approve it.
CHARACTERIZING HR STRATEGIES
As you can see in Figure 16.7, the variety of ways that HR strategies can be generated
results in various levels of linkage with the business. In general, four categories of this
relationship can be identified.
First, at the most elementary level, “HR-focused” HR functions’ articulation
of people outcomes stems more from an analysis of what their functions currently
do than from an understanding of how those people outcomes relate to the larger
business. Second, “people-linked” functions have clearly identified, articulated, and
aligned their HR activities around people issues and outcomes, but not business issues
and outcomes. Third, “business-linked” HR functions begin with an assessment of
what HR is doing, then identify the major people outcomes they should focus on, and,
in a few cases, how those might translate into positive business outcomes. Finally,
“business-driven” functions have fully developed HR strategies which begin by identi-
fying the major business needs and issues, consider how people fit in and what people
outcomes are necessary, and then build HR systems focused on meeting those needs.
For example, as Kroger sought to develop a new strategy for competing in the retail
grocery store market, it required a different approach to leadership. Figure 16.8 shows
the leadership competencies necessary to execute the strategy. The larger focus is on
leaders who have a passion for people and a passion for results, with a number of more
specific competencies making up each.
Figure 16.7 An Outside-In Perspective

Approaches to Business-Driven ( 5 cases)
Developing an HR
Strategy Business People
HR Strategy
issues/outcomes issues/outcomes
3 Different Inside-Out Stages

Business-Linked ( 5 cases)
Business People
HR Strategy
issues/outcomes issues/outcomes
People-Linked ( 7 cases)
People
HR Strategy
issues/outcomes
HR-Focused (3 cases)
People
HR Strategy
issues/outcomes
Figure 16.8
Kroger’s Leadership
Model
SOURCE: Courtesy of Kroger Chief HR Officer Katy Barclay.

The HR strategy must help address the issues that the business faces which will deter-
mine its success. As finding, attracting, and retaining talent has become a critical issue,
virtually every HR function is addressing this as part of the HR strategy.
Measuring HRM Effectiveness

The strategic decision-making process for the HRM function requires that decision mak- LO 16-3
ers have a good sense of the effectiveness of the current HRM function. This information Explain the approaches
provides the foundation for decisions regarding which processes, systems, and skills of to evaluating the
effectiveness of HRM
HR employees need improvement. Often HRM functions that have been heavily involved
practices.
in transactional activities for a long time tend to lack systems, processes, and skills for
delivering state-of-the-art traditional activities and are thoroughly unable to contribute
in the transformational arena. Thus diagnosis of the effectiveness of the HRM function
provides critical information for its strategic management.
In addition, having good measures of the function’s effectiveness provides the following
benefits:3
∙ Marketing the function: Evaluation is a sign to other managers that the HRM func-
tion really cares about the organization as a whole and is trying to support opera-
tions, production, marketing, and other functions of the company. Information
regarding cost savings and benefits is useful to prove to internal customers that
HRM practices contribute to the bottom line. Such information is also useful for
gaining additional business for the HRM function.
∙ Providing accountability: Evaluation helps determine whether the HRM function is
meeting its objectives and effectively using its budget.
APPROACHES FOR EVALUATING EFFECTIVENESS

Two approaches are commonly used to evaluate the effectiveness of HRM practices: the
audit approach and the analytic approach.
Audit Approach
The audit approach focuses on reviewing the various outcomes of the HRM functional Audit Approach
areas. Both key indicators and customer satisfaction measures are typically collected. Type of assessment
Table 16.1 lists examples of key indicators and customer satisfaction measures for staff- of HRM effectiveness
that involves review of
ing, equal employment opportunity, compensation, benefits, training, performance man- customer satisfaction
agement, safety, labor relations, and succession planning. The development of electronic or key indicators (like
employee databases and information systems has made it much easier to collect, store, turnover rate or aver-
and analyze the functional key indicators (more on this later in the chapter) than in the age days to fill a posi-
past, when information was kept in file folders. tion) related to an HRM
functional area (such as
We previously discussed how HRM functions can become much more customer- recruiting or training).
oriented as part of the strategic management process. If, in fact, the function desires
to be more customer-focused, then one important source of effectiveness data can be
the customers. Just as firms often survey their customers to determine how effectively
the customers feel they are being served, the HRM function can survey its internal
customers.
One important internal customer is the employees of the firm. Employees often have
both direct contact with the HRM function (through activities such as benefits adminis-
tration and payroll) and indirect contact with the function through their involvement in
activities such as receiving performance appraisals, pay raises, and training programs.
Table 16.1
Examples of Key Indicators and Customer Satisfaction Measures for HRM Functions
KEY INDICATORS CUSTOMER SATISFACTION MEASURES
Staffing
Average days taken to fill open requisitions Anticipation of personnel needs
Ratio of acceptances to offers made Timeliness of referring qualified workers to line
Ratio of minority/women applicants to supervisors
representation in local labor market Treatment of applicants
Per capita requirement costs Skill in handling terminations
Average years of experience/education of hires Adaptability to changing labor market conditions
per job family
Equal employment opportunity
Ratio of EEO grievances to employee population Resolution of EEO grievances
Minority representation by EEO categories Day-to-day assistance provided by personnel
Minority turnover rate department in implementing affirmative action plan
Aggressive recruitment to identify qualified women
and minority applicants
Compensation
Per capita (average) merit increases Fairness of existing job evaluation system in assigning
Ratio of recommendations for reclassification to grades and salaries
number of employees Competitiveness in local labor market
Percentage of overtime hours to straight time Relationship between pay and performance
Ratio of average salary offers to average salary in Employee satisfaction with pay
community
Benefits
Average unemployment compensation Promptness in handling claims
payment (UCP) Fairness and consistency in the application of
Average workers’ compensation payment (WCP) benefit policies
Benefit cost per payroll dollar Communication of benefits to employees
Percentage of sick leave to total pay Assistance provided to line managers in reducing
potential for unnecessary claims
Training
Percentage of employees participating in training Extent to which training programs meet the needs of
programs per job family employees and the company
Percentage of employees receiving tuition refunds Communication to employees about available
Training dollars per employee training opportunities
Quality of introduction/orientation programs
Employee appraisal and development
Distribution of performance appraisal ratings Assistance in identifying management potential
Appropriate psychometric properties of appraisal Organizational development activities provided by
forms HRM department
Succession planning
Ratio of promotions to number of employees Extent to which promotions are made from within
Ratio of open requisitions filled internally to those Assistance/counseling provided to employees in
filled externally career planning
Safety
Frequency/severity ratio of accidents Assistance to line managers in organizing safety
Safety-related expenses per $1,000 of payroll programs
Plant security losses per square foot (e.g., fires, Assistance to line managers in identifying potential
burglaries) safety hazards
Assistance to line managers in providing a good working
environment (lighting, cleanliness, heating, etc.)
KEY INDICATORS CUSTOMER SATISFACTION MEASURES
Labor relations
Ratio of grievances by pay plan to number of Assistance provided to line managers in handling
employees grievances
Frequency and duration of work stoppages Efforts to promote a spirit of cooperation in plant
Percentage of grievances settled Efforts to monitor the employee relations climate in
plant
Overall effectiveness
Ratio of personnel staff to employee population Accuracy and clarity of information provided to
Turnover rate managers and employees
Absenteeism rate Competence and expertise of staff
Ratio of per capita revenues to per capita cost Working relationship between organizations and HRM
Net income per employee department
SOURCE: Reprinted with permission. Excerpts from Chapter 15, “Evaluating Human Resource Effectiveness,” pp. 187–222, by Anne S. Tsui and Luis
R. Gomez-Mejia, from Human Resource Management: Evolving Roles and Responsibilities, edited by Lee Dyer. Copyright © 1988 by The Bureau of
National Affairs, Inc., Washington, DC, 20037. To order BNA publications call toll free 1-800-960-1220.
Many organizations such as AT&T, Motorola, and General Electric use their regular
employee attitude survey as a way to assess the employees as users/customers of the
HRM programs and practices.4 However, the problem with assessing effectiveness only
from the employees’ perspective is that often they are responding not from the stand-
point of the good of the firm, but, rather, from their own individual perspective. For
example, employees notoriously and consistently express dissatisfaction with pay level
(who doesn’t want more money?), but to simply ratchet up pay across the board would
put the firm at a serious labor cost disadvantage.
Thus, many firms have gone to surveys of top line executives as a better means of
assessing the effectiveness of the HRM function. The top-level line executives can see
how the systems and practices are impacting both employees and the overall effective-
ness of the firm from a strategic standpoint. This can also be useful for determining how
well HR employees’ perceptions of their function’s effectiveness align with the views of
their line colleagues. For example, a study of 14 firms revealed that HR executives and
line executives agreed on the relative effectiveness of HR’s delivery of services such as
staffing and training systems (that is, which were most and least effectively delivered) but
not on the absolute level of effectiveness. As Figure 16.9 shows, HR executives’ ratings
of their effectiveness in different roles also diverged significantly from line executives’. In
addition, line executives viewed HRM as being significantly less effective with regard to
HRM’s actual contributions to the firm’s overall effectiveness, as we see in Figure 16.10.5
The Analytic Approach

The analytic approach focuses on either (1) determining whether the introduction of a pro- Analytic Approach
gram or practice (like a training program or a new compensation system) has the intended Type of assessment of
effect, (2) estimating the financial costs and benefits resulting from an HRM practice, or HRM effectiveness that
involves determining
(3) using analytical data to increase organizational effectiveness. For example, in Chapter the impact of, or the
7 we discussed how companies can determine a training program’s impact on learning, financial cost and ben-
behavior, and results. Evaluating a training program is one strategy for determining efits of, a program or
whether the program works. Typically, in an overall evaluation of effectiveness, we are practice.
interested in determining the degree of change associated with the program.
Figure 16.9 8.0

Comparing HR and 7.3
Line Executives’ 7.0 6.8
6.5
Evaluations of the 6.1 6.2 6.1
Effectiveness of HRM 6.0
Roles 5.3 5.2 5.3
5.0 4.7
4.0
3.0
2.0
1.0
0
Providing HRM Change Business Developing the Tailoring HRM
services consulting partner organization practices to
strategy
HR mean Line mean
SOURCE: P. Wright, G. McMahan, S. Snell, and B. Gerhart, “Comparing Line and HR Executives’ Perceptions of HR
Effectiveness: Services, Roles, and Contributions,” CAHRS (Center for Advanced Human Resource Studies) working
paper 98-29, School of ILR, Cornell University, Ithaca, NY.
Figure 16.10 7.0

Comparing HR and
Line Executives’ 6.0
Evaluations of the
Effectiveness of HRM 5.0 5.0 5.0
5.0 4.8 4.8 4.8
Contributions 4.5
4.2 4.3 4.2 4.2
4.1
4.0 3.9 3.8
3.0
2.0
1.0
0.0
Performing the
expected job
Responsive to
customer needs
Providing useful
information
Enhancing
competitiveness
Value-added
contribution
Contributing to
core competence
Building human
capital
HRM mean Line mean
SOURCE: P. Wright, G. McMahan, S. Snell, and B. Gerhart, “Comparing Line and HR Executives’ Perceptions of HR
Effectiveness: Services, Roles, and Contributions,” CAHRS (Center for Advanced Human Resource Studies) working
paper 98-29, School of ILR, Cornell University, Ithaca, NY.
The second strategy involves determining the dollar value of the training program,
taking into account all the costs associated with the program. Using this strategy, we are
not concerned with how much change occurred but rather with the dollar value (costs
versus benefits) of the program. Table 16.2 lists the various types of cost–benefit analy-
ses that are done. The human resource accounting approach attempts to place a dollar
value on human resources as if they were physical resources (like plant and equipment)
or financial resources (like cash). Utility analysis attempts to estimate the financial
impact of employee behaviors (such as absenteeism, turnover, job performance, and sub-
stance abuse).
For example, wellness programs are a popular HRM program for reducing health care
costs through reducing employees’ risk of heart disease and cancer. One study evalu-
ated four different types of wellness programs. Part of the evaluation involved determin-
ing the costs and benefits associated with the four programs over a three-year period.6
A different type of wellness program was implemented at each site. Site A instituted
a program involving raising employees’ awareness of health risks (distributing news
articles, blood pressure testing, health education classes). Site B set up a physical fit-
ness facility for employees. Site C raised awareness of health risks and followed up with
employees who had identified health risks. Site D provided health education and follow-
up counseling and promoted physical competition and health-related events. Table 16.3
shows the effectiveness and cost-effectiveness of the Site C and Site D wellness models.
The analytic approach is more demanding than the audit approach because it requires
the detailed use of statistics and finance. A good example of the level of sophistication
that can be required for cost–benefit analysis is shown in Table 16.4. This table shows
the types of information needed to determine the dollar value of a new selection test for
entry-level computer programmers.
Finally, HR analytics can be used by the function to increase the effectiveness of the
firm. For instance, Google’s analytical approach to HR has revealed which backgrounds
and capabilities are correlated with high performance as well as the leading cause of
attrition—an employee’s feeling that he or she is underused at the company. It also dis-
covered that the ideal number of recruiting interviews is 5, down from a previous aver-
age of 10.
In addition, Project Oxygen was aimed at developing great managers (named because
good management, like oxygen, keeps the company alive). The analytics team poured
through performance management scores, employee surveys, and other data to group
managers based on two dimensions: their task performance and their people performance.
Table 16.2
Human resource accounting Types of Cost–
Benefit Analyses
Utility analysis
SOURCE: Based on A. S. Tsui and L. R. Gomez-Mejia, “Evaluating HR Effectiveness,” in Human Resource

Management: Evolving Roles and Responsibilities, ed. L. Dyer (Washington, DC: Bureau of National Affairs, 1988),
pp. 1–196.
Table 16.3 SITE C SITE D

Effectiveness and
Cost-Effectiveness
Annual direct program costs, per employee per year $30.96 $38.57
of Two Wellness
Programs for Four Percentage of cardiovascular disease risksa for which 48% 51%
Cardiovascular risk was moderately reduced or relapse prevented
Disease Risk Factors Percentage of preceding entry per annual $1 spent 1.55% 1.32%
per employee
Amount spent per 1% of risks reduced or relapse prevented $.65 $.76
aHighblood pressure, overweight, smoking, and lack of exercise.

SOURCE: J. C. Erfurt, A. Foote, and M. A. Heirich, “The Cost-Effectiveness of Worksite Wellness Programs,”
Personnel Psychology 45 (1992), p. 22.
Table 16.4
Example of Cost–benefit information
Analysis Needed to Current employment 4,404
Determine the Dollar Number separating 618
Value of a Selection Number selected 618
Test Average tenure 9.69 years
Test information
Number of applicants 1,236
Testing cost per applicant $10
Total test cost $12,360
Average test score 0.80 SD
Test validity 0.76
SDy (per year)a $10,413
Computation
Quantity = Average tenure × Applicants selected
= 9.69 years × 618 applicants
= 5,988 person-years
Quality = Average test score × Test validity × SDy
= 0.80 × 0.76 × $10,413
= $6,331 per year
Utility = (Quantity × Quality) – Costs
= (5,988 person-year × $6,331 per year) – $12,360
= $37.9 million
aSD = Dollar value of one standard difference in job performance. Approximately 40% of average salary.
y
SOURCES: From J. W. Boudreau, “Utility Analysis,” in Human Resource Management: Evolving Roles and Responsibili-
ties, ed. L. Dyer (Washington, DC: Bureau of National Affairs, 1988), p. 150; F. L. Schmidt, J. E. Hunter, R. C. McKenzie,
and T. W. Muldrow, “Impact of Valid Selection Procedures on Work-Force Productivity,” Journal of Applied Psychology
64 (1979), pp. 609–26.
They then conducted a double-blind study focusing on those who were top (or bottom) on
both dimensions, in order to identify eight behaviors that characterized good managers.7
Improving HRM Effectiveness

LO 16-4 Once a strategic direction has been established and HRM’s effectiveness evaluated, lead-
Describe the new ers of the HRM function can explore how to improve its effectiveness in contributing to
structures for the HRM the firm’s competitiveness. Returning briefly to Figure 16.1, which depicted the differ-
function.
ent activities of the HRM function, often the improvement focuses on two aspects of the
pyramid. First, within each activity, HRM needs to improve both the efficiency and
effectiveness in performing each of the activities. Second, often there is a push to elimi-
nate as much of the transactional work as possible (and some of the traditional work) to
free up time and resources to focus more on the higher-value-added transformational
work. Redesign of the structure (reporting relationships) and processes (through out-
sourcing and information technology) enables the function to achieve these goals simul-
taneously. Figure 16.11 depicts this process.
RESTRUCTURING TO IMPROVE HRM EFFECTIVENESS

Traditional HRM functions were structured around the basic HRM subfunctions such as
staffing, training, compensation, appraisal, and labor relations. Each of these areas had
a director who reported to the VP of HRM, who often reported to a VP of finance and
administration. However, for the HRM function to truly contribute strategically to firm
effectiveness, the senior HR person must be part of the top management team (reporting
directly to the chief executive officer), and there must be a different structural arrange-
ment within the function itself.
A generic structure for the HRM function is depicted in Figure 16.12. As we see,
the HRM function effectively is divided into three divisions: the centers for expertise,
Figure 16.11
Improving HRM Effectiveness
Transformational (5–15%)
Structural realignment
Cultural change
Training
Compensation
Employee relations
Transactional (65–75%) Process

Outsourcing Benefits administration redesign,
Record keeping information
Employee services technology
Figure 16.12 ganization structure

Old and New
Structures for the
HRM Organization VP, HRM
Director
Director Director Director
training &
staffing compensation planning
development
ganization structure
VP, HRM
Centers for Field staff Service center

expertise
Rewards
Staffing technology
Training &
development processing
Communications
Traditional/ Transformational/ Transactional

transformational traditional
SOURCE: P. Wright, G. McMahan, S. Snell, and B. Gerhart, Strategic Human Resource Management: Building Human
Capital and Organizational Capability. Technical report. Cornell University, 1998.
the field generalists, and the service center.8 The centers for expertise usually consist of
the functional specialists in the traditional areas of HRM such as recruitment, selection,
training, and compensation. These individuals ideally act as consultants in the develop-
ment of state-of-the-art systems and processes for use in the organization. The field
generalists consist of the HRM generalists who are assigned to a business unit within the
firm. These individuals usually have dual reporting relationships to both the head of the
line business and the head of HRM (although the line business tends to take priority).
They ideally take responsibility for helping the line executives in their business strategi-
cally address people issues, and they ensure that the HRM systems enable the business
to execute its strategy. Finally, the service center consists of individuals who ensure
that the transactional activities are delivered throughout the organization. These service
centers often leverage information technology to efficiently deliver employee services.
For example, organizations such as Chevron have created call-in service centers where
employees can dial a central number where service center employees are available to
answer their questions and process their requests and transactions.
Such structural arrangements improve service delivery through specialization. Center

for expertise employees can develop current functional skills without being distracted by
transactional activities, and generalists can focus on learning the business environment
without having to maintain expertise in functional specializations. Finally, service center
employees can focus on efficient delivery of basic services across business units.
OUTSOURCING TO IMPROVE HRM EFFECTIVENESS

Restructuring the internal HRM function and redesigning the processes represent inter- LO 16-5
nal approaches to improving HRM effectiveness. However, increasingly HR executives Describe how outsourc-
are seeking to improve the effectiveness of the systems, processes, and services the func- ing HRM activities
can improve service
tion delivers through outsourcing. Outsourcing entails contracting with an outside ven-
delivery efficiency and
dor to provide a product or service to the firm, as opposed to producing the product effectiveness.
using employees within the firm.
Why would a firm outsource an HRM activity or service? Usually this is done for one Outsourcing
of two reasons: either the outsourcing partner can provide the service more cheaply than An organization’s use
it would cost to do it internally, or the partner can provide it more effectively than it can of an outside organiza-
be performed internally. Early on, firms resorted to outsourcing for efficiency reasons. tion for a broad set of
Why would using an outsourced provider be more efficient than having internal employ- services.
ees provide a service? Usually it is because outsourced providers are specialists who are
able to develop extensive expertise that can be leveraged across a number of companies.
For example, consider a relatively small firm that seeks to develop a pension system
for employees. To provide this service to employees, the HRM function would need to
learn all of the basics of pension law. Then it would need to hire a person with specific
expertise in administering a pension system in terms of making sure that employee con-
tributions are withheld and that the correct payouts are made to retired employees. Then
the company would have to hire someone with expertise in investing pension funds. If
the firm is small, requirements of the pension fund might not fill the time (80 hours per
week) of these two new hires. Assume that it takes only 20 total hours a week for these
people to do their jobs. The firm would be wasting 60 hours of employee time each
week. However, a firm that specializes in providing pension administration services to
multiple firms could provide the 20 hours of required time to that firm and three other
firms for the same cost as had the firm performed this activity internally. Thus the spe-
cialist firm could charge the focal firm 50% of what it would cost the small firm to do the
pensions internally. Of that 50%, 25% (20 hours) would go to paying direct salaries and
the other 25% would be profit. Here the focal firm would save 50% of its expenses while
the provider would make money.
Now consider the aspect of effectiveness. Because the outsourced provider works for
a number of firms and specializes in pensions, its employees develop state-of-the-art
knowledge of running pension plans. They can learn unique innovations from one com-
pany and transfer that learning to a new company. In addition, employees can be more
easily and efficiently trained because all of them will be trained in the same processes
and procedures. Finally, with experience in providing constant pension services, the firm
is able to develop a capability to perform these services that could never be developed by
two individuals working 25% of the time on these services.
What kind of services are being outsourced? Firms primarily outsource transactional
activities and services of HRM such as pension and benefits administration as well as
payroll. However, a number of traditional and some transformational activities have been
outsourced as well. The “Competing through Globalization” box shows how some firms
that offshored some of their business activities have now begun reshoring them.
Some U.S. Companies Bringing Jobs Back Home
United Technologies’ Otis eleva- in Florence, South Carolina, skilled work-
tor company, the world’s larg- estimating that the move would ers in Florence.
est manufacturer and installer lower freight and logistic costs As demand for
of elevators and escalators, is by 17% and reduce costs an production continued to rise,
one of a growing number of additional 20% by co-locating delayed orders piled up and
manufacturing companies now design and production work- Otis had to postpone closing its
“reshoring” their labor force to ers. At the same time, Otis Nogales factory five months in
the United States. As the low closed facilities in Arizona and order to meet demand. These
overseas labor costs—which Indiana, transferring some obstacles cost United Technolo-
originally enticed companies of those workers to South gies $60 million in 2013 and
to offshore their manufacturing Carolina. $9 million in the first quarter of
facilities—rise, companies have Otis planned these fac- 2014.
begun taking advantage of the tory moves with the intent to
tax incentives and supply-chain close its production factory in DISCUSSION QUESTION
and operations advantages of Nogales, Mexico. However, What challenges might a com-
co- or near-locating their design the company bit off more that pany face that plans to “reshore”
facilities and manufacturing it could chew, simultaneously its labor force?
plants in the United States. updating computer systems and
SOURCE: T. Mann, “Otis Finds ‘Reshoring’
In 2012, Otis opened a changing product offerings. It Manufacturing Is Not Easy,” The Wall Street
423,000-square-foot facility also struggled to find enough Journal, May 2, 2014, www.wsj.com.
IMPROVING HRM EFFECTIVENESS THROUGH PROCESS REDESIGN

LO 16-6 In addition to structural arrangements, process redesign enables the HRM function to
Relate how process more efficiently and effectively deliver HRM services. Process redesign often uses
reengineering is used information technology, but information technology applications are not a requirement.
to review and redesign
Thus we will discuss the general issue of process reengineering and then explore infor-
HRM practices.
mation technology applications that have aided HRM in process redesign.
Reengineering Reengineering is a complete review of critical work processes and redesign to make
Review and redesign them more efficient and able to deliver higher quality. Reengineering is especially criti-
of work processes cal to ensuring that the benefits of new technology can be realized. Applying new tech-
to make them more
efficient and improve
nology to an inefficient process will not improve efficiency or effectiveness. Instead, it
the quality of the end will increase product or service costs related to the introduction of the new technology.
product or service. Reengineering can be used to review the HRM department functions and processes,
or it can be used to review specific HRM practices such as work design or the perfor-
mance management system. The reengineering process involves the four steps shown in
Figure 16.13: identify the process to be reengineered, understand the process, redesign
the process, and implement the new process.9
Identifying the Process

First, the company should identify the process they want to re-engineer and the individu-
als who are part of that process. Managers who control the process or are responsible for
functions within the process (sometimes called “process owners”) should be identified
and asked to be part of the reengineering team. Team members should include employ-
ees involved in the process (to provide expertise) and those outside the process, as well
as internal or external customers who see the outcome of the process.
680
Figure 16.13
The Reengineering
Process
Identify Understand Redesign Implement

the process the the the
to be process process new process
reengineered
Feedback
Understanding the Process

Several things need to be considered when evaluating a process:
∙ Can jobs be combined?
∙ Can employees be given more autonomy? Can decision making and control be built
into the process through streamlining it?
∙ Are all the steps in the process necessary?
∙ Are data redundancy, unnecessary checks, and controls built into the process?
∙ How many special cases and exceptions have to be dealt with?
∙ Are the steps in the process arranged in their natural order?
∙ What is the desired outcome? Are all of the tasks necessary? What is the value of
the process?
Various techniques are used to understand processes. Data-flow diagrams are useful
to show the flow of data among departments. Figure 16.14 shows a data-flow diagram for
payroll data and the steps in producing a paycheck. Information about the employee and
department are sent to the general account. The payroll check is issued based on a pay-
ment voucher that is generated from the general accounting ledger. Data-entity relation-
ship diagrams show the types of data used within a business function and the relationship
among the different types of data. In scenario analysis, simulations of real-world issues
are presented to data end users. The end users are asked to indicate how an information
system could help address their particular situations and what data should be maintained
to deal with those situations. Surveys and focus groups collect information about the
data collected, used, and stored in a functional area, as well as information about time
and information-processing requirements. Users may be asked to evaluate the impor-
tance, frequency, and criticality of automating specific tasks within a functional area. For
example, how critical is it to have an applicant tracking system that maintains data on
applicants’ previous work experience? Cost–benefit analyses compare the costs of com-
pleting tasks with and without an automated system or software application. For exam-
ple, the analysis should include the costs in terms of people, time, materials, and dollars;
the anticipated costs of software and hardware; and labor, time, and material expenses.10
The “Competing through Sustainability” box describes how IKEA has used the redesign
of its products to reduce its costs, its customers’ prices, and its carbon footprint.
Redesigning the Process

During the redesign phase, the team develops models, tests them, chooses a prototype,
and determines how to integrate the prototype into the organization.
IKEA Cuts Costs Sustainably
Many argue that firms that focus For instance, IKEA has the redesign
on sustainability can help the reduced the cost, weight, and reduced costs,
environment while also helping raw material costs of some reduced fuel use, and reduced
their bottom line. IKEA’s ruthless sofas by making the legs hollow. prices for customers.
emphasis on packaging illus- Also, efficient packaging pro-
trates how this can happen. vides a focus for cost cutting. DISCUSSION QUESTION
The Swedish furniture maker In 2010 IKEA redesigned one How can a company’s HR func-
and household retailer has of its more popular sofas from tion actively support the orga-
always sought to cut costs but one solid piece to several with nization’s mission of reducing
has increased this emphasis as it a hinged back and detachable costs and minimizing its impact
seeks to drive its revenue growth. arms. This resulted in a package on the environment?
Chief Executive Peter Agnefjäll half the size, removing 7,477 SOURCE: S. Chaudhuri, “IKEA Can’t
recently said, “We are engineer- delivery trucks from roads each Stop Obsessing about Its Packaging,”
ing costs out of our value chain year and providing for a 14% The Wall Street Journal, June 17, 2015,
www.wsj.com.
that don’t contribute anything.” lower price tag. In other words,
Figure 16.14
A Data-Flow Diagram Employee benefits
for Payroll Data program data
Employee
Payroll run data
Chart of accounts
General ledger
detail
Payment voucher
Check
682
Implementing the Process

The company tries out the process by testing it in a limited, controlled setting before LO 16-7
expanding companywide. For example, J. M. Huber Corporation, a New Jersey–based Discuss the types of
conglomerate that has several operating divisions scattered throughout the United States, new technologies
that can improve the
used reengineering to avoid installing new software onto inefficient processes.11 HR
efficiency and effective-
staff began by documenting and studying the existing work flow and creating a strategy ness of HRM.
for improving efficiency. Top management, midlevel managers, and human resources
staff worked together to identify the processes that they most wanted to improve. They
determined that the most critical issue was to develop a client–server system that could
access data more easily than the mainframe computer they were currently using. Also,
the client–server system could eliminate many of the requisitions needed to get access to
data, which slowed down work. The HRM department’s efforts have streamlined record-
keeping functions, eliminated redundant steps, and automated manual processes. The
fully automated client–server system allows employees to sign up and change benefits
information using an interactive voice-response system that is connected to the compa-
ny’s database. In addition, managers have easier access to employees’ salary history, job
descriptions, and other data. If an employee is eligible for a salary increase and the man-
ager requests a change and it is approved, the system will process it (without entry by a
New Technologies
clerical worker), and the changes will be seen on the employee’s paycheck. Results of the Current applications
reengineering effort are impressive. The redesigned processes have reduced the number of knowledge, proce-
of problems that HRM has to give to other departments by 42%, cut work steps by 26%, dures, and equipment
and eliminated 20% of the original work. Although the company is spending more than that have not been
$1 million to make the technology work, it estimates that the investment should pay for previously used. Usu-
ally involves replac-
itself in five years. ing human labor with
equipment, information
processing, or some
IMPROVING HRM EFFECTIVENESS THROUGH USING NEW combination of the two.
TECHNOLOGIES—HRM INFORMATION SYSTEMS
Several new and emerging technologies can help improve the effectiveness of the HRM Transaction
function. New technologies are current applications of knowledge, procedures, and equip- Processing
Computations and
ment that have not been used previously. New technology usually involves automation—
calculations used to
that is, replacing human labor with equipment, information processing, or some review and document
combination of the two. HRM decisions and
In HRM, technology has already been used for three broad functions: transaction practices.
processing, reporting, and tracking; decision support systems; and expert systems.12
Transaction processing refers to computations and calculations used to review and Decision Support
document HRM decisions and practices. This includes documenting relocation, train- Systems
ing expenses, and course enrollments and filling out government reporting require- Problem-solving systems
which usually include
ments (such as EEO-1 reports, which require companies to report information to the a “what-if” feature that
government regarding employees’ race and gender by job category). Decision support allows users to see how
systems are designed to help managers solve problems. They usually include a “what outcomes change when
if” feature that allows users to see how outcomes change when assumptions or data assumptions or data
change. These systems are useful, for example, for helping companies determine the change.
number of new hires needed based on different turnover rates or the availability of
employees with a certain skill in the labor market. Expert systems are computer sys- Expert Systems
tems incorporating the decision rules of people deemed to have expertise in a certain Computer systems
incorporating the deci-
area. The system recommends actions that the user can take based on the information sion rules of people
provided by the user. The recommended actions are those that a human expert would recognized as experts
take in a similar situation (such as a manager interviewing a job candidate). in a certain area.
Software Applications for HRM

IMPROVING HRM EFFECTIVENESS THROUGH NEW TECHNOLOGIES—E-HRM
Since the mid-1990s, as HRM functions sought to play a more strategic role in their
organizations, the first task was to eliminate transactional tasks in order to free up time to
focus on traditional and transformational activities. Part of building a strategic HR func-
tion requires moving much of the transactional work away from being done by people
so that the people can have time available to work on strategic activities. Consequently,
the use of technology can both make HR more strategic and by doing so increase the
value that HR adds to the business.13 As indicated in Figure 16.11, outsourcing of many
of these activities provided one mechanism for reducing this burden. However, more rel-
evant today is the focus on the use of information technology to handle these tasks. Early
on this was achieved by the development and implementation of information systems
that were run by the HRM function but more recently have evolved into systems that
allow employees to serve themselves. For example, employees can access the system and
make their benefit enrollment, changes, or claims online. Clearly, technology has freed
HRM functions from transactional activities to focus on more strategic actions.
However, the speed requirements of e-business force HRM functions to explore how
to leverage technology for the delivery of traditional and transformational HRM activi-
ties. This does not imply that over time all of HRM will be executed online, but that
a number of HRM activities currently delivered via paper or face-to-face communica-
tions can be delivered electronically with no loss (and even gains) in effectiveness and
efficiency. This is illustrated by Figure 16.15. We explore some examples next. The
Figure 16.15 E-Enabled Delivery of HRM

Change in Delivery
Traditional
Electronic
face-to-face
Tranformational (25–35%) delivery
delivery
Cultural change
Training
Compensation
Employee relations
Transactional (15–25%)
Benefits administration
Record keeping
Employee services
Process
redesign,
Outsourcing
information
technology
Improving Health through Technology
If you’re a large health insurer clap, then go off to develop new their activity
who faces pressure from apps that can be used by their levels. This illus-
increasing medical costs, how customers. App designers work trates how technology and
can you encourage your cus- in pairs so that as one writes the new forms of work design can
tomers to live healthier life- code, the other can test it and provide companies with a
styles? Multi-billion-dollar health make improvements. competitive advantage.
insurer Humana has focused on These apps, such as
using a team-based workplace HumanaVitality, allow customers DISCUSSION QUESTION
design to produce applications to set health goals for them- What other ways can you think
that can help customers live selves or challenge others to of that companies might be
better. engage in healthy activities. For able to leverage social media
Humana’s Digital Experience instance, they developed the and mobile apps to better con-
Center is located in Louisville, “Step Challenge” encouraging nect with their employees and
Kentucky, but presents a more customers to walk more during customers?
Silicon Valley sort of structure the day. The app has already
and culture. The 11 designers been downloaded by over SOURCE: T. Loftus, “Can You Put a
Little Palo Alto into an Insurer in Louisville?”
and 4 remote workers end each 135,000 customers and seems The Wall Street Journal, April 28, 2015,
morning’s meeting with a hand to be helping them increase www.wsj.com.
“Competing through Technology” box illustrates how one health care company uses
technology to improve customers’ health.
In a world dominated by social media, companies like Google are now using it for
internal purposes. Google developed “Grow,” an internal platform that makes it easy for
Googlers to find learning opportunities, jobs, one-on-one advice, and other development
resources to suit their needs and interests. Grow unifies myriad learning, development,
and job search tools into a one-stop shop for Googlers to manage and act on their develop-
ment. It suggests courses, opportunities, advisors, and more based on what the company
knows about the Googler (e.g., role, level, location) and the data a Googler provides within
the tool (e.g., skills they want to develop). Not surprisingly given Google’s search capabil-
ity, this system allows employees to search for learning resources or jobs of interest.
Grow is an inherently social platform, and every Googler has a customizable pro-
file that is visible to others. Figure 16.16 displays the Grow profile of Sunil Chandra,
Google’s VP of Staffing and Operations. As you can see, Googlers can tag skills they
have (e.g., consulting, people management, and coaching for Sunil) and those they want
to develop (e.g., entrepreneurship, and prioritization) in their profile. Skills listed in
Grow help the system get to know the user and offer more personalized job recommen-
dations. Googlers can also indicate if they would like to advise others on a particular
skill. If Sunil tags himself as a “Skill Advisor” on a topic (e.g., leadership), he will
appear in Grow’s search results, and other Googlers can view his skills and contact him
for advice. He can select the option to “teach other Googlers,” as well, which would con-
nect him to Google’s g2g (or “Googlers-to-Googlers”) program, an internal volunteer
teaching network that allows employees to teach their peers on a variety of subjects.
As mentioned above, Grow also allows Googlers to list skills they would like to
develop. They can add up to 10 skills, and Grow will use these inputs to further
685
Figure 16.16
Personal Web Page
for Sunil Chandra
customize their learning recommendations. To help Googlers get started, Grow sug-
gests a number of skills on the right-had side of the page (culled from a multi-year
study of the skills that make Googlers effective in their roles). In Sunil’s case, he
has already added all of his suggested skills directly to his profile, hence why the
tool reflects “no suggested skills.” Sunil’s profile also includes his picture, job title,
location, and a link to his internal employee page to help his fellow Googlers get to
know him.
In sum, Grow profiles are a great way for Googlers to teach the tool about their skills
and development areas, and get better learning and job recommendations in the process.
It also helps Googlers connect with their peers as advisors, mentors, or internal teachers,
in addition to providing a host of other learning and development resources.
Recruitment and Selection

Traditional recruitment and selection processes have required considerable face-to-face
communications with recruitment firms and potential employees, labor-intensive assess-
ment devices, and significant monitoring of managerial decisions to ensure that hiring
patterns and decisions do not run afoul of regulatory requirements. However, technology
has transformed these processes.
For example, online recruiting accounts for one of every eight hires according to
k-force.com’s poll of 300 U.S. companies. IBM employees now fill out forms on the web
to identify contract help they need, and that information is immediately sent to 14 temp
agencies. Within an hour agencies respond with résumés for review, allowing IBM to cut
hiring time from 10 days to 3 and save $3 million per year.
Finally, technology has enabled firms to monitor hiring processes to minimize the
potential for discriminatory hiring decisions. For example, Home Depot was accused of
forcing female applicants into cashier jobs while reserving the customer service jobs for
males. While not admitting guilt, as part of their consent decree Home Depot uses tech-
nology to identify people who have skills for jobs they are not applying for based on key
words in their résumés. In addition, the technology forces managers to interview diverse
candidate sets before making decisions.
Compensation and Rewards

Compensation systems in organizations probably reflect the most pervasive form of
bureaucracy within HRM. In spite of the critical role they play in attracting, motivating,
and retaining employees, most systems consist of rigid, time-consuming, and ineffective
processes. Managers fill out what they believe to be useless forms, ignore guidelines,
and display a general disdain for the entire process.
Leveraging technology may allow firms to better achieve their compensation goals
with considerably less effort. For example, one problem many merit or bonus pay plans
face is that managers refuse to differentiate among performers, giving everyone similar
pay increases. This allows them to spend less time thinking about how to manage (rate
and review) performance as well as minimizes the potential conflict they might face.
Thus, employees do not see linkages between performance and pay, resulting in lower
motivation among all employees and higher turnover among top performers (and possi-
bly lower turnover among bottom performers). To minimize this, Cypress Semiconduc-
tors requires managers to distinguish between equity and merit and forces distributions
with regard to both concepts.14 For example, equity means that the top-ranked performer
in any group of peers should make 50% more than the lowest-ranked performer, and
people with comparable performance should receive comparable salaries. With regard to
merit, there must be at least a 7% spread between the lowest and highest pay raises (if the
lowest raise is 3%, then the highest must be at least 10%). If ratings and raises are input
into a system, the firm can monitor and control the rating process to ensure that adequate
differentiations are made consistent with the policy.
Training and Development

Exploring different vehicles for delivering training (PC, video, and the like) certainly is
not a new concept. In addition, a number of firms have begun delivering training via the
web. Their experience suggests that some types of training can be done effectively via
the Internet or an intranet, whereas others might not. For example, companies such as
IBM and Dell both boast that they have developed Internet-based training for some parts
of their workforce.
Interestingly, the challenge of speedy delivery of HRM services brings the concept
of Internet-based training to the forefront. In today’s competitive environment, firms
compete to attract and retain both customers and talented employees. How well a firm
develops and treats existing employees largely determines how well it achieves these
outcomes. Yet the challenges of speed, project focus, and changing technology create
environments that discourage managers from managing their people, resulting in a situ-
ation where employees may not feel respected or valued.
This presents a challenge to firms to provide both the incentive and the skills for man-
agers to treat employees as assets rather than commodities. Consider how Internet-based
training might facilitate this. Assume that you work for Widget.com, a fast-growing,
fast-paced e-business. You arrive at work Monday morning, and your e-mail contains a
high-priority message with either an attachment or a link to a URL. It is your Monday
morning challenge from the CEO, and you know that the system will track whether you
link and complete this challenge. When you link to it, you see a digital video of your
CEO telling you how people are Widget.com’s competitive advantage, and that when
they don’t feel valued, they leave. Thus his challenge to you is to make your employees
feel valued today. To do so, you will in the next 10 minutes learn how to express appre-
ciation to an employee. You receive six learning points; you observe a digitized video
model performing the learning points; you review the learning points again and take a
quiz. You then see the CEO giving you the final challenge: that in the next 15 minutes
you are to take one of your employees aside and express your appreciation using the skill
you just developed.
Notice the advantages of this process. First, it was not time-consuming like most
three-day or one-week training programs. The entire process (training and demonstra-
tion with a real employee) took less than 30 minutes; you have developed a skill; and
an employee now probably feels better about the organization. It communicated a real
organizational value or necessary competency. It didn’t require any travel expenses to a
training facility. It did not overwhelm you with so much information that you would be
lucky to remember 10% of what you were exposed to. Finally, it was a push, rather than
pull, approach to training. The firm did not wait for you to realize you had a deficiency
and then go search and sign up for training. It pushed the training to you.
Thus technology allows firms to deliver training and development for at least some
skills or knowledge faster, more efficiently, and probably more effectively. It can quickly
merge training, communication, and immediate response to strategic contingencies.
Creating and nurturing a committed workforce presents a tremendous challenge to
firms today. According to a recent survey conducted by Monster.com, 61% of Ameri-
cans consider themselves overworked and 86% are not satisfied with their jobs.15 Such
findings suggest that firms need to find ways to monitor commitment levels, identify
potential obstacles to commitment, and respond quickly to eliminate those obstacles.
In large part, attitude surveys have constituted the platform from which these activities
were managed in the past.
Consider the traditional attitude survey. Surveys are administered to employees over
a period of four to six weeks. The data are entered and analyzed, requiring another six to
eight weeks. A group interprets the results to identify the major problem areas, and task
forces are formed to develop recommendations; this process easily takes another four to
six months. Finally, decisions must be made about implementing the task force recom-
mendations. In the end, at best employees might see responses to their concerns 12 to
18 months after the survey—and then the survey administrators cannot understand why
employees think that completing the survey is a waste of time.
Now consider how technology can shorten that cycle. E-pulse represents one attempt
to create a platform for almost real-time attitude surveys. Developed by Theresa Wel-
bourne at the University of Michigan, E-pulse is a scalable survey device administered
online. Normally three questions are asked regarding how employees feel about work,
but more questions can be added to get feedback on any specific issue. The survey goes
out online, and when employees complete it, the data are immediately entered and ana-
lyzed. In essence, the part of the process that took four months in the past has been
reduced to a day.
Next the firm can decide how it wants to use the information. For example, it could
be broken down by business, site, or work unit, with the relevant information going to
the leader of the chosen unit of analysis. In essence, a supervisor could receive almost
immediate feedback about the attitudes of his or her work group, or a general manager
about his or her business unit. The supervisor or manager can respond immediately, even
if only to communicate that she or he realizes a problem exists and will take action soon.
One must recognize that although the technology provides for faster HRM, only a
more systemic approach will ensure better and smarter HRM. For example, disseminat-
ing the information to the supervisors and managers may be faster, but unless those indi-
viduals possess good problem-solving and communication skills, they may either ignore
the information or, worse yet, exacerbate the problem with inappropriate responses.
As we noted with regard to training, this systemic approach requires knocking down
traditional functional walls to deliver organizational solutions rather than functional pro-
grams. Thus the challenge is to get beyond viewing the technology as a panacea or even
as a functional tool, but rather as a catalyst for transforming the HRM organization.
The Future for HR Professionals

The future for careers in the human resource profession seems brighter than ever. An
increasing number of successful companies such as Microsoft have made the top HR job
a member of the senior management team, reporting directly to the chief executive offi-
cer. CEOs recognize the importance of their workforce in driving competitive success.
Firms need to seek the balance between attracting, motivating, and retaining the very
best talent and keeping labor and administrative costs as low as possible. Finding such a
balance requires HR leaders who have a deep knowledge of the business combined with
a deep knowledge of HR issues, tools, processes, and technologies.
For a reader who is just getting a first glimpse of the HRM function, to portray what a
vastly different role HRM must play today compared to 20 or even 10 years ago is impos-
sible. As noted earlier, HRM has traditionally played a largely administrative role—simply
processing paperwork plus developing and administering hiring, training, appraisal, com-
pensation, and benefits systems—and all of this has been unrelated to the strategic direc-
tion of the firm. In the early 1980s HRM took on more of a one-way linkage role, helping
to implement strategy. Now strategic decision makers are realizing the importance of
people issues and so are calling for HRM to become the “source of people expertise” in
the firm.16 This requires that HR managers possess and use knowledge of how people can
and do play a role in competitive advantage as well as the policies, programs, and prac-
tices that can leverage the firm’s people as a source of competitive advantage. This leads
to an entirely new set of competencies for today’s strategic HR executive.17
In the future, HR professionals will need four basic competencies to become partners LO 16-8
in the strategic management process.18 First, they will need “business competence”— List the competencies
the HRM executive
knowing the company’s business and understanding its economic financial capabili-
needs to become a
ties. This calls for making logical decisions that support the company’s strategic plan strategic partner in the
based on the most accurate information possible. Because in almost all companies the company.
effectiveness of decisions must be evaluated in terms of dollar values, the HR executive
must be able to calculate the costs and benefits of each alternative in terms of its dollar
impact.19 In addition, it requires that the nonmonetary impact be considered. The HR
executive must be fully capable of identifying the social and ethical issues attached to
HRM practices. HR professionals must often act as the conscience of the organization in
all aspects, and the “Integrity in Action” box shows how firms can sometimes border on
unethical behavior when dealing with their customers.
Second, HR professionals will need “professional–technical knowledge” of state-of-
the-art HRM practices in areas such as staffing, development, rewards, organizational
design, and communication. New selection techniques, performance appraisal methods,
training programs, and incentive plans are constantly being developed. Some of these
programs can provide value whereas others may be no more than the products of today’s
HRM equivalent of snake oil. HR executives must be able to critically evaluate the new
techniques offered as state-of-the-art HRM programs and use only those that will benefit
the company.
Third, they must be skilled in the “management of change processes,” such as diag-
nosing problems, implementing organizational changes, and evaluating results. Every
time a company changes its strategy in even a minor way, the entire company has to
INTEGRITY IN ACTION
Did AT&T Deceive Its Customers?
Do you have an unlimited wire- used a certain amount of data and insufficient
less data plan for your phone? If during a billing cycle. In other disclosure.”
so, do you know how it works? words, their data was faster at AT&T disputes the allegations.
The Federal Communications the beginning of the month than
Commission (FCC) announced at the end. FCC Chairman Tom DISCUSSION QUESTION
recently that it plans to fine Wheeler stated, “Consumers Do you think that providing
AT&T for allegedly misleading should get what they pay for. unlimited data, but at different
its customers who thought that Broadband providers must be speeds, is deceptive?
their unlimited wireless data up front and transparent about SOURCE: G. Nagesh and T. Gryta, “FCC to
plans worked the same way the services they provide. The Fine AT&T $100 Million over Capping Unlimited
all the time. In fact, what the FCC will not stand idly by while Data Plans,” The Wall Street Journal, June 17,
2015, www.wsj.com.
plans did was to cap the data consumers are deceived by
speed once a customer had misleading marketing materials
change. These changes result in conflict, resistance, and confusion among the people
who must implement the new plans or programs. The HR executive must have the skills
to oversee the change in a way that ensures its success. In fact, one survey of Fortune 500
companies found that 87% of the companies had their organization development/change
function as part of the HR department.20
Finally, these professionals must also have “integration competence,” meaning the
ability to integrate the three other competencies to increase the company’s value. This
requires that, although specialist knowledge is necessary, a generalist perspective must
be taken in making decisions. This entails seeing how all the functions within the HRM
area fit together to be effective and recognizing that changes in any one part of the HRM
package are likely to require changes in other parts of the package.
Google has sought to achieve this integration with what they call the “three-thirds”
staffing model. This consist of the following groups of people with complimentary
skill sets:
1. One-third traditional HR people—subject matter experts in benefits, compensation,

employee relations, learning, and recruiting. Their expertise, pattern recognition,
and emotional intelligence serve as the foundation for developing the services and
programs.
2. One-third consultants—high-end strategy experts with a background in manage-
ment consulting who thrive on solving big, amorphous problems and bring a delib-
erate, business approach to people issues.
3. One-third analytics professionals—masters and doctoral-level folks who measure,
analyze, and provide insight into all that the people operations function does, and
to prove what really works. They have a healthy appetite for the impossible and
drive experimentation to ensure that Google is as innovative on the people side as
it is on the product side.
This staffing model has enabled Google to build the required skill base and integrate
the various people to build a world-class HR organization.21
690
The Role of the Chief

Human Resource Officer
Having discussed the increasing importance of HR and the new strategic role of HR pro-
fessionals, in closing we examine the role of the leader of the HR function. These chief
human resource officers (CHROs) bear the responsibility for leading the HR function
as well as ensuring that HR systems and processes deliver value to the company. Only
recently have researchers attempted to examine what these HR leaders do and how they
affect the business.
A recent survey identified seven roles that CHROs have to play to one degree or
another, and then asked Fortune 150 CHROs to identify how they spend their time across
those roles. As can be seen in Figure 16.17, CHROs reported spending the second most
time (21%) as a strategic advisor to the executive team. This role entails sharing the Strategic Advisor
people expertise as part of the decision-making process, as well as shaping how the A role of the CHRO
human capital of the firm fits into its strategy. This also was the role that was most fre- that focuses on the
formulation and imple-
quently cited as having the greatest impact on the firm. One CHRO described the impor- mentation of the firm’s
tance of the strategic advisor role as: strategy.
HR is critical, but it’s a tool in the firm’s portfolio. First to truly impact the success of the
firm, the CHRO needs to have a broad credibility that only comes from understanding every
facet of the business at a level deep enough to be able to add business value in discussions
with every leader. That means understanding the firm’s economics, customer behavior, prod-
ucts, technology, etc. at a level deep enough to steer and shape decisions in these areas. From
that flows the trust and credibility to counter the “conventional wisdom” on how best to man-
age people and shape the firm’s talent agenda. Without this broader credibility, the CHRO
can talk about talent, but risks not having sufficient context to make the right decisions. Sec- Talent Architect
ond, from the CEO’s perspective, the most useful thing is the integration of the people strat- A role of the CHRO that
egy with every other part of the firm’s operations. The only way to truly integrate these areas focuses on building and
is to be actively involved in the broader discussions as well.22 identifying the human
capital critical to the
The role of talent architect also sees a significant portion of time spent (17%) and present and future of
was also frequently cited as the role in which the CHRO has the greatest impact on the firm.
What percent of your time would you say you spend in Figure 16.17
each of the following roles? Percentage of Time
CHROs Spend in
Firm representative
5% Other
Each Role
Workforce sensor 0%
8%
Strategic
advisor
Functional leader 21%
22%
Executive
Talent coach
architect 17%
17%
Board liaison
10%
the business. Playing the role of talent architect requires that CHROs help the
executive team see the importance of talent, identify present and future talent gaps,
and come to own the talent agenda. One CHRO described the importance of this role
this way:
Keeping the senior team focused on the strategic talent needs of the business allows proper
identification of talent gaps and future needs, thus allowing time to develop best talent and
design appropriate experiential assignments.23
Counselor/ CHROs report spending as much time in the role of counselor/confidante/coach as

Confidante/Coach they do in the talent architect role (17%), and a number of CHROs listed this role as
A role of the CHRO that one of the roles with the greatest impact. This role seemingly is a broad one, and it can
focuses on counseling
or coaching team mem-
entail anything from behavioral or performance counseling to being the personal
bers or resolving inter- sounding board for the CEO. Perhaps as pressure mounts on CEOs from investors and
personal or political analysts, the CHRO is the most trusted advisor that can be counted on to give personal
conflicts among team advice or simply to listen to the CEO’s problems. One poignant comment regarding
members. this role was:
If I do my job right, I am the copper wire that connects all the outlets of the firm together
effectively. This includes OD work (which some might put in the strategic advisor category),
performance counseling and relationship building, business consulting and the strategic ele-
ments of talent acquisition and planning.24
Leader of the HR
Function The leader of the HR function is the role in which CHROs spent the most time, but
A role of the CHRO that
it is not seen as one that has the greatest impact. This role deals with ensuring that the
focuses on working
with HR team members HR function is aligning its activities and priorities toward the needs of the business,
regarding the develop- and it usually entails meeting with direct reports to provide guidance and check on
ment, design, and deliv- progress. However, CHROs increasingly rely on their direct reports to design and
ery of HR services. deliver HR services while they shift their attention to advising and counseling the top
executive team.
Liaison to the Board Often this counselor/confidante/coach role entails coaching senior leaders regarding
A role of the CHRO that their communications style, and particularly warning them when their messages might
focuses on prepara-
tion for board meet-
be misinterpreted by those lower in the organizations.
ings, phone calls with Liaison to the board entails all of the activities in which CHROs engage with the
board members, and board of directors, including discussions of executive compensation, CEO performance,
attendance at board CEO succession, and performance of other members of the executive leadership team.
meetings. This role is increasing in importance, although it has a long way to go before equaling
the strategic advisor, talent architect, and counselor/confidante/coach roles.
Workforce Sensor The role of workforce sensors entails taking the pulse of the employee population to
A role of the CHRO that
identify any morale or motivation issues. This is a role in which CHROs do not spend
focuses on identify-
ing workforce morale much time, and few viewed it as having the greatest impact on the business.
issues or concerns. Finally, CHROs to some extent become the face of the organization to outside con-
stituents such as labor unions, nongovernmental organizations, and the press. They
Representative of spend the least amount of time in the representative of the firm role (see Table 16.5).
the Firm The new strategic role for HRM presents both opportunities and challenges. HRM
A role of the CHRO that has the chance to profoundly impact the way organizations compete through people.
focuses on activities On the other hand, with this opportunity comes serious responsibility and accountabil-
with external stakehold-
ers, such as lobbying,
ity.25 HRM functions of the future must consist of individuals who view themselves as
speaking to outside businesspeople who happen to work in an HRM function, rather than HRM people who
groups, etc. happen to work in a business.
Table 16.5
Strategic advisor to the executive team—activities focused specifically on the Roles of the CHRO
formulation and implementation of the firm’s strategy.
Counselor/confidante/coach to the executive team—activities focused on counseling
or coaching team members or resolving interpersonal or political conflicts among team
members.
Liaison to the board of directors—preparation for board meetings, phone calls with
board members, attendance at board meetings.
Talent architect—activities focused on building and identifying the human capital
critical to the present and future of the firm.
Leader of the HR function—working with HR team members regarding the
development, design, and delivery of HR services.
Workforce sensor—activities focused on identifying workforce morale issues or concerns.
Representative of the firm—activities with external stakeholders, such as lobbying,
speaking to outside groups, etc.
A LOOK BACK
Tech start-up GitHub has been forced to grow up, and the 250-person company seems
to have taken Mr. Andreessen’s advice to heart when it comes to HR. The company now
has almost a dozen people devoted to developing leadership training programs, orga-
nizational design, and conflict resolution. They also have an individual formally trained
in conflict resolution. In addition, the company has begun developing a formal organi-
zational structure with clear reporting relationships and distinct managerial predictions.
Start-up tech firms often resist such moves for fear that the rules, structures, and
job descriptions will stifle innovation and cost too much money. However, as the
GitHub story shows, often such costs serve as necessary investments to build a
successful company over the long term.
QUESTIONS
1. Why is it important for start-ups to pay attention to people issues?
2. How can having a good HR function help start-ups to grow profitably?
3. How do you think HR differs in large companies like IBM or Goodyear com-
pared to start-ups like GitHub?
SUMMARY
The roles required of the HRM function have changed as an administrative expert, employee advocate, change agent,
people have become recognized as a true source of com- and strategic partner. The function must also deliver transac-
petitive advantage. This has required a transformation of the tional, traditional, and transformational services and activi-
HRM function from focusing solely on transactional activities to the firm, and it must be both efficient and effective.
ties to an increasing involvement in strategic activities. In HR executives must strategically manage the HRM function
fact, according to a recent study, 64% of HR executives said just as the firm must be strategically managed. This requires
that their HRM function is in a process of transformation.26 that HRM develop measures of the function’s performance
The strategic management of the HRM function will deter- through customer surveys and analytical methods. These
mine whether HRM will transform itself to a true strategic measures can form the basis for planning ways to improve
partner or simply be blown up. performance. HRM performance can increase through new
In this chapter we have explored the various changing structures for the function, through using reengineering and
roles of the HRM function. HRM today must play roles as information technology, and through outsourcing.
KEY TERMS
Audit approach, 671 Transaction processing, 683 Counselor/confidante/coach, 692
Analytic approach, 673 Decision support systems, 683 Leader of the HR function, 692
Outsourcing, 679 Expert systems, 683 Liaison to the board, 692
Reengineering, 680 Strategic advisor, 691 Workforce sensor, 692
New technologies, 683 Talent architect, 691 Representative of the firm, 692
1. Why have the roles and activities of the HRM function brochures, completing enrollment forms, and sending
changed over the past 20 to 30 years? What has been them to their HR rep. A temporary staff has to be hired to
driving this change? How effectively do you think HRM process the large amount of paperwork that is generated.
has responded? Enrollment forms need to be checked, sorted, batched,
2. How can the processes for strategic management discussed sent to data entry, keypunched, returned, and filed. The
in Chapter 2 be transplanted to manage the HRM function? process is slow and prone to errors. How could you use
3. Why do you think that few companies take the time to process reengineering to make benefits enrollment more
determine the effectiveness of HRM practices? Should a efficient and effective?
company be concerned about evaluating HRM practices? 6. Some argue that outsourcing an activity is bad because
Why? What might people working in the HRM function the activity is no longer a means of distinguishing the
gain by evaluating the function? firm from competitors. (All competitors can buy the
4. How might imaging technology be useful for recruit- same service from the same provider, so it cannot be a
ment? For training? For benefits administration? For per- source of competitive advantage.) Is this true? If so, why
formance management? would a firm outsource any activity?
5. Employees in your company currently choose and enroll
in benefits programs after reading communications
How ethical are you? Read each of the following descriptions. For each, circle whether you believe the behavior described
is ethical or unethical.
1. A company president found that a competitor had made an important scientific discovery that would sharply Ethical
reduce the profits of his own company. The president hired a key employee of the competitor in an attempt Unethical
to learn the details of the discovery.
2. To increase profits, a general manager used a production process that exceeded legal limits for environmen- Ethical
tal pollution. Unethical
3. Because of pressure from her brokerage firm, a stockbroker recommended a type of bond that she did not Ethical
consider to be a good investment. Unethical
4. A small business received one-fourth of its revenues in the form of cash. On the company’s income tax Ethical
forms, the owner reported only one-half of the cash receipts. Unethical
5. A corporate executive promoted a loyal friend and competent manager to the position of divisional vice Ethical
president in preference to a better qualified manager with whom she had no close ties. Unethical
6. An employer received applications for a supervisor’s position from two equally qualified applicants. The employer Ethical
hired the male applicant because he thought some employees might resent being supervised by a female. Unethical
7. An engineer discovered what he perceived to be a product design flaw that constituted a safety hazard. His Ethical
company declined to correct the flaw. The engineer decided to keep quiet, rather than taking his complaint Unethical
outside the company.
8. A comptroller selected a legal method of financial reporting that concealed some embarrassing financial Ethical
facts. Otherwise, those facts would have been public knowledge. Unethical
9. A company paid a $350,000 “consulting” fee to an official of a foreign country. In return, the official Ethical
promised to help the company obtain a contract that should produce a $10 million profit for the company. Unethical
10. A member of a corporation’s board of directors learned that his company intended to announce a stock Ethical
split and increase its dividend. On the basis of this favorable information, the director bought additional Unethical
shares of the company’s stock. Following the announcement of the information, he sold the stock at a gain.
Now score your results. How many actions did you judge SOURCE: Based on S. Morris et al., “A Test of Environmental, Situational,
and Personal Influences on the Ethical Intentions of CEOs,” Business and
to be unethical?
Society 34 (1995), pp. 119–47.
All of these actions are unethical. The more of the actions
you judged to be unethical, the better your understanding of
ethical business behavior.
EXERCISING STRATEGY
Transforming the Business and HR at Xerox
In 1958, Xerox launched the Xerox 914, the first automatic, The largest single savings came from consolidating and
plain-paper office copier. This product went on to become expanding the HR Service Center. The Center began with
the top-selling industrial product of all time. Xerox’s suc- purely transactional work (e.g., address changes), then added
cessful xerography technology gave it a sustainable com- web-based processes to handle routine work. The Center now
petitive advantage that endured for years. However, all good conducts research and analysis to HR operations and handles
things must come to an end, and in Xerox’s case, that end employee- relations issues. This has enabled HR to reduce
was the late 1990s. By 2000, Xerox experienced its biggest headcount without reducing levels of service.
slide in history, and the consensus among analysts within the Also, as with any organization that has shed 30% of its
industry was that Xerox was working with “an unsustainable workforce, employee morale was and continues to be an
business model,” meaning unless things changed drastically, issue. Even before the fall, HR had been taking the pulse
Xerox would soon cease to exist. In 2000 Xerox had $17.1 of employees through their “hearts and minds” surveys.
billion in debt, with only $154 million in cash on hand. By This intranet-based survey taps into a number of employee
2001, Xerox’s stock, which had peaked at $63, fell to about attitudes and seeks to identify the problem areas for HR
$4—a loss of 90% of its market capitalization. And as if and line executives to focus on. Employees have noted
that was not enough, it also faced an accounting investiga- concerns with items like “Company supports risk-taking,”
tion by the Securities and Exchange Commission for how it “Company considers impact on employees,” “Senior-
accounted for its customer leases on copiers. management behavior is consistent with words,” and
Enter new VP of HR Pat Nazemetz in 1999 and new CEO “Trust level is high.”
Anne Mulcahy in 2000 to try to right a sinking ship. Mulcahy “People often ask me how Xerox has found success,”
put the company on a starvation diet. This entailed selling says Mulcahy. “My answer is that you have to have a strat-
major operations in China and Hong Kong, reducing global egy and a plan, but [more importantly], what you really need
headcount to 61,100 from 91,500 through selloffs, early retire- is excellence of execution, and that starts and ends with a
ments, and layoffs, and implementing drastic cost controls. talented, motivated group of people aligned around a com-
While Mulcahy’s strategy has brought Xerox back to life mon set of goals. Our HR people came through with a series
(2003 saw Xerox triple its net income to $360 million) as an of alignment workshops and retention incentives just when
organization, the HR function had to drive the change in the we needed them [to] make Xerox the stronger, better com-
business while simultaneously transforming the function. pany it is today.”
While many HR functions look to outsource, Xerox
transformed its HR function largely internally. According to QUESTIONS
Nazemetz, outsourcing providers say “ ‘Let us in, let us take 1. After having gone through the massive downsizing,
over your HR function and we can take 10% to 30% out of morale obviously has presented challenges. While Xerox
your cost base.’ We began trimming down, finding syner- employees seem to understand the need for change
gies and opportunities to get more efficient. We found the (minds), they may not emotionally embrace it (hearts).
savings ourselves.” How can Xerox gain both “hearts” and “minds”?
2. Xerox’s HR function focuses on three initiatives: (a) improvement and high performance from all employ-
employee value proposition (what can employees expect ees?), and (c) “three exceptional candidates” (how can HR
from the company, and what can the company expect deliver a pipeline of three-deep bench talent for every posi-
from employees?), (b) performance culture (how can the tion within the organization?). From everything you have
company develop a culture that encourages continuous learned, how might Xerox address each of these issues?
MANAGING PEOPLE
Saving Starbucks’ Soul
Chairman Howard Schultz is on a mission to take his Starbucks has become expert at something that’s decidedly
company back to its roots. Oh, yeah—he also wants unromantic—streamlining operations. Over the past 10 years
to triple sales in five years. the company has redesigned the space behind the counter to
“A heady aroma of coffee reached out and drew me in. boost barista efficiency. Automatic espresso machines speed
I stepped inside and saw what looked like a temple for the the time it takes to serve up a shot. Coffee is vacuum-sealed,
worship of coffee . . . it was my Mecca. I had arrived.”— making it easier to ship over long distances. To boost sales,
Howard Schultz on his first visit to Starbucks in 1981. the company sells everything from breath mints to CDs
On April 3, Starbucks launches a pair of confections to notebooks. Add it up and you have an experience that’s
called Dulce de Leche Latte and Dulce de Leche Frappuc- nothing like the worn wooden counters of the first store in
cino. A 16-oz. Grande latte has a robust 440 calories (about Pike Place Market or an Italian espresso bar.
the same as two packages of M&M’s) and costs about $4.50 Somewhere along the way that disconnect began to gnaw
in New York City—or about three times as much as McDon- at Schultz. Most recently it manifested itself in a note he
ald’s most expensive premium coffee. Starbucks Corp. wrote to his senior team. The Valentine’s Day memo, which
describes its latest concoctions, which took 18 months to leaked to the web, cut to the heart of what he sees as the
perfect, this way: “Topped with whipped cream and a dust- company’s dilemma. “We have had to make a series of deci-
ing of toffee sprinkles, Starbucks’ version of this traditional sions,” Schultz wrote, “that, in retrospect, have led to the
delicacy is a luxurious tasty treat.” watering down of the Starbucks experience, and what some
If you find yourself at Starbucks in the next few weeks, might call the commoditization of our brand.”
letting a Dulce de Leche Latte slide over your taste buds, you Now, Schultz is asking his lieutenants to redouble their
might wonder how this drink came to be. It’s a tale worth efforts to return to their roots. “We’re constantly—I don’t
hearing. On the surface it’s a story about how the Starbucks want to say battling—but we don’t want to be that big com-
marketing machine conjures and sells café romance to mil- pany that’s corporate and slick,” says Michelle Gass, senior
lions of people around the world. On a deeper level it’s a vice-president and chief merchant for global products. “We
story about how a company, along with its messianic leader, don’t. We still think about ourselves as a small entrepreneur-
is struggling to hold on to its soul. ial company.” That’s a tricky business when you have 150,000
Ask Schultz for the key to Starbucks and he’ll tell you it’s employees in 39 countries. But keeping that coffee joie de
all about storytelling. Starbucks is centered on two oft-repeated vivre alive inside Starbucks is crucial to Schultz’s entire phi-
tales: Schultz’s trip to Seattle in 1981, where he first enjoyed losophy. Who better to sell something than a true believer?
gourmet coffee, and a 1983 trip to Milan, where he discovered In 2004, Starbucks introduced something called the Coffee
espresso bar culture. Not only are these journeys useful touch- Master program for its employees. It’s a kind of extra-credit
stones for recruits, they also provide the original marketing course that teaches the staff how to discern the subtleties
story for a company that prides itself on giving customers an of regional flavor. Graduates (there are now 25,000) earn a
authentic experience. “The one common thread to the success special black apron and an insignia on their business cards.
of these stories and the company itself,” says Schultz, “is that The highlight is the “cupping ceremony,” a tasting ritual
they have to be true—and they have to be authentic.” traditionally used by coffee traders. After the grounds have
steeped in boiling water, tasters “crest” the mixture, penetrat-
TRUE BELIEVERS ing the crust on top with a spoon and inhaling the aroma.
Stories alone aren’t enough, though, to fuel Starbucks’ other As employees slurp the brew, a Starbucks Coffee Educator
obsession: to grow really, really big. By 2012, Schultz aims encourages them to taste a Kenyan coffee’s “citrusy” notes or
to nearly triple annual sales, to $23.3 billion. The com- the “mushroomy” flavor of a Sumatran blend.
pany also plans to have 40,000 stores world wide, up from If the ritual reminds you of a wine tasting, that’s inten-
13,500 today, not long after that, to hit its profit targets. tional. Schultz has long wanted to emulate the wine business.
Winemakers, after all, command a premium by focusing Latin aesthetic. (And if customers want some authenticity to
on provenance: the region of origin, the vineyard, and, of take home with them, they can buy one of five paintings of
course, the grape that gives the wine its particular notes— Costa Rican farmers that Guevara produced for Starbucks.
a story, in other words. Bringing wine’s cachet to coffee They will sell for $25 apiece.) A second poster will feature
would help take the brand upmarket and allow Starbucks to Costa Rican coffee farmers from whom Starbucks buys
sell premium beans. beans. A third will show a grandmotherly figure cooking up
The product and marketing people call the strategy dulce de leche on a gas stove. (She’s a paid model from Seat-
“Geography is a Flavor.” And in 2005 they began selling tle.) Each poster will feature the tagline “I am Starbucks.”
this new story with whole-bean coffee. The company reor- Having devised a story, Starbucks needed a drink that
ganized the menu behind the counter, grouping coffees by would say “Latin America.” Beverage brainstorming takes
geography instead of by “smooth” or “bold.” It replaced place in the Liquid Lab, an airy space painted in Starbucks’
the colorful Starbucks coffee bags with clean white pack- familiar blue, green, and orange hues. The room features huge
ages emblazoned with colored bands representing the region bulletin boards plastered with the latest beverage trends. In this
of origin. Later, for those connoisseurs willing to pay $28 case it didn’t take an anthropologist to figure out which drink
a pound, Starbucks introduced single-origin beans called Starbucks should use to promote its Latin American theme.
“Black Apron Exclusives.” Dulce de leche is a caramel-and-milk dessert enjoyed
The next step was to reach the masses who buy drinks in throughout much of the region. What’s more, Häagen-Dazs
the stores. The team decided to launch a series of in-store introduced dulce de leche ice cream in 1998, and Starbucks
promotions, each with a new set of drinks, that would com- followed suit with its own ice cream in 1999. So Americans
municate regional idiosyncrasies to customers. The first pro- are familiar with the flavor, says McKenzie, but “it still has
motion, the team decided, would highlight Central and South a nice exotic edge to it.” Besides, she adds, caramel and milk
America, where Starbucks buys more than 70% of its beans. go great with coffee.
The sort of authenticity Schultz loves to talk about is Even so, concocting a drink is never simple at Starbucks.
hard to pull off when you’re the size of Starbucks. Telling The research-and-development department routinely tackles
a story to a mass audience sometimes requires smoothing 70 beverage projects a year, with 8 of them leading to new
over inconvenient cultural nuances. Plus, the marketing drinks. A drink must not only appeal to a broad swath of
folks have to work quickly to stay abreast of beverage trends, coffee drinkers but also be easy for a barista to make quickly
not to mention ahead of such rivals as Dunkin’ Donuts and so as to maximize sales per store (hello, Wall Street). “The
McDonald’s. Diving deep is not an option. store . . . is a little manufacturing plant,” says Gass, and
A year ago, 10 Starbucks marketers and designers got on yet it must seem as though the drink is being handcrafted
a plane and went looking for inspiration in Costa Rica. “It’s specially for the customer (hello, Howard Schultz).
being able to say: This is how and why this [drink] is made,” Creating the Dulce de Leche Latte and Frappuccino fell to
says Angie McKenzie, who runs new product design. “Not Debbie Ismon, a 26-year-old beverage developer who holds
because someone told us or we read it somewhere.” The a degree in food science and has worked at Starbucks for 2
Starbucks team spent five days in Costa Rica, traveling on 1/2 years. In late June 2006, the design team brought her a
a minivan owned by TAM Tours. Later, a smaller group small sample they’d whipped up that they felt embodied the
toured Mexico City and Oaxaca as well. right tastes, plus a written description of the characteristics
they hoped to see. For the next four months, Ismon fiddled
MADE IN CHINA with various ratios of caramel, cooked milk, and sweetness
The mission was to find products that would evoke an “notes.” After the design group decided which version tasted
authentic vibe in the United States. That’s harder than it most “in-concept,” Ismon mixed up three different flavors
sounds. Philip Clark, a merchandising executive, wanted for the big taste test. One hundred or so random Starbucks
to sell traditional Costa Rican mugs. But the ones typically employees filed in, sampled the drinks, and rated them on
used to drink coffee were drab and brown; they wouldn’t computer screens. The process was repeated two more times
pop on store shelves. Plus, they broke easily. Then he found for each drink. Finally, 18 months after starting the process,
Cecilia de Figueres, who handpaints ceramic mugs in a Starbucks had its two latest premium beverages.
mountainside studio an hour from the capital, San Jose. The If previous drinks, such as Caramel Macchiato, are any
artist favors bright floral patterns; they would pop nicely. guide, Starbucks’ Dulce de Leche drinks will sell briskly.
Starbucks paid de Figueres a flat fee for her designs. Each That should please Wall Street and perhaps even help perk
mug will have a tag bearing her name and likeness; on the up the stock, which is down 20% from its May 2006 high on
bottom it will say “Made in China.” worries that operating margins are falling and that Starbucks
Starbucks will weave artisans and other Costa Ricans could miss its ambitious growth targets.
into the in-store promotional campaign. Painter Eloy Zuñiga And as you wait in line for your Dulce de Leche Latte,
Guevara will appear on a poster with a decidedly homespun you might ask yourself: Are you paying $4.50 for a caffeine
jolt and caramel topping? Or have you simply been dazzled 2. How would an effective strategic HRM function con-
by Howard Schultz’s storytelling magic? tribute to keeping Starbucks on track?
SOURCE: From B. Helm, “Saving Starbucks’ Soul,” BusinessWeek, April 9,
QUESTIONS 2007, pp. 56–61. Used with permission of Bloomberg L. P. Copyright © 2007.
1. What are some of the HRM issues inherent in Howard All rights reserved.
Schultz’s concerns?
Employees Make a Difference at Amy’s Ice Creams
One of the bright spots for hungry people in Austin, Texas, year, the company selects a King and Queen to honor based
is Amy’s Ice Creams—its factory on Burnet Road or one on which employees did the most company-sponsored char-
of several Amy’s stores. Founder Amy Miller, who dropped itable work. In this way, employee rewards are tied to the
out of medical school to start the business, figures it is just company’s value.
another way to “make a difference in people’s lives,” offer- Fun and community service aren’t just a way to be nice;
ing customers a fun place to celebrate or cheer up. they also have made Amy’s Ice Creams a company ice
Miller had been paying med school with a job at Steve’s cream lovers care to buy from. The company reaps millions
Ice Cream, but when the company was sold, she thought the of dollars in sales and has expanded the number of locations
new owners were too stodgy, so she opened her own ice cream to meet growing demand in Austin as well as in Houston and
shop. Given the motivation to strike out on her own, it’s not San Antonio. Still, it’s not just about the revenues. Co-owner
surprising that her goal is to manage her employees in a differ- (and Amy’s husband) Steve Simmons told a reporter, “We
ent way, one that combines informal fun with care for others. never want to be a mega-company. When we don’t know
The spirit of fun is defined by the employee selection pro- employees’ names, there’s a problem.”
cess Miller invented. When interviewing candidates, Miller
hands them a white paper bag with the instruction to “make QUESTIONS
something creative” and show her later. One applicant used 1. Which elements of a customer-oriented HRM per-
it to make a hot-air balloon. Another put food in a bag, gave spective does Amy’s Ice Creams seem to have? (See
it to a homeless person, took a photo of the gift, and put the Figure 16.2.)
photo in the bag to return as the creative offering. 2. Suppose Amy’s hired you as a consultant to evaluate
Job design also plays up the fun. Amy’s prized employ- whether the company has an effective HRM function.
ees don’t just scoop up ice cream but also come up with Which outcomes would you look for? How would you
ways to create a playful atmosphere. The company encour- measure them?
ages workers to juggle shakers or give away a scoop of ice 3. Generally, a small ice cream shop such as Amy’s cannot
cream to a customer who is willing to sing and dance. afford to pay store workers very high wages. How well
While the two painted concrete cows that sit in front of the do you think the company can achieve high employee
Amy’s factory are an emblem of the company’s commitment satisfaction without high pay? What can it do to fos-
to fun, its commitment to caring has a more uplifting sign: ter satisfaction besides the efforts described here? How
Amy’s Ice Creams funded the construction of a room in a could e-HRM support these efforts?
local children’s cancer care center. The room resembles an ice SOURCES: Amy’s Ice Creams corporate website, www.amysicecreams.com,
cream shop and includes freezers stocked with ice cream—a accessed June 19, 2015; Janine Popick, “GrowCo.: Growth by Involvement at
Amy’s Ice Creams,” Inc., March 16, 2010, www.inc.com; Renuka Rayasam,
treat that patients can share with visiting family members.
“Sweet Success,” Ausin American-Stateman, September 29, 2005; Business &
Service to the community is also connected to employee Company Resource Center, http://galenet.galegroup.com; and Michael Malone,
engagement. At Amy’s, the employees choose the charities “Chain Founder; Amy Miller, Amy’s Ice Creams,” Restaurant Business, March
the company will support. At a prom hosted by Amy’s every 1, 2003, available at All Business.com, www.allbusiness.com
NOTES
1. P. Wright, S. Snell, and P. Jacobsen, “Current Approaches to HR 2. Personal communication, June 2010.
Strategies: Inside-Out vs. Outside-In,” Human Resource Planning 3. A. S. Tsui and L. R. Gomez-Mejia, “Evaluating HR Effective-
27 (2004), pp. 36–46. ness,” in Human Resource Management: Evolving Roles and
Responsibilities, ed. L. Dyer (Washington, DC: Bureau of 14. C. O’Reilly and P. Caldwell, Cypress Semiconductor (A):
National Affairs, 1988), pp. 1-187–1-227. Vision, Values, and Killer Software (Stanford University Case
4. D. Ulrich, “Measuring Human Resources: An Overview of Prac- Study, HR-8A, 1998).
tice and a Prescription for Results,” Human Resource Manage- 15. “61 Percent of Americans Consider Themselves Overworked
ment 36, no. 3 (1997), pp. 303–20. and 86 Percent Are Not Satisfied with Their Job, According
5. P. Wright, G. McMahan, S. Snell, and B. Gerhart, “Comparing to Monster’s 2004 Work/Life Balance Survey,” Business Wire,
Line and HR Executives’ Perceptions of HR Effectiveness: Ser- August 3, 2004.
vices, Roles, and Contributions,” CAHRS (Center for Advanced 16. G. McMahan and R. Woodman, “The Current Practice of Orga-
Human Resource Studies) working paper 98-29, School of ILR, nization Development within the Firm: A Survey of Large
Cornell University, Ithaca, NY. Industrial Corporations,” Group and Organization Studies 17
6. J. C. Erfurt, A. Foote, and M. A. Heirich, “The Cost- (1992), pp. 117–34.
Effectiveness of Worksite Wellness Programs,” Personnel Psy- 17. B. Becker, M. Huselid, and D. Ulrich, The HR Scorecard: Link-
chology 15 (1992), p. 22. ing People, Strategy, and Performance (Cambridge, MA: HBS
7. T. H. Davenport, J. Haris, and J. Shapiro, “Competing on Press, 2001).
Talent Analytics,” Harvard Business Review, October 2010, 18. D. Ulrich and A. Yeung, “A Shared Mindset,” Personnel Admin-
pp. 52–59. istrator, March 1989, pp. 38–45.
8. P. Wright, G. McMahan, S. Snell, and B. Gerhart, Strategic 19. G. Jones and P. Wright, “An Economic Approach to Conceptu-
HRM: Building Human Capital and Organizational Capability, alizing the Utility of Human Resource Management Practices,”
Technical report. Cornell University, Ithaca, NY, 1998. Research in Personnel/Human Resources 10 (1992), pp. 271–99.
9. T. B. Kinni, “A Reengineering Primer,” Quality Digest, January 20. R. Schuler and J. Walker, “Human Resources Strategy: Focus-
1994, pp. 26–30; “Reengineering Is Helping Health of Hospi- ing on Issues and Actions,” Organizational Dynamics, Summer
tals and Its Patients,” Total Quality Newsletter, February 1994, 1990, pp. 5–19.
p. 5; R. Recardo, “Process Reengineering in a Finance Divi- 21. Company documents.
sion,” Journal for Quality and Participation, June 1994, 22. P. Wright, “Strategies and Challenges of the Chief Human
pp. 70–73. Resource Officer: Results of the First Annual Cornell/CAHRS
10. L. Quillen, “Human Resource Computerization: A Dollar and Survey of CHROs,” Technical report, 2009.
Cents Approach,” Personnel Journal, July 1989, pp. 74–77. 23. Ibid.
11. S. Greengard, “New Technology Is HR’s Route to Reengineer- 24. Ibid.
ing,” Personnel Journal, July 1994, pp. 32c–32o. 25. J. Paauwe, Human Resource Management and Performance:
12. R. Broderick and J. W. Boudreau, “Human Resource Manage- Unique Approaches for Achieving Long-Term Viability (Oxford:
ment, Information Technology, and the Competitive Edge,” Oxford University Press, 2004).
Academy of Management Executive 6 (1992), pp. 7–17. 26. S. Csoka and B. Hackett, Transforming the HR Function for
13. S. Shrivastava and J. Shaw, “Liberating HR through Technology,” Global Business Success (New York: Conference Board, 1998),
Human Resource Management 42, no. 3 (2003), pp. 201–17. Report 1209-19RR.
GLOSSARY
9-box grid A three-by-three matrix used by groups of Assessment Collecting information and providing feed-
managers and executives to compare employees within one back to employees about their behavior, communication
department, function, division, or the entire company. style, or skills.
Acceptability The extent to which a performance mea- Assessment center A process in which multiple rat-
sure is deemed to be satisfactory or adequate by those who ers evaluate employees’ performance on a number of
use it. exercises.
Action learning Teams work on an actual business Associate union membership A form of union mem-
problem, commit to an action plan, and are accountable for bership by which the union receives dues in exchange for
carrying out the plan. services (e.g., health insurance, credit cards) but does not
Action plan Document summarizing what the trainee and provide representation in collective bargaining.
manager will do to ensure that training transfers to the job. Attitudinal structuring The aspect of the labor–
Action steps The part of a written affirmative plan that management negotiation process that refers to the relation-
specifies what an employer plans to do to reduce underuti- ship and level of trust between the negotiators.
lization of protected groups. Audit approach Type of assessment of HRM effective-
Adventure learning Learning focused on the develop- ness that involves review of customer satisfaction or key
ment of teamwork and leadership skills by using structured indicators (e.g., turnover rate, average days to fill a position)
outdoor activities. related to an HRM functional area (e.g., recruiting, training).
Agency shop A union security provision that requires an Avatars Computer depictions of humans that can be
employee to pay union membership dues but not to join used as imaginary coaches, co-workers, and customers in
the union. simulations.
Agent In agency theory, a person (e.g., a manager) who Balanced scorecard A means of performance measure-
is expected to act on behalf of a principal (e.g., an owner). ment that gives managers a chance to look at their company
Alternative dispute resolution (ADR) A method of from the perspectives of internal and external customers,
resolving disputes that does not rely on the legal sys- employees, and shareholders.
tem. Often proceeds through the four stages of open door Bench strength The business strategy of having a pool
policy, peer review, mediation, and arbitration. of talented employees who are ready when needed to step
Alternative work arrangements Independent contrac- into a new position within the organization.
tors, on-call workers, temporary workers, and contract Benchmarking Comparing an organization’s practices
company workers who are not employed full-time by the against those of the competition.
company. Big data Information merged from a variety of sources,
Americans with Disabilities Act (ADA) A 1990 act including HR databases, corporate financial statements,
prohibiting individuals with disabilities from being dis- and employee surveys, to make evidence-based HR deci-
criminated against in the workplace. sions and show that HR practices can influence the organi-
Analytic approach Type of assessment of HRM effec- zation’s bottom line.
tiveness that involves determining the impact of, or the Blended learning Delivering content and instruction
financial costs and benefits of, a program or practice. with a combination of technology-based and face-to-face
Appraisal politics A situation in which evaluators purpose- methods.
fully distort a rating to achieve personal or company goals. Bona fide occupational qualification (BFOQ) A job
Apprenticeship A work-study training method with qualification based on race, sex, religion, and so on that
both on-the-job and classroom training. an employer asserts is a necessary qualification for the job.
Arbitration A procedure for resolving collective bar- Calibration meetings A way to discuss employees’ per-
gaining impasses by which an arbitrator chooses a solution formance with the goal of ensuring that similar standards
to the dispute. are applied to their evaluations.
700
Glossary 701
Career support Coaching, protection, sponsorship, and in a job and then incumbents’ scores are correlated with
providing challenging assignments, exposure, and visibility. existing measures of their performance on the job.
Cash balance plan Retirement plan in which the em- Consolidated Omnibus Budget Reconciliation Act
ployer sets up an individual account for each employee (COBRA) The 1985 act that requires employers to per-
and contributes a percentage of the employee’s salary; the mit employees to extend their health insurance coverage
account earns interest at a predetermined rate. at group rates for up to 36 months following a qualifying
Centralization Degree to which decision-making event, such as a layoff.
authority resides at the top of the organizational chart. Content validation A test validation strategy performed
Change The adoption of a new idea or behavior by a by demonstrating that the items, questions, or problems
company. posed by a test are a representative sample of the kinds of
situations or problems that occur on the job.
Checkoff provision A union contract provision that
requires an employer to deduct union dues from employ- Continuous learning A learning system that requires
ees’ paychecks. employees to understand the entire work process and
expects them to acquire new skills, apply them on the job,
Closed shop A union security provision requiring a person
and share what they have learned with other employees.
to be a union member before being hired. Illegal under NLRA.
Coordination training Training a team in how to share
Cloud computing A computing system that provides
information and decision-making responsibilities to maxi-
information technology infrastructure over a network in a
mize team performance.
self-service, modifiable, and on-demand model.
Corporate campaigns Union activities designed to
Coach A peer or manager who works with an employee
exert public, financial, or political pressure on employers
to motivate her, help her develop skills, and provide rein-
during the union-organizing process.
forcement and feedback.
Counselor/confidante/coach to the executive team A
Cognitive ability tests Tests that include three dimen-
role of the CHRO that focuses on counseling or coaching
sions: verbal comprehension, quantitative ability, and rea-
team members or resolving interpersonal or political con-
soning ability.
flicts among team members.
Communities of practice Groups of employees who
Criterion-related validity A method of establishing
work together, learn from each other, and develop a com-
the validity of a personnel selection method by showing a
mon understanding of how to get work accomplished.
substantial correlation between test scores and job perfor-
Comparable worth A public policy that advocates rem- mance scores.
edies for any undervaluation of women’s jobs (also called
Cross-cultural preparation The process of educating
pay equity).
employees (and their families) who are given an assign-
Compa-ratio An index of the correspondence between ment in a foreign country.
actual and intended pay.
Cross-training Training in which team members under-
Compensable factors The characteristics of jobs that an stand and practice each other’s skills so that members are
organization values and chooses to pay for. prepared to step in and take another member’s place should
Competencies Sets of skills, knowledge, and abilities he or she temporarily or permanently leave the team.
and personal characteristics that enable employees to per- Decision support systems Problem-solving systems that
form their jobs. usually include a “what-if” feature that allows users to see
Competency model Identifies and provides a descrip- how outcomes change when assumptions or data change.
tion of competencies that are common for an entire occu- Delayering Reducing the number of job levels within an
pation, organization, job family, or specific job. organization.
Competitiveness A company’s ability to maintain and Departmentalization Degree to which work units are
gain market share in its industry. grouped based on functional similarity or similarity of
Concentration strategy A strategy focusing on increas- workflow.
ing market share, reducing costs, or creating and maintain- Development The acquisition of knowledge, skills,
ing a market niche for products and services. and behaviors that improve an employee’s ability to meet
Concurrent validation A criterion-related validity study changes in job requirements and in client and customer
in which a test is administered to all the people currently demands.
702 Glossary
Development planning system A system to retain and Employment-at-will doctrine The doctrine that, in the
motivate employees by identifying and meeting their devel- absence of a specific contract, either an employer or employee
opment needs (also called career management systems). could sever the employment relationship at any time.
Direct applicants People who apply for a job vacancy Empowering Giving employees the responsibility and
without prompting from the organization. authority to make decisions.
Disparate impact A theory of discrimination based on Equal employment opportunity (EEO) The govern-
facially neutral employment practices that disproportionately ment’s attempt to ensure that all individuals have an equal
exclude a protected group from employment opportunities. opportunity for employment, regardless of race, color, reli-
Disparate treatment A theory of discrimination based on gion, sex, age, disability, or national origin.
different treatment given to individuals because of their race, Equal Employment Opportunity Commission (EEOC)
color, religion, sex, national origin, age, or disability status. The government commission established to ensure that
Distributive bargaining The part of the labor–management all individuals have an equal opportunity for employment,
negotiation process that focuses on dividing a fixed eco- regardless of race, color, religion, sex, age, disability, or
nomic “pie.” national origin.
Diversity training Refers to learning efforts that are Ergonomics The interface between individuals’ physio-
designed to change employees’ attitudes about diver- logical characteristics and the physical work environment.
sity and/or develop skills needed to work with a diverse Ethics The fundamental principles of right and wrong
workforce. by which employees and companies interact.
Downsizing The planned elimination of large numbers of Evidence-based HR Demonstrating that human re-
personnel, designed to enhance organizational effectiveness. source practices have a positive influence on the com-
Downward move A job change involving a reduction in pany’s bottom line or key stakeholders (employees,
an employee’s level of responsibility and authority. customers, community, shareholders).
Due process policies Policies by which a company Exempt Employees who are not covered by the Fair
formally lays out the steps an employee can take to appeal Labor Standards Act. Exempt employees are not eligible
a termination decision. for overtime pay.
Duty of fair representation The National Labor Rela- Expatriate Employee sent by his or her company to
tions Act requirement that all bargaining unit members manage operations in a different country.
have equal access to and representation by the union. Expectancy theory The theory that says motivation is a
Efficiency wage theory A theory stating that wage function of valence, instrumentality, and expectancy.
influences worker productivity. Experiential learning Training programs in which
E-learning Instruction and delivery of training by com- trainees gain knowledge and theory, participate in behav-
puters through the Internet or company intranet. ioral simulations, analyze the activity, and connect the
theory and activity with on-the-job situations.
Employee assistance programs (EAPs) Employer pro-
grams that attempt to ameliorate problems encountered by Expert systems Computer systems incorporating the deci-
workers who are drug dependent, alcoholic, or psychologi- sion rules of people recognized as experts in a certain area.
cally troubled. Explicit knowledge Knowledge that is well-documented
Employee engagement The degree to which employees and easily transferred to other persons.
are fully involved in their work and the strength of their job External analysis Examining the organization’s oper-
and company commitment. ating environment to identify strategic opportunities and
Employee Retirement Income Security Act (ERISA) threats.
The 1974 act that increased the fiduciary responsibilities External growth strategy An emphasis on acquiring
of pension plan trustees, established vesting rights and vendors and suppliers or buying businesses that allow a
portability provisions, and established the Pension Benefit company to expand into new markets.
Guaranty Corporation (PBGC). External labor market Persons outside the firm who
Employee stock ownership plan (ESOP) An employee are actively seeking employment.
ownership plan that provides employers certain tax and Fact finder A person who reports on the reasons for a
financial advantages when stock is granted to employees. labor–management dispute, the views and arguments of
Glossary 703
both sides, and a nonbinding recommendation for settling Goals What an organization hopes to achieve in the
the dispute. medium- to long-term future.
Fair Labor Standards Act (FLSA) The 1938 law that Goals and timetables The part of a written affirmative
established the minimum wage and overtime pay. action plan that specifies the percentage of women and
Family and Medical Leave Act The 1993 act that minorities that an employer seeks to have in each job group
requires employers with 50 or more employees to provide and the date by which that percentage is to be attained.
up to 12 weeks of unpaid leave after childbirth or adoption; Group mentoring program A program pairing a suc-
to care for a seriously ill child, spouse, or parent; or for an cessful senior employee with a group of four to six less
employee’s own serious illness. experienced protégés.
Financial Accounting Statement (FAS) 106 The rule Group- or team-building methods Training methods
issued by the Financial Accounting Standards Board in 1993 that help trainees share ideas and experiences, build group
requiring companies to fund benefits provided after retirement identity, understand the dynamics of interpersonal rela-
on an accrual rather than a pay-as-you-go basis and to enter tionships, and get to know their own strengths and weak-
these future cost obligations on their financial statements. nesses and those of their co-workers.
Forecasting The attempts to determine the supply of and Hands-on methods Training methods that require the
demand for various types of human resources to predict trainee to be actively involved in learning.
areas within the organization where there will be future Health maintenance organization (HMO) A health
labor shortages or surpluses. care plan that provides benefits on a prepaid basis for
Formal education programs Employee development employees who are required to use only HMO medical
programs, including short courses offered by consultants service providers.
or universities, executive MBA programs, and university High-performance work systems Work systems
programs. that maximize the fit between employees and technology.
Formal training Training and development programs and High-potential employees Employees the company be-
courses that are developed and organized by the company. lieves are capable of being successful in high-level man-
Four-fifths rule A rule that states that an employment agement positions.
test has disparate impact if the hiring rate for a minority Host country The country in which the parent-country
group is less than four-fifths, or 80 %, of the hiring rate for organization seeks to locate or has already located a
the majority group. facility.
Frame of reference A standard point that serves as a Host-country nationals (HCNs) Employees born and
comparison for other points and thus provides meaning. raised in a host, not parent, country.
Gamification Game-based strategies applied to perfor- HR or workforce analytics The practice of using data
mance management to make it a fun, effective, transparent, from HR databases and other data sources to make evi-
and inclusive process for employees and managers. dence-based human resource decisions.
Gainsharing A form of group compensation based on group HR dashboard HR metrics (such as productivity and
or plant performance (rather than organizationwide profits) absenteeism) that are accessible by employees and manag-
that does not become part of the employee’s base salary. ers through the company intranet or human resource infor-
General duty clause The provision of the Occupational mation system.
Safety and Health Act that states an employer has an over- Human resource information system (HRIS) A sys-
all obligation to furnish employees with a place of employ- tem used to acquire, store, manipulate, analyze, retrieve,
ment free from recognized hazards. and distribute information related to human resources.
Generalizability The degree to which the validity of Human resource management (HRM) The policies,
a selection method established in one context extends to practices, and systems that influence employees’ behavior,
other contexts. attitudes, and performances.
Glass ceiling A barrier to advancement to higher-level Human resource recruitment The practice or activity
jobs in the company that adversely affects women and carried on by the organization with the primary purpose of
minorities. The barrier may be due to lack of access to identifying and attracting potential employees.
training programs, development experiences, or relation- In-basket A simulation of the administrative tasks of a
ships (e.g., mentoring). manager’s job.
704 Glossary
Incentive effect The effect a pay plan has on the behav- Job evaluation An administrative procedure used to
iors of current employees. measure internal job worth.
Inclusion Creating an environment in which employees Job experience The relationships, problems, demands,
share a sense of belonging, mutual respect, and commit- tasks, and other features that employees face in their jobs.
ment with others so they can perform their best work. Job hazard analysis technique A breakdown of each
Individualism–collectivism One of Hofstede’s cultural job into basic elements, each of which is rated for its
dimensions; describes the strength of the relation between potential for harm or injury.
an individual and other individuals in a society. Job involvement The degree to which people identify
Informal learning Learning that is learner initiated, themselves with their jobs.
involves action and doing, is motivated by an intent to Job redesign The process of changing the tasks or the
develop, and does not occur in a formal learning setting. way work is performed in an existing job.
Intangible assets A type of company asset including Job rotation The process of systematically moving a
human capital, customer capital, social capital, and intel- single individual from one job to another over the course
lectual capital. of time. The job assignments may be in various functional
areas of the company or movement may be between jobs in
Integrative bargaining The part of the labor–
a single functional area or department.
management negotiation process that seeks solutions ben-
eficial to both sides. Job satisfaction A pleasurable feeling that results from
the perception that one’s job fulfills or allows for the ful-
Interactional justice A concept of justice referring fillment of one’s important job values.
to the interpersonal nature of how the outcomes were
Job specification A list of the knowledge, skills, abili-
implemented.
ties, and other characteristics (KSAOs) that an individual
Internal analysis The process of examining an organi- must have to perform a job.
zation’s strengths and weaknesses.
Job structure The relative pay of jobs in an organization.
Internal growth strategy A focus on new market and Kaizen Practices participated by employees from all lev-
product development, innovation, and joint ventures. els of the company that focus on continuous improvement
Internal labor force Labor force of current employees. of business processes.
Internship On-the-job learning sponsored by an educa- Key jobs Benchmark jobs, used in pay surveys, that
tional institution, or part of an academic program. have relatively stable content and are common to many
Interview Employees are questioned about their work organizations.
and personal experiences, skills, and career plans. Knowledge management Process of enhancing company
Intraorganizational bargaining The part of the labor– performance by designing and using tools, systems, and
management negotiation process that focuses on the con- cultures to improve creation, sharing, and use of knowledge.
flicting objectives of factions within labor and management. Knowledge workers Employees who own the intellec-
tual means of producing a product or service.
Involuntary turnover Turnover initiated by the organi-
zation (often among people who would prefer to stay). Leader of the HR function A role of the CHRO that
focuses on working with HR team members regarding the
ISO 9000:2000 A series of quality assurance standards
development, design, and delivery of HR services.
developed by the International Organization for Standard-
Leaderless group discussion Process in which a team
ization in Switzerland and adopted worldwide.
of five to seven employees solves an assigned problem
Job analysis The process of getting detailed information within a certain time period.
about jobs.
Leading indicator An objective measure that accurately
Job description A list of the tasks, duties, and responsi- predicts future labor demand.
bilities that a job entails. Lean thinking A way to do more with less effort, equip-
Job design The process of defining the way work will ment, space, and time, but providing customers with what
be performed and the tasks that will be required in a they need and want.
given job. Learning management system (LMS) Technology
Job enlargement Adding challenges or new responsi- platform that automates the administration, development,
bilities to an employee’s current job. and delivery of a company’s training program.
Glossary 705
Learning organization An organization whose employees Mobile devices Equipment such as smartphones and
are continuously attempting to learn new things and apply tablet computers that provide employees with anytime,
what they have learned to improve product or service quality. anywhere access to HR applications and other work-
Liaison to the board of directors A role of the CHRO related information.
that focuses on preparation for board meetings, phone calls Motivation to learn The desire of the trainee to learn
with board members, and attendance at board meetings. the content of a training program.
Long-term–short-term orientation One of Hofstede’s Myers-Briggs Type Inventory (MBTI)® A psychologi-
cultural dimensions; describes how a culture balances cal test used for team building and leadership development
immediate benefits with future rewards. that identifies employees’ preferences for energy, informa-
Maintenance of membership Union rules requiring tion gathering, decision making, and lifestyle.
members to remain members for a certain period of time Needs assessment The process used to determine if
(e.g., the length of the union contract). training is necessary.
Malcolm Baldrige National Quality Award An award Negative affectivity A dispositional dimension that re-
established in 1987 to promote quality awareness, to rec- flects pervasive individual differences in satisfaction with
ognize quality achievements of U.S. companies, and to any and all aspects of life.
publicize successful quality strategies.
New technologies Current applications of knowledge, pro-
Manager support Degree to which trainees’ managers cedures, and equipment that have not been previously used.
emphasize the importance of attending training programs Usually involves replacing human labor with equipment,
and stress the application of training content to the job. information processing, or some combination of the two.
Managing diversity The process of creating an environ- Nonkey jobs Jobs that are unique to organizations and
ment that allows all employees to contribute to organiza- that cannot be directly valued or compared through the use
tional goals and experience personal growth. of market surveys.
Marginal tax rate The percentage of an additional Occupational Safety and Health Act (OSHA) The 1970
dollar of earnings that goes to taxes. law that authorizes the federal government to establish and
Masculinity–femininity dimension One of Hofstede’s enforce occupational safety and health standards for all
cultural dimensions; describes the division of roles bet- places of employment engaging in interstate commerce.
ween the sexes within a society.
Offshoring A special case of outsourcing where the jobs
Massive Open Online Courses (MOOCs) Online that move actually leave one country and go to another.
learning designed to enroll large numbers of learners who
Onboarding Refers to the process of helping new hires
have access to the Internet and composed of interactive
adjust to social and performance aspects of their new jobs.
coursework including video lectures, discussion groups,
wikis, and assessment quizzes. On-the-job training (OJT) Peers or managers train-
ing new or inexperienced employees who learn the job by
Mediation A procedure for resolving collective bargain-
observation, understanding, and imitation.
ing impasses by which a mediator with no formal authority
acts as a facilitator and go-between in the negotiations. Opportunity to perform The trainee is provided with or
actively seeks experience using newly learned knowledge,
Mentor An experienced, productive senior employee
skills, or behavior.
who helps develop a less experienced employee.
Merit bonus Merit pay paid in the form of a bonus, Organizational analysis A process for determining the
instead of a salary increase. business appropriateness of training.
Merit increase grid A grid that combines an employee’s Organizational commitment The degree to which an
performance rating with his or her position in a pay range to employee identifies with the organization and is willing to
determine the size and frequency of his or her pay increases. put forth effort on its behalf.
Merit pay Traditional form of pay in which base pay is Outcome fairness The judgment that people make with
increased permanently. respect to the outcomes received relative to the outcomes
received by other people with whom they identify.
Minimum wage The lowest amount that employers are
legally allowed to pay; the 1990 amendment of the Fair Outplacement counseling Counseling to help displaced
Labor Standards Act permits a subminimum wage to employees manage the transition from one job to another.
workers under the age of 20 for a period of up to 90 days. Output A job’s performance standards.
706 Glossary
Outsourcing An organization’s use of an outside organi- Procedural justice A concept of justice focusing on the
zation for a broad set of services. methods used to determine the outcomes received.
Parent country The country in which a company’s cor- Profit sharing A compensation plan in which payments
porate headquarters is located. are based on a measure of organization performance (prof-
Parent-country nationals (PCNs) Employees who its) and do not become part of the employees’ base salary.
were born and live in a parent country. Progression of withdrawal Theory that dissatisfied
Pay grades Jobs of similar worth or content grouped individuals enact a set of behaviors to avoid the work
together for pay administration purposes. situation.
Pay level The average pay, including wages, salaries, and Promotions Advances into positions with greater chal-
bonuses, of jobs in an organization. lenge, more responsibility, and more authority than the
employee’s previous job.
Pay policy line A mathematical expression that describes
the relationship between a job’s pay and its job evaluation Prosocial motivation The degree to which people are
points. motivated to help other people.
Pay structure The relative pay of different jobs (job Protean career A career that is frequently changing due
structure) and how much they are paid (pay level). to both changes in the person’s interests, abilities, and val-
ues and changes in the work environment.
Pension Benefit Guaranty Corporation (PBGC) The
agency that guarantees to pay employees a basic retirement Psychological success The feeling of pride and accom-
benefit in the event that financial difficulties force a com- plishment that comes from achieving life goals.
pany to terminate or reduce employee pension benefits. Psychosocial support Serving as a friend and role
Performance appraisal The process through which an model, providing positive regard and acceptance, and cre-
organization gets information on how well an employee is ating an outlet for a protégé to talk about anxieties and
doing his or her job. fears.
Performance feedback The process of providing employ- Quantitative ability Concerns the speed and accuracy
ees information regarding their performance effectiveness. with which one can solve arithmetic problems of all kinds.
Performance management The means through which Range spread The distance between the minimum and
managers ensure that employees’ activities and outputs are maximum amounts in a pay grade.
congruent with the organization’s goals. Rate ranges Different employees in the same job may
Performance support systems Computer applications have different pay rates.
that can provide (as requested) skills training, information Readiness for training Employee characteristics that
access, and expert advice. provide them with the desire, energy, and focus necessary
Person analysis A process for determining whether em- to learn from training.
ployees need training, who needs training, and whether Reasonable accommodation Making facilities readily
employees are ready for training. accessible to and usable by individuals with disabilities.
Power distance One of Hofstede’s cultural dimensions; Reasoning ability Refers to a person’s capacity to invent
concerns how a culture deals with hierarchical power solutions to many diverse problems.
relationships—particularly the unequal distribution of power. Recruitment The process of seeking applicants for
Predictive validation A criterion-related validity study that potential employment.
seeks to establish an empirical relationship between appli- Reengineering Review and redesign of work processes
cants’ test scores and their eventual performance on the job. to make them more efficient and improve the quality of the
Preferred provider organization (PPO) A group of end product or service.
health care providers who contract with employers, insur- Referrals People who are prompted to apply for a job by
ance companies, and so forth to provide health care at a someone within the organization.
reduced fee. Reliability The consistency of a performance measure;
Presentation methods Training methods in which train- the degree to which a performance measure is free from
ees are passive recipients of information. random error.
Principal In agency theory, a person (e.g., the owner) Repatriation The preparation of expatriates for return to
who seeks to direct another person’s behavior. the parent company and country from a foreign assignment.
Glossary 707
Representative of the firm A role of the CHRO that Skill-based pay Pay based on the skills employees
focuses on activities with external stakeholders, such as acquire and are capable of using.
lobbying, speaking to outside groups, etc. Social media Online and mobile technology used to cre-
Repurposing Directly translating instructor-led training ate interactive communications.
online. Social networking Websites and blogs that facilitate
Reshoring Moving jobs from overseas to the U.S. interactions between people.
Return on investment Refers to the estimated dollar Social performance management Social media and
return from each dollar invested in learning. microblogs similar to Facebook, LinkedIn, and Yammer
Reverse mentoring Business situation in which younger that allow employees to quickly exchange information, talk
employees mentor more senior employees. to each other, provide coaching, and receive feedback and
Right-to-work laws State laws that make union shops, recognition in the form of electronic badges.
maintenance of membership, and agency shops illegal. Sorting effect The effect a pay plan has on the compo-
Role behaviors Behaviors that are required of an indi- sition of the current workforce (the types of employees
vidual in his or her role as a job holder in a social work attracted and retained).
environment. Specificity The extent to which a performance mea-
Role-play A participant taking the part or role of a man- sure gives detailed guidance to employees about what is
ager or other employee. expected of them and how they can meet these expectations.
Sabbatical A leave of absence from the company to Stakeholders The various interest groups who have rela-
renew or develop skills. tionships with and, consequently, whose interests are tied
Safety awareness programs Employer programs that to the organization (e.g., employees, suppliers, customers,
attempt to instill symbolic and substantive changes in the shareholders, community).
organization’s emphasis on safety. Standard deviation rule A rule used to analyze employ-
Sarbanes-Oxley Act of 2002 A congressional act passed ment tests to determine disparate impact; it uses the differ-
in response to illegal and unethical behavior by managers ence between the expected representation for minority groups
and executives. The act sets stricter rules for business, espe- and the actual representation to determine whether the differ-
cially accounting practices including requiring more open ence between the two is greater than would occur by chance.
and consistent disclosure of financial data, CEOs’ assur- Stock options An employee ownership plan that gives
ance that data are completely accurate, and provisions that employees the opportunity to buy the company’s stock at a
affect the employee–employer relationship (e.g., develop- previously fixed price.
ment of a code of conduct for senior financial officers). Strategic advisor to the executive team A role of the
Selection The process by which an organization CHRO that focuses on the formulation and implementa-
attempts to identify applicants with the necessary knowl- tion of the firm’s strategy.
edge, skills, abilities, and other characteristics that will Strategic choice The organization’s strategy; the ways
help it achieve its goals. an organization will attempt to fulfill its mission and
Self-service Giving employees online access to human achieve its long-term goals.
resources information. Strategic congruence The extent to which the perfor-
Shared service model A way to organize the HR func- mance management system elicits job performance that is
tion that includes centers of expertise or excellence, ser- consistent with the organization’s strategy, goals, and culture.
vice centers, and business partners. Strategic human resource management (SHRM) A
Simulation A training method that represents a real-life pattern of planned human resource deployments and activ-
situation, allowing trainees to see the outcomes of their ities intended to enable an organization to achieve its goals.
decisions in an artificial environment. Strategy formulation The process of deciding on a
Situational interview An interview procedure where strategic direction by defining a company’s mission and
applicants are confronted with specific issues, questions, goals, its external opportunities and threats, and its internal
or problems that are likely to arise on the job. strengths and weaknesses.
Six Sigma process System of measuring, analyzing, Strategy implementation The process of devising
improving, and controlling processes once they meet qual- structures and allocating resources to enact the strategy a
ity standards. company has chosen.
708 Glossary
Stretch assignments Job assignments in which there is The process includes self-evaluations as well as evaluations
a mismatch between an employee’s skills and past experi- from the manager’s boss, subordinates, peers, and customers.
ences and the skills required for success on the job. Total quality management (TQM) A cooperative form
Succession planning The identification and tracking of of doing business that relies on the talents and capabili-
high-potential employees capable of filling higher-level ties of both labor and management to continually improve
managerial positions. quality and productivity.
Summary plan description (SPD) A reporting require- Training A planned effort to facilitate the learning of
ment of the Employee Retirement Income Security Act job-related knowledge, skills, and behavior by employees.
(ERISA) that obligates employers to describe the plan’s Training design process A systematic approach for de-
funding, eligibility requirements, risks, and so forth within veloping training programs.
90 days after an employee has entered the plan. Training outcomes A way to evaluate the effective-
Support network Trainees who meet to discuss their ness of a training program based on cognitive, skill-based,
progress in using learned capabilities on the job. affective, and results outcomes.
Sustainability The ability of a company to make a profit Transaction processing Computations and calcula-
without sacrificing the resources of its employees, the tions used to review and document HRM decisions and
community, or the environment. Based on an approach to practices.
organizational decision making that considers the long- Transfer The movement of an employee to a different
term impact of strategies on stakeholders (e.g., employees, job assignment in a different area of the company.
shareholders, suppliers, community).
Transfer of training The use of knowledge, skills, and
Tacit knowledge Knowledge based on personal experi- behaviors learned in training on the job.
ence that is difficult to codify.
Transitional matrix Matrix showing the proportion or
Taft-Hartley Act The 1947 act that outlawed unfair number of employees in different job categories at differ-
union labor practices. ent times.
Talent architect A role of the CHRO that focuses on Transnational process The extent to which a company’s
building and identifying the human capital critical to the planning and decision-making processes include represen-
present and future of the firm. tatives and ideas from a variety of cultures.
Talent management Attracting, retaining, developing, Transnational representation Reflects the multina-
and motivating highly skilled employees and managers. tional composition of a company’s managers.
Task analysis The process of identifying the tasks, Transnational scope A company’s ability to make HRM
knowledge, skills, and behaviors that need to be empha- decisions from an international perspective.
sized in training.
Tuition reimbursement The practice of reimbursing
Team leader training Training of the team manager or employees’ costs for college and university courses and
facilitator. degree programs.
Technic of operations review (TOR) Method of deter- Uncertainty avoidance One of Hofstede’s cultural
mining safety problems via an analysis of past accidents. dimensions; describes how cultures seek to deal with an
Teleconferencing Synchronous exchange of audio, unpredictable future.
video, or text between individuals or groups at two or more Union shop A union security provision that requires a
locations. person to join the union within a certain amount of time
Temporary assignment Job tryouts such as employees after being hired.
taking on a position to help them determine if they are Upward feedback A performance appraisal process for
interested in working in a new role. managers that includes subordinates’ evaluations.
Third country A country other than a host or parent country. Utility The degree to which the information provided by
Third-country nationals (TCNs) Employees born in a selection methods enhances the effectiveness of selecting
country other than a parent or host country. personnel in real organizations.
360-degree appraisal (feedback systems) A performance Utilization analysis A comparison of the race, sex, and
appraisal process for managers that includes evaluations ethnic composition of an employer’s workforce with that
from a wide range of persons who interact with the manager. of the available labor supply.
Glossary 709
Validity The extent to which a performance mea- Voluntary turnover Turnover initiated by employees
sure assesses all the relevant—and only the relevant— (often whom the company would prefer to keep).
aspects of job performance. Webcasting Classroom instruction provided online via
Verbal comprehension Refers to a person’s capacity to live broadcasts.
understand and use written and spoken language. Whistle-blowing Making grievances public by going to
Virtual reality Computer-based technology that pro- the media or government.
vides trainees with a three-dimensional learning experi- Workforce sensor A role of the CHRO that focuses on
ence. Trainees operate in a simulated environment that identifying workforce morale issues or concerns.
responds to their behaviors and reactions. Workforce utilization review A comparison of the pro-
Virtual teams Teams that are separated by time, geo- portion of workers in protected subgroups with the pro-
graphic distance, culture and/or organizational boundaries portion that each subgroup represents in the relevant labor
and rely exclusively on technology for interaction between market.
team members.
NAME AND COMPANY INDEX
Aaron’s Inc., 128 AXA, 630
ABB North America, 305–306 Axelrod, B., 334
Abercrombie & Fitch, 223, 224–225, 235 Axtell, R., 650
Abosch, Ken, 497
Abrams, Robin, 648 Babies ‘R’ Us, 127
Abramson, Jill, 442 Babson College, 101
Accenture, 8, 283 BAE Systems, 304
Accenture PLC, 158 Bailey, S., 279
Aditya Birla Minacs, 401 Baker and McKenzie, 245
Adler, Nancy, 642 Bakke, Alan, 104
Adobe, 207, 209, 319 Baldwin T., 279
ADP, 8, 281 Balkin, D. B., 525
Advanced Micro Devices, 302 Ballou, B., 539
Aeppel, T., 75 Balzar, W. K., 444
Aetna, 18, 431, 457, 557 Banana Republic, 26, 43
Agilent Technologies, 401 Bandura, A., 278
Agnefjäll, Peter, 682 Banjo, S., 629
Aguinis, H., 322, 365 Bank of America, 47, 238, 436
Airbnb, 400 Barbash, Jack, 587, 609
Airbus, 72–74 Barclay, Katy, 670
Akin & Smith LLC, 356 Barclays, 521
Alaska Air, 639 Barling, J., 50
Albaugh, Jim, 200 Barnes, C. M., 442
Alcoa, 162 Barnes, Lynette A., 115
Alliance for Bangladesh Worker Safety, 582 Barnes, Randy, 67
Allianz, 539 Barnett, R., 407
AlliedBarton Security Systems, 394 Barra, Mary, 145, 405
Allstate, 125 Bates, R., 279
AlphaCore, 194 Bauer, T., 307
Alston and Bird, 424 Baumann, B., 384
Amalgamated Clothing and Textile Workers Union (ACTWU), 598 Baxter, Annie, 497
Amazon.com, 167, 200, 464, 618 Baylor Health Care System, 32
American Arbitration Association, 600 BE&K, 539
American Express, 28, 277 Bear Stearns, 547
American Federation of Labor and Congress of Industrial Organizations Beatty, R., 21
(AFL-CIO), 583, 584, 598 Becker, B., 21, 28
American Federation of State, County, and Municipal Employees Beebe, Gayle, 122
(AFSCME), 619 Belgian Privacy Commission, 71
American Heart Association (AHA), 152 Bellman, E., 125
American International Group (AIG), 333 Berkshire Hathaway, 630
American Management Association (AMA), 91 Berrone, P., 525
American Motors, 587 Bertagnoli, L., 514
American Society for Training and Development, 22 Berzon, A., 173
American Staffing Association, 197 Bezos, Jeff, 464
American/US Airways, 67 Bezrvkova, K., 306
American Welding Society, 186 Bhobe, S., 357
Amoco, 133 Bingham, T., 272
Anand, R., 306 Biogen Idec, 47
Andreessen, Marc, 663 Birchbox Inc., 400
Aon Hewitt, 497 Birdi, K., 50
Apple, 86, 158, 207–208, 434, 478, 525, 552, 630, 648 BKD, 382
Arizona State University (ASU), 18, 90, 201, 444 Black, S., 647
Armstrong, J., 273 Blake, S., 37
Armstrong, Lance, 436 Blimpie’s, 426
Art & Logic, 49 Blue Cross Blue Shield of Michigan (BCBSM), 409–410
Arthur, J., 87 BMW, 478, 590
AstraZeneca, 406 Boathouse Sports, 174
Asurion, 385 Bock, L., 363
AT&T, 38, 397, 673, 690 Bock, Laszlo, 242
Audi, 462 Body Media, 430
711
712 Name and Company Index
Boeing, 72–74, 151, 167, 197, 200, 606 Chavez, C., 306
Boeing Corporation, 45 Cheblum, R., 45
Boling, Andrew, 245 Cheesecake Factory Inc., 22
Bonache, J., 647 Cheesewright, David, 629
Booz Allen, 307–308 Cheng, Louie, 559
Booz Allen Hamilton, 205 Chertavian, Gerald, 277
Borgese, Samuel, 198 Chevron, 171, 630, 678
Bort, J., 562 CHG Healthcare Services, 408
Botelho, G., 245 Chick-fil-A, 236
Boudreau, J., 467, 468 Chili’s Restaurants, 168, 327
Boudreau, J. W., 676 China National Petroleum, 630
BP, 20, 130, 137, 430, 630 Chinese Institute of Industrial Relations, 440
BranchOut, 210 Chizen, Bruce, 207
Brat, I., 90 Chomchuen, W., 479
Bray, M., 364 Chouinard, Yvon, 540
Brennan, John, 203 Christiana Care, 152
Brenner, Phillip, 199 Chrysler, 461, 510, 560, 568, 587, 609–610
Bridgepoint Education, 24 Chrysler Dundee Engine, 51
Brinker International Inc., 327 CIA (Central Intelligence Agency), 203
Bross, A., 647 Cigna, 430
Brotherson, P., 46 Cisco Systems, 49, 204–205, 397, 433, 514
Brustein, J., 552 Citibank, 158, 520
Bruyere, S., 124 Citicorp, 89
Bryant, A., 363 Citigroup, 89, 481, 520
BuildOn, 550 Clegy, C., 50
Bunch, W., 29, 33 Clinton, Bill, 103, 126
Bundy, Sandra, 127 Clinton Correctional Facility, 244
Burger King, 135, 199–200 CMP Media, 539
Burkitt, L., 560 CMS Energy, 289
Burlington Northern Santa Fe Corporation, 351 Coca-Cola, 43, 281, 327
Burnison, Gary, 129 Coca-Cola Bottling Company Consolidated (CCBCC), 285, 292
Burton, Arthur, 127 Code Jam, 251
Bush, George H.W., 103 Coeur Mining, 9
Byrne, Clara, 363 Cognizant, 25
Cohen, P., 42
Caesars Entertainment Corporation, 560 Cohn, N., 237
California Labor Commissioner’s Office, 183 Coke, 28
Caligiuri, P., 647 Coldwell Banker, 23
CalPERS, 521 Collison, J., 385
Campion, Michael A., 168 Colquitt, J., 276
Capital BlueCross, 23 Colvin, A.J.S., 608
Cappelli, Peter, 475 Colvin, Alexander, 581
CareerBuilder, 209, 244 ComAir, 438
CareSource, 23, 390 Comey, James, 253
Carey, S., 67 Commons, John R., 580
Cargill, 186 Communication Workers of America, 600
Carnegie-Mellon University, 243 Conference Board, 89
Carter, Clara, 349 Conmed, 150–151
Carter, Jimmy, 102 Connecticut Health Foundation (CHF), 352
Cartus, 402–403 Connolly, K., 306, 406
Cascio, W. F., 474 ConocoPhillips, 27
Cassilly, Lisa, 424 Consumer Finance Protection Bureau (CFPB), 236
Castro, Fidel, 199 Container Store, 473–474
Catalina Restaurant Group, 198 Continental, 72, 639
Caterpillar, 604 Cordeiro, A., 560
CDW Corporation, 287 Cornell University, 124
Center for Automotive Research, 479 Costco Wholesale, 422, 457, 473
Center for Creative Leadership, 395 Coursera, 290–291
Central Intelligence Agency (CIA), 203 Cox, T. H., 37
Central States Manufacturing, 514 Crown Cork & Seal, 610
Cerner, 539 Culbert, S., 320
Chandra, Sunil, 685–686 Cutcher-Gershenfeld, J., 611
Chao, G., 307 CVS, 34–35
Chapman, B., 273 CVS Caremark, 431
Chatter, 26 CVS Health, 560
Chaudhuri, S., 682 Cypress Semiconductors, 687
Name and Company Index 713
Daimler, 630 Emshwiller, J. R., 240

Damon, Robert, 129 English, Paul, 425
Davis, S., 407 ENI, 630
DaVita Healthcare Partners, 293 Enron, 547
Dearborn, J., 402 Entertainment and Sports Programming Network (ESPN), 377–378
Decker, P. J., 286 E.ON, 630
Delahaye, B. L., 278 Equal Employment Opportunity Commission (EEOC), 39, 102, 107, 108,
Dell Computer Company, 86, 151, 687 110–112, 115, 118, 122–124, 126–130, 235, 240, 367, 430
Dell Inc., 36, 353 Erblich, Timothy, 79
Deloitte, 330–331 Erfurt, J. C., 676
De Long, T., 334 Erickson, S., 124
Delta, 72, 639 Ernst & Young, 210, 300
Delta/Northwest, 67 Ernst & Young LLC, 360–361
Deming, W. Edwards, 506–507 Erwin, Michael, 244
DeRose, C., 474 Esen, E., 385
Derven, M., 46 ESPN (Entertainment and Sports Programming Network), 377–379
Deutche Bourse, 630 Estee Lauder, 124
Dichter, Mark, 424–425 Ethisphere Institute, 79
Digital Equipment, 284 Etihad Airways, 283
Dillard’s, 124–125 Evans Analytical Group (EAG), 292
Dimension Data, 41 Everson, K., 397, 410
Disney, 377 Everwise, 404
Di Stefano, G., 278 Evolution Fresh, 18
Distefano, Michael, 129 Evolv Incorporated, 231
Dixon, Pam, 430 EXOR Group, 630
Dobler, Amy, 404 Expedia Inc., 328
Doke, D., 650 Express Scripts Inc., 89
Dolezal, Rachel, 245 Exxon Mobil, 20, 630
D’Onfro, J., 562
Donovan, J., 203 Facebook, 21–23, 45–46, 70, 71, 200, 210, 211, 234, 243, 263, 266, 291,
Douglas County Libraries (Colorado), 353 356, 515, 535, 552
Dow Chemical, 28, 29, 409, 410 Fairless, T., 71, 104
Dowell, B., 407 Famulari, J. J., 651
Driebusch, Corrie, 521 Fang, M., 637
Duke Power, 120–121 Fannie Mae, 539
Duncan, J., 384 Farmers Insurance Group, 291–292
Dunlop, John, 578 FDNY, 294
Dunnette, M., 340 Federal Aviation Authority (FAA), 431–432, 639
DuPont, 511, 512, 610 Federal Bureau of Investigation (FBI), 240, 253
Durosko, Craig, 513 Federal Communications Commission (FCC), 690
Dyer, Lee, 673, 675, 676 Federal Express, 327
Federal Labor Relations Authority, 619
Eastman, L. J., 395 Federal Mediation and Conciliation Service (FMCS), 605, 608
Eastman Kodak, 284 Federal Reserve Bank, 17
Eaton Corporation, 41–42 FedEx, 151, 158, 184
Eddy, M., 246 FedEx Office and Print Shops, 158
Educational Testing Service, 248 Feinsteig, Rachel, 497
edX, 290–291 Feintzeig, R., 33, 319, 474, 539
Egge, Danielle, 540 Feloni, R., 278
Ekeberg S., 346 Feltheimer, Jon, 483
Elauf, Samantha, 223, 224–225, 235, 236 Ferrari, 38
Elder, J., 101, 137, 550 Ferzandi, L., 647
Electrolux Group, 122 Fiberdome Inc., 173
Electromation, 519, 610, 619 Fields, G., 240
Electronic Data Systems, 158 Financial Accounting Standards Board (FASB), 515, 568
Eli Lilly, 161, 539 Finnigan, Dan, 210
Elinson, Z., 245 First Tennessee Bank, 553
Elkins, K., 650 Fisher, C., 83
Ellison, Lawrence J., 158, 483 Fisher, Roger, 603
Emanual, Rahm, 236 Fitbit, 430, 431
EMC Corporation, 158 Fleisher, L., 71
eMee, 357 Fletes, Alfredo, 550
Emelo, R., 401 Flippin’ Pizza, 285
Emerald Therapeutics, 197 Folger, R., 508
Emlo, R., 386 Food4Less, 394
Empire Steel and Tin Plant, 516 Foote, A., 676
Ford, 196, 287, 461, 500, 510, 560, 568, 587, 609 Gregersen, H., 647
Ford, Ron Clark, 127 Greyhound Lines, 290
Former, S. E., 384 Grote, D., 344, 365
Foroohar, R., 145 Groupon, 38
Fortune, 3, 74, 211, 405 Groysberg, B., 306, 406
Fossum, J., 596 Gryta, T., 690
Four Seasons, 539 GTE, 399
Fox, A., 344 Guardian Industries, 300
Francis, T., 457 Gummer, C., 195
Franco-Santos, M., 525
Franklin, J., 17 Hagey, K., 428
Freeman, G., 555 Halcrow,, A., 10
Freeman, R. B., 589, 597 Haldeman, Ed, 160
Frege, Carola, 620 Hall, D., 384
Freifeld, L., 264 Halloran, Carmen, 115
Frito-Lay, 38 Halvorson, George, 325
Hamberlin, Mark, 205
Gagne, R. M., 278 Hamp, Julie, 429
Gainey, James, 127 Handfield-Jones, H., 334
Galagan, P., 272, 363 H&M, 157
Gallagher, L., 4 Handybook, 183, 487
Gambill, C., 272 Hanesbrands, 44
Gap Inc., 43, 319, 457 Hannaford Brothers, 556
Gardner, P., 307 Hannan, M., 482
Gates, Bill, 28 Hansen, B., 482
Gazprom, 630 Hanson, R., 344
Genentech Inc., 385, 386, 400 Happy Home Company, 535
General Cable, 51 Hare, P. W., 199
General Electric (GE), 32, 43, 190, 211, 367, 386, 387, 431, Harley-Davidson, 609
550, 673 Harrah’s, 560
General Mills, 384, 385, 400 Harris, P., 292, 650
General Motors (GM), 40, 69, 70, 91, 145, 146, 151, 154, 196, 302, 398, Harrison, D., 647
405, 461, 510–511, 560, 568, 587, 629, 630, 642 Hartford Financial Services Group, 404
Gerhart, B., 467, 468, 519, 612, 637, 664, 674, 678 Harvey, R., 340
Gerhart, Barry, 497 Hatch, Orrin, 580
Germanwings, 246 HCA Inc., 394
Getman, J., 596 HCL Technologies, 297, 446
Gillette, 88–89 HCS Medical Staffing, Inc., 108
Gilliland, S. W., 330 Healey, J. R., 500
Gino, F., 278 Hedge, J., 407
Ginsberg, Ruth, 236 Heineken, 130, 132
GitHub, 663 Heirich, M. A., 676
GlaxoSmithKline, 302 Hennes & Mauritz AB (“H & M”), 481
Gleave, Simon, 559 Herman, J. B., 596
Glencore, 630 Herman Miller, 35
Global Ethics and Compliance Office, 41–42 Hetzner, C., 500
Godard, John, 620 Hewes, R., 279
Goldberg, E., 320 Hewitt, 8
Goldberg, S., 596 Hewlett-Packard (HP), 86, 151, 158, 186, 190, 201
Golden, K., 75, 77 Higgens, T., 145
Goldman Sachs, 481, 539 Hill, Anita, 126
Gomez, A. S., 199 Hillenbrand, Justin, 149
Gomez-Mejia, L. R., 504, 525, 673, 675 Hilton Worldwide, 47, 324
Goode, E., 246 HindlePower, 50–51
Goodwin, N. H., 539 Hirsch, B. T., 587
Goodyear Tire and Rubber Company, 8, 111, 665–667 Hofstede, Geert, 635–636
Google, 15, 45, 48, 49, 78, 207–208, 242, 251, 290–291, 353, 362–363, Holden, M. V., 240
400, 515, 535, 550, 558, 562, 667, 669, 675, 685, 686, 690 Hollenbeck, J. R., 154, 156, 157
Gorenstein, Dan, 497 Holliday, K., 560
Grant Thornton LLP, 281 Holton, E., 21, 279
Gravity Payments, 42 Home Depot, 686
Greater Houston Partnership, 20 Honda, 93, 146, 294, 461, 462
Green, C., 194 Honeywell, 431, 433
Green, J., 191 Hookway, J., 481
GreenForest, 44 Hopkins, Ann, 117
Greenhouse, S., 577 Horvath, Julie Ann, 663
Hotel Employees and Restaurant Employees (HERE), 599–600 Johnson Controls, Inc., 11, 116
HotJobs.com, 209 Jones, A., 428
Hough, L., 340 Jones, Paula Corbin, 126
HourlyNerd, 197 Jones, S., 346
Hsieh, Tony, 439 Joshi, A., 647
Hudson Institute, 125–126 JPMorganChase, 40, 547
Hu-Friedy, 23 Jung, Carl, 389
Hughes, Robert, 251 Just Born, 296, 348, 382, 392
Humana, 685 Juvenile Diabetes Research Foundation, 557
Hunter, J. E., 676
Huselid, M., 21, 28, 50 Kaiser Permanente, 325
Hyland, M., 647 Kalman, F., 283, 378
Kan, Wang, 440
Iberdrola USA, 45 Kaplan, R. S., 517
IBM, 8, 44, 81–82, 89, 130, 157, 158, 231, 284, 476, 481, 686, 687 Karpicke, J., 278
IKEA, 681–682 Katz, H. C., 601, 608
Immelt, Jeff, 387 Katz, Harry, 578, 581
Immigrations, Customs, and Enforcement (ICE), 37, 39 Kazanas, H. C., 286
Indiana Heart Hospital, 175 Kelleher, Herb, 67
Inditex, 481 Keller, Bill, 196
Industrial & Commercial Bank of China, 630 Keller Williams, 263–264
Infosys, 200 Kelly, Chip, 244
Ingersoll Rand, 279 Kenexa Corporation, 231
Inks, L., 344 Kentucky Fried Chicken, 72, 235
Innotrac, 38 KERM television, 245
Instacart, 183 Kettl, D. F., 421
Intel Corporation, 158, 208, 319 Keville, Edel, 404
Intermountain Healthcare, 11 KFC, 43
Internal Revenue Service (IRS), 421, 422, 542, 548, 561 Kim. D. O., 517
International Association of Machinists and Aerospace Workers, 606 Kimberly-Clark, 303
International Coaching Federation, 402 King, Martin Luther, Jr., 106
International Harvester, 513 King Pharmaceutical, 358
International Paper, 28 Kinko’s, 158
International Truck and Engine Corporation, 171 Kirin Brewery, 295
Isaac, M., 183 KLA-Tencor, 274–275, 288–289
Isidore, C., 42 Klein, H., 307
ISO (International Organization for Standardization), 30–31 Kleiner, M. M., 597
Iverson, R., 50 Kleiner Perkins Caufield & Byers, 101
Kleinschmidt, Ulrich, 618
J. M. Huber Corporation, 683 Knack.it, 232
J. P. Stevens, 598 Knowles, M., 278
Jackson, Delbert, 127 Koch, C. G., 240
Jackson, S. F., 83 Kochan, T. A., 578, 581, 601, 608
Jacobs, A., 440 Kohn, A., 278
Jacobson, R., 243 Komatsu, 195
J&J. see Johnson & Johnson Konovsky, M. A., 508
Japan Post Holdings, 630 Korn/Ferry, 128, 129
Jawbone, 430 Korte, G., 421
Jayasinghe, M., 481, 612, 637 KPMG, 559, 652
J.C. Penney, 192 Kraiger, K., 271, 276
Jehn, K., 306 Krantz, M., 457
Jelinek, Craig, 422 Kravitz, D. E., 444
Jenkins, Antony, 521 Kroger, 669–670
Jenny Craig, 127 Kuehner-Hebert, K., 283, 328
Jentsch, F. G., 278 Kühlmann, T., 612, 637
JetBlue, 67, 639 Kulish, N., 246
Jiffy Lube, 267 Kurmanaev, A., 199
Jimmy Johns, 425–426
Jinran, Z., 560 La Boulange, 18
Jive Software, 404 Lambert, Ladena, 514
Jobs, Steve, 207–208, 434 Lanaj, K., 442
John Deere, 151, 346–347 Landis, Floyd, 436
Johnson, David, 151 Langdon, J. C., 330
Johnson, Lyndon, 102, 106, 110 Larson, C., 481
Johnson, R., 442 Latham, G. D., 278
Johnson & Johnson (J&J), 406, 556 Latham, Gary, 341
Latino Employee Network, 38 McCracken, D., 406

Lavin, Sheldon, 200 McDonald, Bob, 159
Lawler, E. E., 6, 504 McDonald’s, 18, 44, 90, 148, 191, 199–200, 386, 401, 424, 457, 514,
Lazear, E., 641 577, 618
Ledbetter, Lilly, 111 McDonnell Douglas, 116
Ledford, Gerald, 476–477 McGann, Mark, 104
Leger, Roxy, 108–109 McGrane, V., 191
Leibowitz, Z., 384 McGraw, M., 46
LensCrafters, 341 McGregor, J., 33, 464, 497
Leonard, D., 421 McGroarty, P., 634
Leonard, Mike, 174 McKenzie, F. C., 518
Lepak, D., 647 McKenzie, R. C., 676
LePine, J., 276 McKersie, Robert, 601
Levin, Dorin, 497 McKinsey and Company, 685
Levi-Strauss, 199, 404 McMahan, G., 664, 674, 678
Levy, J., 555 McMillon, Doug, 443
Libbey Glass, 286–287 Mead, R., 552
Liberman, V., 320 Mead, Rebecca, 552
Link, Jim, 497 Mechanical Turk, 183
LinkedIn, 45–46, 209, 211, 277, 291, 292, 356 Medoff, J. L., 589
LInowes, R., 650 Medtronic, 26
Lions Gate Entertainment, 483 Meichtry, S., 246
Liptak, C. A., 223 Meinert, D., 319, 514
Lockard, C., 17 Meisinger, Kirsten, 149
Locke, E. A., 278 Memorial Care, 357
Lockheed, 547 Mercedes-Benz, 478, 590
Loftus, T., 685 Merck, 29, 77, 78, 514, 518, 519, 630
Logan, Prescott, 190 Mericle, K., 517
Lombardo, M. M., 393 Mertz, Mike, 208
London, M., 322, 365 Mesquita, Jorge, 159
Long Island Jewish Medical Center, 344 Met Life, 638
Lovell, S. E., 444 Meyrowitz, M., 322
Lowsky, B., 433 MGM Resorts International, 9
Lubitz, Andreas, 246 Michaels, E., 334
Lublin, J. S., 129 Michelin Tire Company, 431
Lubrizol Corporation, 360 Microsoft, 28, 190, 200, 201, 294, 319, 334–335, 401, 430, 483, 514, 515,
Luxottica Retail, 341 525, 550
Lyft, 183 Midmark Corporation, 411
Milkovich, G. T., 467, 468, 519
Ma, W., 560 Miller, C. C., 535, 550
MacPherson, D. A., 587 Mindtree Limited, 275
Macy’s, 21–22 Miracle Gro, 431, 432
Mager, B., 278 Mitchell & Company, 91
Maiorino, Fred, 107–108 Mollenkopf, Steven M., 483
Makinen, J., 560 Mondelez International, 400
M&M Manufacturing, 18 Monomoy Capital Partners, 149
Manhattan College, 244 Monsanto, 654
Mann, T., 680 Monster.com, 209, 688
Manufacturing Institute, 20 Moog, 539
Marini, Rick, 210 Moran, R., 650
Marriott, Bill, 3 Morgridge, John, 433
Marriott Corporation, 3–4, 355 Moshinsky, Ben, 522
Martin, E., 199 Motherhood Maternity, 108
Martin, J., 639 Mothers for Merck, 29
Masiello, Steve, 244 Motorola, 673
MasTec, 270, 292–293 Mountain American Credit Union, 299
MasterCard, 404 Mozilla, 356
Matthews, A., 457 MRA Systems, Inc., 367
Maxon, T., 67 Mueller-Hanson, R., 322
Mayer, Marissa, 535 Muldrow, T. W., 676
Mayfield, Shontel, 124–125 Mundy, J., 10
Mazda, 462 Murphy, Colum, 500
MBNA, 539 Murphy, J., 540
McAfee, 266 MySpace.com, 210
McCartney, S., 283
McCauley, C. D., 393, 395 Nadella, Satya, 483
McClean Credit Union, 106 Nagesh, G., 690
Najafi, Nader, 152 O’Leary-Kelly, A., 307

Nampak Ltd., 634 Olson, P., 430
Naquin, S., 21 O’Neill, Paul, 162
Narin, S., 481 O’Neill, Sean, 132
NASA, 277, 281 Opperman, J., 155
NASCAR, 295 Optimus, 208
Nathan, B. R., 286 Oracle, 158, 201, 231
National Association for the Advancement of Colored People (NAACP), Organization for Economic Cooperation and Development, 20, 535
244, 245, 600 Orion, 151
National Association of Manufacturers, 584 OSI Group Inc., 199–200
National Education Association, 583–584 Ostrower, J., 606
National Football League (NFL), 244 Otis Elevator Company, 680
National Foreign Trade Council (NFTC), 646
National Institute for Occupational Safety and Health (NIOSH), P.A. Semi, 158
132–133 Paletta, D., 203
National Institutes of Health (NIH), 35 Paletta, Damian, 497
National Labor Relations Board (NLRB), 103, 424, 592–595, 597, 599, Panera Bread, 18
608, 610–611, 619 Pao, Ellen, 101, 137
National Organization on Disability, 130 Parker Hannifan Corporation, 150
National Safety Council, 135 Parkinson, Robert, 559
National Security Agency, 435 Patagonia, 540
National Society to Prevent Blindness, 136 Patrick, Robert, 186
National Technological University, 284 Patterson, M., 50
Nationwide Mutual Insurance, 296 Paul, K. B., 444
Nazre, Ajit, 101 Paychex, 410–411
NBC, 428 Payne, S. C., 278
Nemecek, John, 122–123 Pearle Vision, 341
Nemours, 275–277 Peds Legwear, 44
NetCentric Corporation, 425 Pellegrini, Joe, 432
Netflix, 13, 355 PEMCO Mutual Insurance Company, 381
Netscape, 663 Pennsylvania State University, 206
New York Bell, 604 Pension Benefit Guaranty Corporation (PBGC), 545, 568
New York Department of Labor (DOL), 172 PepsiCo, 47, 72, 74, 192, 400, 470, 514
New York Stock Exchange, 630 Perez, E., 203
The New York Times, 196, 442 Persistent Systems, 356, 357
New York Yankee, 459 Peterson, Kim, 464
Nicas, J., 67 Pew Research, 631
Nike, 192, 430, 470 Philadelphia Eagles, 244
Nir, S. M., 172 Philips, 283
Nissan, 462, 590 Phillips 66, 630
Nixon, Richard M., 111 Pinterest, 539
Noe, R., 276, 344 Pisano, G., 278
Noer, David M., 647 Pisoni, Adam, 425
Nokia, 190 Pitasky, Scott, 167
Noon, Matt, 205 Pitney Bowes, 9, 395
Noonan, Laura, 522 Pizza Hut, 43, 72
Noon Turf Care, 205 Plants, Inc., 356
Nordstrom, 3 Plater, M., 278
Northwestern Mutual Life, 557 Polaroid, 610
Norton, D. P., 517 Pollack, Carol, 352
Novartis, 29 Pomeroy, A., 353
Nucor Steel, 159–160 Porter, C., 195
Nudelman, M., 650 Porter, Michael, 86
Nuriddin, H., 278 PPD, 288
PPL Electric Utilities, 284
Obama, B., 111, 199, 550, 639 Pratt, Michael, 441
Obe, M., 479 Pratt and Whitney, 476
O’Boyle, E., Jr., 365 Presto-Warner, Tom, 663
O’Brien, S. A., 183 Price, Dan, 42
Occupational Information Network (O*NET), 165, 166–167 PricewaterhouseCoopers Public Sector Practice (PwC PSP), 30
Occupational Safety and Health Organization, 171 PricewaterhouseCoopers (PwC), 209
Office of Federal Contract Compliance Programs (OFCCP), 108, Prigmore, C., 364
111–113 Pritchard, P., 346
Ohio Bell, 604 Procter & Gamble (P&G), 88–89, 158–159, 192, 291, 400, 433, 514
OhioHealth, 27–28 Proulx, Jim, 197
Ohlott, J., 395 Publix, 3
O’Leary, R., 322 Puckett, T., 599
Pulakos, E., 322, 344 Sandusky, Jerry, 206

Pulaskos, E., 407 SAP, 45, 231, 402
Pure-Living China, 559 SAS Institute, 535
Putnam Investments, 160, 161 Satellite Healthcare, 24
PwC, 404 Satyam Computer Services Ltd., 125
Pyrillis, R., 430, 442 Saymen, Michael, 211
Scalia, Antonin, 223
Qoros Auto Co., 559 Scanlon, Joseph N., 516
Qualcomm, 24–25, 483 SCC Soft Computer, 401
Schering-Plough, 107, 630
Rabl, T., 612, 637 Schiller, J. S., 555
Rackspace, 47 Schmidt, Eric, 207–208
Raddohl, Tara, 240 Schmidt, F. L., 676
Raju, Ramalinga, 125 Schoenfeldt, L., 83
Ramanujam, V., 75, 77 Schuler, R. S., 83
Ramirez, J., 319, 320, 328 Schulte, B., 540
Rana Plaza garment factory, 157, 582 Schultz, Howard, 92–93
Randstad, 497 Scott, H. Lee, 169
Rappeport, A., 428 Sears, 327, 519
REI., 3 Sears Roebuck & Co., 93, 123
Reilly, B. A., 444 Seattle Pacific University, 42
Reilly, C. E., 444 Seattle’s Best Coffee, 18
Reinhart, C., 364 Security and Exchange Commission, 40–41
Reynolds, C., 651 Segal, J. A., 598
Right Management, 433 Selko, A., 51
Riphahn, R., 505 Service Employees International Union (SEIU), 550, 577, 600
Rising (Rising Medical Solutions), 544 Shaffer, M., 647
Ritz-Carlton Hotel, 272 Shape Corp., 308
Rivermark Community Credit Union, 15 Shaw, B., 83
Robb, D., 46 Shea Homes, 188
Robert Half Associates, 513–514 Sherer, Peter, 475
Roberts, D., 440 Shilling, M. P., 518
Robinson, A., 50 Sidley Austin, 397
Rochelle, Michael, 205–206 Siemens, 48
Rodale’s, 38 Siemens AG, 20
Rodino, Margie, 557 Sierra Nevada Corporation, 307
Rodriguez, Alex, 459–460 Silver, Sheila, 235
Roediger, Henry, III, 278 Silverman, R. E., 183, 487
Rolls-Royce, 287 Simpson, C., 155
Roosevelt, Franklin, 537, 591 Singapore Airlines, 72
Rosenbush, S., 151 Singer, N., 183
Rossett, A., 279 Sinopec Group, 630
Roth, P., 346 Sisson, Charles, 108–109
Rothwell, W., 286, 407 Skype, 242, 386
Royal Dutch Shell, 20, 303, 630 Valve Company, 557
RSI Apparels Limited, 582 Sloat, S., 618
Rubin, R., 421 Smialek, J., 240
Rummler, G., 364 Smith, B. J., 278
Runzheimer International, 473 Smith, D., 560
Ruocco, Joe, 665–666 Smith, D. C., 444
Ruppert Landscape, 10 Smith, J., 223
Rusli, E., 663 Smith, J. W., 322
Russell, J., 322 Smith, K., 562
Russell, L., 322 Smith, V., 306
Rynes, S., 467, 468 Smither, J. W., 330
Smith-Jentsch, K. A., 278
Snavely, B., 479
The Sacramento Municipal Utitlity District (SMUD), 401 Snell, S., 664, 674, 678
Saint Gobain, 201 SNI, 281
Salary.com, 473 Snowden, Edward, 435
Salas, E., 278 Social Security Administration, 542–543
Salesforce.com Inc., 26, 200 Society for Human Resource Management (SHRM), 12,
Salopek, J., 48 13–15, 124
Samilton, Tracy, 497 Society of Actuaries, 568
Sam’s Club, 120–121, 422 Sodexo, 163, 304–305, 401, 600
Samsung Electronics, 630 Sommers, D., 17
S&P 500, 547 Sonic, 291
Sony, 295 Torsone, Johnna, 9

Sony Music, 295 Toshiba America Medical Systems, 402
Southern Company, 41 Total, 630
Southwest Airlines, 15, 67, 72, 666 Toyota, 146, 193, 429, 458, 460, 461, 477, 479, 552, 590, 598,
Spectrum Health, 280 629, 630
Spegele, B., 560 Toys “R” Us, 192
Spell, C., 306 Training magazine, 263
Spicer, C., 342 Travelers Group, 89
Spirit Airlines, 67, 639 Trend Micro, 203
Spring Arbor University, 122 Trummer, Tamara, 403
Springfield Remanufacturing (SRC), 513 Trump, Donald, 428
St. Joseph’s Hospital and Medical Center, 394 Tsui, A. S., 675
Staats, B., 278 Tsui, Anne S., 673
Stack, Jack, 513 Turrif, T. W., 136
Stahl, G., 643 Twitter, 21–22, 45–46, 48, 266, 280, 283, 291, 292, 356
Starbucks, 18, 89, 90, 92–93, 444
State Grid, 630 Uber, 104, 183, 184, 440, 487
State University of New York, 192 Udacity, 290–291
Steelcase, 391, 539 Ulrich, D., 28
Stevens, L., 151 Umpqua bank, 271–272
Stevis, M., 634 UniGroup Relocation, 559
STIHL Group, 272 Union of Needletrade, Industrial, and Textile Employees
Stoll, J. D., 511 (UNITE), 600
Stone, B., 442 United Airlines (UAL), 295
Stride, C., 50 United Auto Workers (UAW), 69, 91, 116, 510–511, 568, 587,
Strom, S., 457 609–610, 619
Stryker Orthopaedics, 397–398 United/Continental, 67
Stuebing, K., 346 United Parcel Service (UPS), 151, 184, 247, 291, 423
SuccessFactors, 231 United Steelworkers of America, 134
Summers, N., 145 United Technologies, 680
Sun Design, 513 United Way Agency, 379
Sunglass Hut, 341 Universal Studio, 426
Sun Microsystems Inc., 158 University Hospitals, 404
Swain, Lawrence, 127 University of California at Berkeley, 192
Swarns, R. L., 577 University of California at Davis, 104
University of California-San Francisco, 152
Tabuchi, H., 474 University of Kansas, 192
Taco Bell, 43, 72 University of Kentucky, 244
Taleo, 231 University of Maryland, 201
TAMKO Building Products Inc., 7 University of South Florida, 244
Tannenbaum, S., 271 University of Texas (UT), 237, 238
Tareen, S., 428 Up-to-Date Laundry, 600
Target, 18, 38, 125, 240, 457 Ury, William, 603
TaskRabbit, 183 U.S. Army, 205–206
Tasty Catering, 513 U.S. Attoney General, 145
Tata Consultancy Service LTD, 200, 300 U.S. Bancorp, 8
Taylor, Bret, 535 U.S. Bureau of Labor Statistics, 18, 25, 188, 497, 539,
Teavana, 18 553, 563
Tesla Motors, 10–11, 434 U.S. Chemical Safety and Hazard Investigation Board, 137
Texaco, 238 U.S. Civil Service Commission, 112
Texas Rangers, 459 U.S. Congress, 102, 130, 154, 598
Texas Roadhouse, 326 U.S. Court of Appeals, 103, 127, 593
Thayer, Paul W., 168 U.S. Department of Education, 126
Thomas, Clarence, 126 U.S. Department of Justice, 102, 112, 113
Thomas, J., 292 U.S. Department of Labor, 108, 112, 132–134, 166, 239, 287, 293, 485,
Thomson Reuters, 388 487, 547, 548, 610
Thoppil, D. A., 125 U.S. District Courts, 103
Thorndike, E. L., 498 U.S. Employment Service (USES), 210
3M, 77, 79 U.S. Federal Bureau of Investigation (FBI), 432
TIAA-CREF, 521 U.S. Office of Personnel Management, 111
Tichy, N., 474 U.S. Postal Service, 436
Timberland, 539 U.S. Secret Service, 40
Time Warner, 211 U.S. Securities and Exchange Commission (SEC), 520–521
The Timken Company, 115 U.S. Steel, 160
Tindall, Kip, 473–474 U.S. Supreme Court, 102, 103, 106, 108, 110, 111, 116, 117, 126, 128,
TJX, 398 129, 223, 237, 238, 366, 428, 566, 607
T-Mobile, 277 U.S. Treasury, 547
USAirways, 639 Wessel, D., 195

Usher, C. J., 393 Wexley, Ken, 341
Whalen, J., 152
Valdary, C., 245 Wheeler, Tom, 690
Valdes-Dalpena, P., 145 Whirlpool, 287, 355
Valentino-Devries, J., 243 White, Tim, 191–192
Valle, S., 199 Whole Foods, 3
ValueRx, 89 Whyte, Fred, 272
Valve Corporation, 157 Widget.com, 687
Valvoline, 409 Wighton, David, 522
Vance, R., 24 Williams, Bruce, 433
Vandy, Ashley, 234 Williams, Dennis, 511
VanLooy, S., 124 Williams, Lynn, 134
Vasquez, Andres, 127 Wilmouth, F., 364
Ventiv Health, Inc., 23 Winters, M., 306
Verdi, 618 Wipro, 200, 290
Verigy, 25–26 Wisconsin Plastics, Inc. (WPI), 367
Verizon, 47–48, 282, 303, 600, 631 W.L. Gore and Associates, 156
Verizon Wireless, 388 Wolf, M., 17
Veterans Administration, 40 Wolf, S., 307
Vick, K., 199 Woo, Louis, 439
Vijayaraghavan, V., 334 Wood, S., 50
Vinson, Michelle, 127–128 Woodall, B., 479
Virgin America, 67, 639 WorldatWork, 507
Vlasic, B., 511 World Health Organization, 29
Volkswagen, 461–462, 478, 590, 619, 629, 630 World Privacy Forum, 430
Volvo, 462 Worthington Industries, 539
Wright, P., 10, 664, 674, 678
Wright, T., 481
Wagner, J. A., 154, 156, 157
Walgreens, 7, 404 Xerox Corporation, 42, 231, 303, 384, 539, 611
Walker, A., 334
Wall, R., 246 Yahoo, 190, 535
Wall, T., 50 Yammer, 356, 425
Walmart, 18, 44, 90, 120, 121, 123, 169, 191–192, 205, 235–236, 240, Yan, S., 440
291, 303, 443, 457, 458, 473, 514, 629, 630 Year Up, 277
Walsh, B., 430 Yellin, T., 145
Walton, Richard, 601 YMCA of Greater Rochester, New York, 354
Ward, B. W., 555 YouTube, 48, 267, 272, 281, 291, 400
War Labor Board, 607 Yum! Brands, 43, 199–200
The Washington Post, 196
Watson, T. J., 158 Zacharatos, A., 50
Wearable Intelligence, 47 Zappa, Jim, 79
Weatherly, L., 21 Zappos, 439, 464
Webb, Beatrice, 580 Zara, 157, 481
Webb, Sidney, 580 Zax, D., 151
Weber, L., 33, 183, 194, 631 Zemke, R., 273
Weber, Lauren, 487 Zheng, A., 560
Weil, Gotshal, & Manges, 294 Zinger, D., 357
Weinstein, M., 46, 48, 273 Zirtual, 487
Weisinger, J., 306 Zorro, P., 457
Welbourne, Theresa, 688 Zuckerberg, Mark, 535
Welkowitz, W., 599 Zynga, 515, 539
SUBJECT INDEX
Abilities, 164. See also Cognitive ability Attitudinal structuring, 601
Ability to pay, 501 Attribute approach, to performance measurement, 351
Absence presence, 173 evaluating, 337–338
Absenteeism, 436 graphic rating scales, 336–337
Acceptability, performance measurement and, 329–330 mixed-standard scales, 337
Accessibility, 178 Audiovisual training, 284–285
Accountability, 160, 671 Audit approach, 671–673
Accuracy training, 359 Authority differentiation, 174
“Acqui-hire,” 234 Autonomy, 170
Acquisitions, 88–89 Avatars, 287–288
Action learning, 295–296 Awards, team, 516–517
Action plan, 279, 383–384
Action steps, 113 Background checks, 240, 244–245
ADDIE model, 267 Bakery, Confectionery, Tobacco Workers & Grain Millers
Adjustment (personality), 248 International Union, 623
Administrative linkage, 74–76 Bakke v. California Board of Regents, 104
Advanced manufacturing environments, 477 Balanced scorecard, 27–28, 344–345, 517–520
Adventure learning, 293–294 Banding, 248, 476
Advertisements (image advertising), 206 Bangladesh garment factory tragedy, 582
Affirmative action, 128–130, 202, 237 Batch work methods, 149
“Pink Quota” (Europe), 256 Behavioral appraisal emphasis, 88
Affordable Care Act, 149, 196, 566, 567, 572 Behavioral approach, to performance measurement, 339–343, 351
AFL-CIO, 584–585 behaviorally anchored rating scales, 339, 340
Age, of workforce, 34–35, 193 behavioral observation scales, 339–341
Age discrimination, 107 competency models, 341–342
Age Discrimination in Employment Act (ADEA), 107–108, evaluation of, 342–343
238, 566 Behaviorally anchored rating scale (BARS), 339, 340
Agency shop, 586 Behavioral observation scale (BOS), 339–341
Agency theory, 499–502, 522 Behavior-based contracts, 501
Agents, in agency theory, 499 Behavior modeling, 289
Agreeableness, 248 Benchmarking, 463, 553
Alabama House Bill 56, 216–217 Bench strength, 407
Albermarle Paper v. Moody, 119, 333 Benefits, 85, 672. See also Benefits management; specific benefit
Alliance for Bangladesh Worker Safety, 582 cafeteria plans, 564–565
Alternation ranking, 333 child care, 550, 551–553
Alternative dispute resolution (ADR), 428–429 differentiating, 539
Alternative work arrangements, 25–26. See also Flexibility employee wellness programs, 567
American Federation of Labor and Congress of Industrial Organizations family-friendly, 535, 550–553
(AFL-CIO), 584–585 growth of, 536–539
American Federation of State, County and Municipal Employees job dissatisfaction and, 443–444
(AFSCME), 619 labor relations and, 614–615
American-made goods, as competitive advantage, 215–216 pay for time not worked, 549–550
Americans with Disabilities Act (ADA), 109–110, 239 private group insurance, 544–545
outcomes, 130 retirement benefits, 545–549
sample of complaints filed under, 131 Social Security, 540–542
Americans with Disabilities Act Amendments Act (ADAAA), 110 tax advantage of, 538
Analytic approach, 673–676 unemployment insurance, 191, 542–543
Apparel industry, 174 workers’ compensation, 543–544
Appraisal politics, 358 Benefits management, 553–565
Appreciation, 452–453 Affordable Care Act, 566, 567, 572
Apprenticeships, 286–287 communication with employees, 562–565
Apps, for learning, 292, 312 cost control, 553–561
Arbitration, 428, 606 flexible plans, 563–565
Armed forces recruitment, 205–206 health care costs and quality, 555–560
Asia, in the global market, 629, 632 monitoring future benefits obligations, 568
Assessment. See also Performance appraisals nature of workforce, 561–562
for employment development, 389–394 nondiscrimination rules, qualified plans, tax treatment, 566
Myers-Briggs Type Indicator for, 389 regulatory issues in, 566–569
performance appraisals and 360-degree feedback for, 392–394 sex, age, and disability, 566–568
Assessment centers, 252, 390–392 staffing responses, 560–561
Associate union membership, 598 surveys and benchmarking, 553
721
722 Subject Index
Bias recruiting/retaining engineering talent in, 500

gender, 235–236 working conditions, 439, 440
unconscious, 304 Churning, 451
Big data, 11 Civil Rights Act of 1866, 106
Biographical information, 244, 254 Civil Rights Act of 1991, 109
Biological approach, to job design, 168, 170–171 Civil Rights Act of 1964, Title VII, 102
Blended learning, 291–292, 296, 312 Civil Service Reform Act of 1978, 619
Board of directors Classroom instruction, 284. See also Training
guidelines for independence and leadership, 523 Closed shop, 586
liaison to, 692 Clothing industry, 174
Body language, international, 649 Cloud computing, 48
Bona fide occupational qualification (BFOQ), 116 Coaches and coaching, 313, 404–405
Bonuses COBRA (Consolidated Omnibus Budget Reconciliation
bonus caps, 522 Act of 1985), 544
merit, 497, 505 Codes of conduct, 521
Boomerang employee, 192 Codetermination, 639
Boundaryless career, 380 Coding tutorials, 211
“Brain drain,” 184 Cognitive ability, 138, 160
Brand image, 223 Cognitive ability tests, 247–248, 254
Bring Your Own Device (BYOD), 194 Cold calling, 207
Brito v. Zia, 337, 366 Collateralized debt obligations (CDOs), 158
Broad bands, 476 Collective bargaining, 591. See also Labor relations;
Broad worker specifications, 167 Labor unions
Brown v. Board of Education, 140–142 legal framework, 590–593
Bullying, 443 typical contract provisions in, 581
Bundy v. Jackson, 127 unfair labor practices (employers), 591–592
Business games, 288–289 unfair labor practices (labor unions), 592, 593
Business model, 68–70 in Wisconsin, 619
General Motors example, 69–70 Collectivist vs. individualistic orientation, 637
unsustainable, 695 College degrees, 195
Business Objective: A Life by Design (BOLD), 263 College internship programs, 211
Buyouts, 193–196 College placement services, 211, 212
Colleges/universities, diversity and, 237–238
Calibration meetings, 359 Communication
Call center staffing, 198 in compensation decisions, 474–475
Cambodian workers, 481 compensation/merit pay and, 523–524
Capitalist systems cultural differences and, 637
compensation and, 640–641 expatriate workers and, 649–650, 654
human capital and, 640 illiteracy and, 563
Card-check provision, 600 intercultural, 649
Career management systems, 384–385. See also Development planning medical issues and, 174
systems; Employee development overcommunication, 164–165
Career pattern, 380 safety issues and, 135
Career planning, 162 social media and union-related communication, 599
Career support, 403 translation services, 659
Case studies, 288–289 voice mechanisms, 615
Cash balance plans, 547–548 Communism, 639
Cause-and-effect diagrams, 348 Communities of practice, 281
Center of excellence subunit, 159 Comparable worth, 484
Centralization, 153 Compa-ratio, 471
Central tendency error, 359 Comparative approach
CEO compensation, 482–483 evaluating, 335–336
Change, adaptation to, 23 forced distribution, 333–335
Checkoff provision, 586 paired comparison, 335
Chief executive officer compensation, 482–483 to performance management, 333, 351
Chief human resource officer, 691–693 Compensable factors, 465–466
as counselor/confidante/coach, 692 Compensation, 672. See also Benefits; Pay levels; Pay structure
as leader of the HR function, 692 altering pay and hours, 201
as liaison to the board, 692 Cambodian workers and, 481
as representative of the firm, 692 communication and, 523–524
as strategic advisor, 691 cultural influences on, 637
as talent architect, 691–692 employer costs for, 497
as workforce sensor, 692 environmental requirements and, 89
Child care, 550, 551–553, 573 executive pay, 482–483, 490–491
China of expatriates, 650–653
air quality, 559–560 government regulation of, 483–488
economy and collective action in, 619 hourly costs in manufacturing, 640
Subject Index 723
influence of, on individual employees, 498–502 Coordination training, 294

job satisfaction and, 434–444 Core values, 370
labor relations and, 614–615 Corporate campaigns, 598
managerial and executive pay, 518–521 Correlation coefficient, 225–226
market competition and, 457–458 Cost-benefit analysis, 676, 681
minimum wage, 486, 639 Cost control benefits, 553–561
monitoring costs of, 471 Cost leadership strategy, 86, 87
organization strategy and, 524–525 Counselor/confidante/coach (chief human resource
participation and communication in pay decisions, officer), 692
474–475 Counter cyclical hiring, 07
pay and process, 524 Craft unions, 584
pay cuts, 201 Criminal records, 240
pay for performance programs, 502–518 Criterion-related validity, 228–232
pay sorting effects, and labor force composition, 502 Critical success factors (CSFs), 327
process and context issues, 521–524 Cross-border mergers, 630
raises, 508 Cross-cultural preparation, 300–303, 648–650
skill-based pay, 477 on-site phase, 302
software applications, 687 predeparture phase, 301–302
taxation on, 640 repatriation phase, 302–303
time-and-a-half, 561 steps, 301
total compensation, 458 Cross-training, 294
union vs. nonunion, 614 Cuba-U.S. relations, 199
Compensatory damages, under Civil Rights Act of 1991, 109 Cultural diversity. See Diversity
Competency models, 341–342 Cultural intelligence (CQ), 646
Competitions, for job applicants, 251 Culture
Competitive advantage globalization and, 634–637
employee development and, 378 mergers and acquisitions and, 89
enhancing firm competitiveness, 93–94 Customer-focused company culture, 57–58
HRM role in, 92–94 Customer-oriented approach, to HRM function, 665–666
made in America as source of, 215–216 Customers, as source of performance information, 354–355
training and, 264, 265–267 Customer satisfaction measures, 672
Competitive challenges, 15–51 Customer service, 29–33
meeting, through HRM practices, 51–54
sustainability challenge, 16–42 Data-entity relationship diagrams, 681
Competitiveness, 4 Data-flow diagrams, 681
Competitive strategy Davis-Bacon Act of 1931, 487
decisions, 74 Deadwood, 366
safety as, 177 Decentralization, 153, 158
Computer-based training (CBT), 284, 289–291 Decentralized subunit, 159
Computer industry, 157–158 Decision making, 145
Computer software. See Software applications for HRM employee participation in, 522–523
Concentration strategies, 88 Defined-benefit plans, 545
Concurrent validation, 229–230 Defined-contribution plans, 545–547
Connectedness, 371 Dejobbing, 167
Conscientiousness, 248, 249 Delayering, 476
Consolidated Omnibus Budget Reconciliation Act of 1985 Demographic changes, in workforce. See Workforce changes and
(COBRA), 544 diversity
Consumer Finance Protection Bureau (CFPB), 236 Departmentalization, 153
Content validation, 231–232 Design support systems, 683
Content validity, 328 Development, 84. See also Employee development; Training
Contextualizing, 250 Development planning systems, 381–385
Continuous improvement, culture of, 325 action planning, 383–384
Continuous learning, 22–27, 380 design factors of, 384
definition of, 265 examples of, 384–385
training and, 265–267 goal setting, 382–383
Contract administration, 607–612 reality check, 382
grievance procedure, 607–609 self-assessment, 381–382
Contract negotiation, 600–606 steps and responsibilities in, 381
bargaining power, impasses, and resolution, 603 Dictionary of Occupational Titles (Department of Labor), 166
give and take of, 606 Differentiation strategy, 86, 87
management’s preparation for, 602–603 Direct applicants, 208
process of, 601–602 Direct foreign investment, 638
stages and tactics, 603 Directional strategies, 88–92
Contrast error, 359 concentration strategies, 88
Contribution margins, 68 downsizing, 89–92
Control charts, 348, 349–350 internal growth strategies, 88
Cooperative labor-management strategies, 609–612 mergers and acquisitions, 88–89
724 Subject Index
Disabilities, 110 funding equality, 141

reasonable accommodation and, 123 Education gap, 244
Disability income, 543–544 Education-human capital, 638
Disability insurance, 544–545 Education Trust, 141
Discipline programs, 427–429 Effectiveness, evaluating, 671–676
Discrimination, 113–124. See also Equal Employment Opportunity (EEO) analytic approach, 673–676
Brown v. Board of Education and, 140 audit approach, 671–673
disparate impact and, 114, 117–120 Effectiveness, improving, 676–683
disparate treatment and, 114–117 new technologies, 683
executive orders, 110–111 outsourcing, 679–680
gender, 112 process redesign, 680–683
“illegal acts,” 111 restructuring for, 677–679
parental, 108–109, 115, 142 Efficiency, 149–152, 175
pattern and practice, 120–121 plotting, 151
racial, 105, 106–107, 111 worker-friendly tasks, 171
reasonable accommodation, 121–124 Elastic demand, 462
religious, 223, 235 E-learning, 289–291, 296
retaliation and, 124–125 Electronic recruiting, 209–210
reverse, 104, 424 E-mail
sexual, 101 inappropriate, 129
“systemic compensation,” 485 Emergent strategies, 82, 92–93
theories of, 114 Emotional intelligence, 249–250
Disparate impact, 114, 117–120, 138 Empathy, 250
defendant’s rebuttal, 119 Employee development, 666, 672. See also Career management systems;
plaintiff’s burden, 118–119 Development planning systems; Training; Training methods
plaintiff’s rebuttal, 119–120 approaches to, 385–405
Disparate treatment, 114–117 assessment center, 390–392
defendant’s rebuttal, 115–116 assessment for, 389–394
mixed-motive cases, 117 careers and, 379–381
plaintiff’s burden, 115 enlarging the current job, 396–397
plaintiff’s rebuttal, 116–117 for expatriates, 301–303
Distance learning, 284 formal education for, 386–388
Distributional errors, 358 fun and community service, 698
Distributive bargaining, 601 glass ceiling problem, 405–406
Diversity interpersonal relationships as, 400–405
company culture and, 303–304 job experiences as, 394–400
effective management of diversity programs, 306 job rotation/lateral moves, 397–398
employee management and, 643 leadership development, 413
in workforce, 33–39 in medical field, 413–414
Diversity compliance officer, 238 performance appraisals and 360-degree feedback for, 392–394
Diversity training, 303–306 personality tests and inventories, 389–390
Divisional structure, 155–158 sabbaticals, 400, 414–415
client structure, 155, 157 software applications, 687–689
geographic structure, 155, 156 special issues in, 405–411
job creation and, 160 succession planning and, 406–411
product structure, 155, 156 temporary assignments, 399–400
Dodd-Frank Act, 236, 520 training and, 379–381
Domestic marketplace, 642–643 transfers, promotions, and downward moves, 398–400
Downsizing, 88, 89–92. See also Employee separation; Layoffs volunteer assignments, 400
effects of, 189–192 Employee engagement, 3–4, 23–24
human resource planning process and, 190–193 Employee exchange, 400
Downward moves, 398–399 Employee ownership programs, 92
Drug tests, 252–254, 429 Employee relations, labor and, 85–86
Dual-purpose interviews, 204 Employee Retirement Income Security Act of 1974 (ERISA), 545
Due process Employees. See also Expatriate employees
Fourteenth Amendment and, 102, 104–105 actions for managing performance of, 365–366
Due process policies, 205 international, 642
Duty of fair representation, 607 recruitment and selection of, 81, 84
as resources, 462–463
Early retirement programs, 91, 107, 193–196. See also Retirement benefits as stakeholders, 4
Ebola outbreak, 192 staying connected to work 24/7, 631
Economic cycles, 17–22 temporary, 196–197
Economic integration, 141 training readiness, 275
Economic systems, globalization and, 639–641 Employee safety, 130, 132–137
Education. See also Training Occupational Safety and Health Act (OSHA), 132–134
college-educated workers and, 195 safety awareness programs, 134–137
Subject Index 725
Employee selection. See Selection Executive Order 10988, 619

Employee separation. See also Downsizing; Layoffs Executive Order 11246, 102, 110–111
voluntary turnover, 423–433 Executive Order 11478, 111
Employee stock ownership plans (ESOPs), 515–516, 528, 546 Executive pay, 482–483, 490–491, 518–521
Employee survey research, 445 Exit interviews, 448
Employee termination. See Employee turnover Exit mechanism, 615
Employee training. See Training Expatriate employees, 300, 642
Employee turnover, 59–60 assessing candidates for overseas assignments, 647
Employee wellness programs (EWPs), 431, 556–558, 567, 675, 676 challenges, 559–560
Employment compensation of, 650–653
government regulation of, 590 gender issues, 648
Employment agencies, 210–211 managing in global markets, 646–654
Employment applications reacculturation of, 652–654
“ban the box” movement, 240 selection of managers, 646–648
Employment-at-will doctrine, 423 supportive HR practices, 655
Employment-at-will policies, 205 training and development of, 301–303, 648–650
Employment Cost Index, 497 Expectancy theory, 498–499
Employment projections, 16, 17 Experiential programs, 293–294
Employment Standards Administration, 108 Expert systems, 683
Empowering, 22 Explicit knowledge, 266
Empowerment/continuous learning, 22–27, 380 External analysis, 77–78
alternative work arrangements, 25–26 External environment scans, 667
change and adaptation to, 23 External equity, 460
demanding work with flexibility, 26–27 External growth strategy, 88
employee engagement and, 23–24 External labor market, 33–34
learning organizations, 22 Extrinsic motivation, 499
talent management, 24–25 Extrinsic rewards, 205–206
Equal Employment Opportunity Commission (EEOC), 111–112 Extroversion, 248, 249
information gathering, 112
investigation and resolution, 111–112 Fact finder, 605–606
issuance of guidelines, 112 Fair Labor Standards Act of 1938 (FSLA), 106, 486, 561, 638–639
Equal Employment Opportunity (EEO), 103–111, 483–486, 672 exempt occupations, 486
congressional legislation, 106–110 minimum wage and, 486, 639
current issues regarding diversity and, 125–130 Family and Medical Leave Act of 1993 (FMLA), 551
enforcement of, 111–113 Family-friendly policies, 535, 550–553
Office of Federal Contract Compliance Programs (OFCCP), 112–113 Fashion industry, 156–157
Equal employment opportunity laws, 638 Fast fashion, 156–157
Age Discrimination in Employment Act (ADEA), 107–108 Federal Aviation Authority (FAA) budget shutdown of 2011, 639
Americans with Disabilities Act (ADA) of 1990, 109–110 Federal Labor Relations Authority, 619
Civil Rights Act of 1991, 109 Federal legislation, selection method standards and, 236–239. See also
Equal Pay Act of 1963, 106 specific legislation
executive orders, 110–111 Federal Register, 112
Fourteenth Amendment, 102, 104–105 Feedback, 170. See also Performance feedback
Pregnancy Discrimination Act, 108–109 Females. See Women
Reconstruction Civil Rights Acts (1866 and 1871), 106 “Fight for 15,” 577, 622
summary, 105 Financial Accounting Standards Board (FASB)
Thirteenth Amendment, 104 SFAS 123R, 515
Title VII of the Civil Rights Act of 1964, 102, 106–107 Financial Accounting Statement (FAS) 106, 568
Vietnam Era Veteran’s Readjustment Act of 1974, 108 Financial advisers, 217–218
Vocational Rehabilitation Act of 1973, 108 Fixed costs, 68, 70
Equal Opportunity Commission, 102 Flexibility, 26–27
Equal Pay Act of 1963, 106 Flexible benefits plans, 563–565
Equipment, 151–152 Flexible spending accounts, 565
Equity theory, 459–461 Flextime, 451–452
Ergonomics, 170–171 Focus groups, 681
Ethics, 40–42, 160 Forced distribution method, 333–335, 425
codes of conduct, 521 Forecasting, 185–188
lack of diversity and, 203 determining labor demand, 186
3M and, 79 determining labor supply, 186–188
European Commission, 632 early retirement incentive programs and, 195
European Economic Community (EEC), 632, 639, 655 labor surplus or shortage, 188
European Union transportation policies, 104 Foreign workers, in U.S., 200–201
Evaluation, of training programs, 297–299 Formal education programs, 386–388
Evidence-based HR, 11 Formal training, 265
Executive branch, 102–103 Four-fifths rule, 118–119
Executive orders 401(k) plans, 546, 547
726 Subject Index
Fourteenth Amendment, 102, 104–105 Great Game of Business (Stack), 513

Frame of reference, 359, 437 Grievance procedures, 607–609
France, signs of religious affiliation in, 223 employee-initiated, 608
Franchise model, 622–623 Griggs v. Duke Power, 117, 120, 138
Fraud, 125 Gross margins, 69
Fun, 698 Group-building training methods, 296
Functional illiteracy, 563 Group incentives, 516–517
Functional structure, 153, 159 Growth, 88
job creation and, 160
Furloughs, 201 Halo errors, 359
Hands-on training methods, 285, 296
Gainsharing, 504, 516, 517 Harassment. See Bullying; Sexual harassment
Gamification, 356, 357 Headhunters, 211
Gender. See also Women Health care
bias, 235–236 Affordable Care Act, 566, 567, 572
discrimination, 117 benefits management, 555–560
stereotyping, 139 controlling costs of, 571
in the workforce, 36–39 health maintenance organization (HMO), 556
General Agreement on Tariffs and Trade (GATT), 633 Heuristics, 358
General Aptitude Test Battery (GATB), 166 High-performance work systems, 49
General duty clause, 132 cultural/institutional constraints and, 637
Generalizability, 232–233 explanation of, 612
Generational differences, in workforce, 35–36 job satisfaction and, 611
Germany, labor unions and, 618 High-potential employees, 407. See also Employees
Getting to Yes (Fisher and Ury), 603 Hispanics, 237
Glass ceiling, 405–406 Histograms, 348, 350
Global challenge, 43–45, 52 Historical trends, charting, 188
entering, 43–44 HMOs, 556
offshoring and reshoring, 44 Hofstede’s cultural dimensions, 635–636
Globalization, 680. See also Global organizations; Global individualism-collectivism, 635
participation long-term short-term orientation, 636
Asian growth, 632 masculinity-femininity dimension, 636
culture and, 616–619, 634, 636–637 power distance, 635
current global changes, 631–633 uncertainty avoidance, 635–636
economic systems and, 639–641 Holidays, paid leave for, 549–550
education-human capital, 638 Honesty tests, 252–254
European Union, 632 Hopkins v. Price Waterhouse, 117
Fortune Global 500, 630 Horns errors, 359
General Agreement on Tariffs and Trade (GATT), 633 Host country, 642, 643
Hofstede’s cultural dimensions and, 635–636 Host-country nationals (HCNs), 642
HRM and, 633–641 Hostile work environment, 127
international employees, 642 HR dashboard, 49
North American Free Trade Agreement (NAFTA), 632 HRIS, 47
pay structures and, 472–473 Human capital, 266, 638. See also Employees
political-legal system, 638–639 educational opportunities and, 638
technology and, 631 Human resource departments
terrorism and global HRM, 656–657 responsibilities and roles of, 5–7
Global organizations, 645 strategic role of, in business, 9–10
and multinational corporations compared, 645 Human resource information systems (HRISs), 47
political-legal system and, 638–639 Human resource management (HRM)
Global participation, 642–646 activities, 664–665
adopting training for, 283 assessment/development of HR, 53
domestic companies, 642–643 building HR strategy, 667–671
global organizations, 645 characterizing strategies, 669–671
international companies, 643–644 compensating HR, 53–54
multinational companies, 644 definition, 4
Global terrorism, 155 Delta Airlines and, 95–96
Goals historical and new organizational structures, 678
of an organization, 77, 343–344 improving effectiveness of, 676–683
setting, 382–383 key indicators and customer satisfaction measures for, 672
timetables and, 113 line executive involvement, 669
Government regulation of compensation, 483–488 managing internal/external environment, 53
equal employment opportunity, 483–486 measuring effectiveness of, 671–676
minimum wage, overtime, prevailing wage laws, 486–487 meeting competitive challenges through, 51–54
Government regulation of employment, 590 practices, 4
Graphic rating scale, 336–337 products, 666
Great Depression, 591 role of, in competitive advantage, 92–94
Subject Index 727
in small business, 97–98 Internal consistency reliability, 329

software applications, 684–689 Internal equity, 460–461
Southwest Airlines and, 94 Internal growth strategies, 88
special issues, 54 Internal labor force, 33
in strategic implementation, 82–86 International markets, 643–644
strategic management of, 665–667 International Monetary Fund, 641
strategic role of, 7–15 International organizations. See Global organizations
strategic types and, 87 International unions, 583, 616–619. See also Labor unions
transactional activities, 664, 677, 679 Internships, 211, 287
Human resource outsourcing, 197–198 Interpersonal fairness, 330
Human resource planning process, 161, 185–203 Interpersonal relationships, 400–405
affirmative action planning, 202 coaching, 404–405
altering pay and hours, 201 mentoring, 401–404
downsizing, 190–193 Interpersonal skills, 289
early retirement programs and buyouts, 193–196 Interrater reliability, 329
forecasting, 185–188 Interviews, 239–243, 254
goal setting and strategic planning, 189–201 assessment, 390
outsourcing, offshoring, and immigration, 197–201 dual-purpose, 204
program implementation and evaluation, 202 exit, 448
temporary workers and, 196–197 on-campus, 211
Human resource profession situational, 241
competencies and behaviors, 13–15 Intraorganizational bargaining, 601–602
education and experience, 13 Intrinsic motivation, 499
future of, 689–690 Intrinsic rewards, 205–206
positions and jobs, 12 Introverted personality type, 249
role of chief HR officer, 691–693 Inventory pile ups, 150
Human resource recruitment, defined, 203 Involuntary turnover, 423–433
Human resource recruitment process. See Recruitment process definition of, 423
Human resource strategy employee assistance and wellness programs, 429–432
basic building process, 667–669 employment-at-will doctrine, 423
characterizing, 669–671 justice principles, 425–427
involving line executives, 669 outplacement counseling, 432–433
strategy roadmap, 668 progressive discipline/alternative dispute resolution,
Human skills, in workflow process, 153 427–429
wrongful discharge, 423–424
Identity theft, 210 ISIS (Islamic State in Iraq and Syria), 155
Illegal immigrants, 216–217 ISO 9000:2000 standards, 30–31
Illiteracy, 563
Image advertising, 206 Job analysis, 83–84, 147, 161–167
Immigrants, 200–201 career planning, 162
jobs abandoned by, 216–217 dynamic elements of, 167
In-basket, 390 human resource planning, 161
Incentive effect, 498 importance of, 161–162
Incentive intensity, 502–503 information, 163–165
Incentive pay, 85, 504. See also Merit bonuses; Merit pay job evaluation, 162
Inclusion programs, 238 line managers and, 162–163
Inclusivity, 178 methods, 165–167
Independent contractors, 183, 184, 214, 487, 561 occupations with largest growth, 19
Individualism-collectivism, 635 performance appraisals, 162
Individualistic vs. collectivist orientation, 637 selection, 161
Industrial unions, 584 training, 162
Informal learning, 266 work redesign, 161
Information systems, 81 Job descriptions, 163–164
Information technology (IT), accessibility and, 124 Job Descriptive Index (JDI), 444–445, 447
Innovation, 178 Job design, 83–84, 147, 167–175
Instructional System Design (ISD), 267 biological approach, 170–171
Insurance. See also Health care; Social Security job satisfaction and, 175
disability, 544–545 mechanistic approach, 168–169
economies of scale, 538 motivational approach, 169–170
private group, 544–545 organizational structure and, 159
unemployment, 542–543 perceptual-motor approach, 172–174
Intangible assets, 21–22 trade-offs among approaches to, 175
Integrative bargaining, 601 Job dissatisfaction. See Job satisfaction
Integrative linkage, 76, 80 Job enlargement, 170
Intended strategies, 92–93 Job evaluation, 162, 465–466
Interactional justice, 426 pay survey data and, 466–467
Internal analysis, 77–78 three-factor system, 466
728 Subject Index
Job experiences, 394–400 Labor relations framework, 578–579

enlarging the current job, 396–397 Labor unions, 581–583
stretch assignments, 394 actions of, and industry structure, 590
Job hazard analysis technique, 135 collective bargaining and, 581
Job involvement, 436 economic changes and, 586
Job performance goals and strategies of, 580–583
expectancy theory and, 498–499 government regulation as substitution for, 590
measures, 119 increased employer resistance to, 587–589
Job programmability, 501 international context, 616–619
Job redesign, 168 largest U.S. labor unions, 583–584
Job rotation, 397–398, 440–441 management and, 580–581
Job satisfaction, 437 membership and bargaining power, 586–590
cost-cutting measures and, 421 national and international unions, 583–584
job design and, 175 organizing process for, 594–600
measuring and monitoring, 444–445 in public sector, 619–620
pay and benefits, 443–444 security, 586
personal dispositions, 438–439 societal goals and, 580
sources, 437–444 worker productivity and, 615–616
supervisors and co-workers and, 441–443 worker views of, 590
survey-feedback interventions, 445–449 Landrum-Griffin Act of 1959, 592
task and roles as predictor of, 439–441 Lateral moves, 397–398
unsafe working conditions, 437–438 Law of Effect, 498
Jobs Characteristics Model, 170 Layoffs, 89. See also Downsizing; Employee separation
Job specifications, 164 Leaderless group discussion, 390
Job structures, 458, 465–466 Leader of HR function, 692
job evaluation, 465–466 Leadership development, 387–388, 413. See also Employee development;
pay levels and, 461–474 Succession planning
Judicial branch, 103 Leading indicators, 186
Justice, principles of, 425–427 Lean production, 149–150
interactional justice, 426 Lean thinking, 32
outcome fairness, 425 Learning environment, creating, 275–278
procedural justice, 426 Learning incentives, 313
Just-in-time inventory control, 150, 151 Learning management system (LMS), 292–293
Learning organizations, 22, 93
Kaizen, 296, 348 Legacy workforce, 69
Key jobs, 465 Legal issues, 39–40. See also Discrimination; Privacy
Key performance indicators (KPIs), 327, 357 performance management, 366–368
Knowledge, 164 Legality, of selection method, 235–239
Knowledge management, 266, 281 federal legislation, 236–239
Knowledge workers, 22 Legal system, in U.S., 102–103
Labor executive branch, 102–103
employee relations and, 85–86 judicial branch, 103
factors influencing supply and demand for, 184 legislative branch, 102
growth in benefits and, 538–539 Legal systems, globalization and, 638–639
on-demand, 183 Legislation. See specific legislation
shortages of, 189 Legislative branch, 102
supply, determining, 186–188 Leniency error, 359
surpluses, 189–190, 201 Liaison to the board, 692
Labor costs Liftout, 208
components, 462 Lilly Ledbetter Fair Pay Act, 111, 485
instability of country differences in, 478 Line executives, 666, 669, 673, 674
manufacturing and, 479 Local unions, 584. See also Labor unions
productivity and, 480 Long-term short-term orientation, 636
skill levels and, 479 “Looks policy,” 223
U.S. competitiveness and, 477–481
Labor demand, determining, 186 Made in America, 215–216
Labor force. See Workforce Maintenance of membership rules, 586
Labor-management relations Malcolm Baldrige National Quality Award, 30–31
cooperative strategies, 609–612 Management. See also Performance management
legal concerns, 610–611 open-book, 513–514
traditional and transformational approaches, 611 Managerial pay, 518–521
Labor market competition, 462 Managers
Labor relations, 673. See also Collective bargaining; Labor unions behaviors of good managers, 362
outcomes of, 613–616 diagnosing causes of poor employee performance, 363–36
in the public sector, 619–620 as sources of performance information, 350–352
strikes, 613 Manager support, 278–280
wages and benefits, 614–615 Managing diversity and inclusion, 303–306
Subject Index 729
Mandatory retirement programs, 238 National Institute for Occupational Safety and Health (NIOSH), 132, 133
Manhart ruling (City of Los Angeles v. Manhart), 566 National Labor Relations Act of 1935 (NLRA), 577, 580, 590–591
Manufacturing rights of employees under, 591
advanced manufacturing environments, 477 National Labor Relations Board (NLRB), 103
determining labor demand, 186 arbitration and, 608
hourly costs in U.S., 640 enforcement of NLRA, 592–593
HRM involvement and, 80 functions of, 594–600
labor costs and, 479 McDonald’s ruling, 622–623
made in America as competitive advantage, 215–216 National unions, 583. See also Labor unions
overseas production, 490 Needs assessment, 269–270
Maquiladora plants, 630, 632, 644 organizational analysis for, 270–273
Marginal tax rate, 538 person analysis for, 270, 273–274
Margins, 68 process, 269
Market forces, EEO regulation and, 485 task analysis for, 270, 274–275
Market pay surveys, 463–465 Negative affectivity, 438–439
Market survey data (pay structure), 467–470 Neutrality provision, 600
Masculinity-femininity dimension, 636 New Deal, 591
Massive open online courses (MOOCs), 290–291 Newspapers, job advertisements in, 208–209
Mastery: The Keys to Success and Long-Term Fulfillment (Leonard), 313 New technologies, 683
Mathematical optimizing programs, 151 E-HRM, 684–689
McDonnell Douglas Corp. v. Green, 116–117 9-box grid, 408
Measurable job outcomes, 501 No Child Left Behind Act, 141
Mechanistic approach, to job design, 168–169 Noncompete clauses, 425–426
motivational approach as reaction to, 169–170 Nonexempt employees, 486
Mediation, 605 Nonkey jobs, 465
Medical insurance, 544 Nonunion representation systems, 620
Medicare, 538 Nonverbal communication, 649
Mega Agent Expansion (MAE), 263 North American Free Trade Agreement (NAFTA), 632
Mental capabilities, job design and. See Cognitive ability
Mental illness, reporting of, 246 Obesity, 431–432
Mentor, 401 Occupational Information Network (O*NET), 166–167, 176
Mentoring programs, 3, 378, 401–404 Occupational Safety and Health Act (OSHA), 132–134, 437–438
benefits of, 403–404 citations and penalties, 134
characteristics of successful, 403 effects of, 134
developing, 402–403 employee rights and responsibilities and, 132–133
examples of, 378, 401 inspections, 133–134
reverse mentoring, 404 unethical business activities and, 173
Mergers, 88–89 worker rights under, 133
cross-border, 630 Office of Federal Contract Compliance Procedures (OFCCP), 108,
Merit bonuses, 497, 505 112–113
Merit increase grid, 505 Offshoring, 44, 198–200, 481
Meritor Savings Bank v. Vinson, 127–128 Okun’s Law, 177–178
Merit pay, 504, 505–509 Old Age, Survivors, Disability and Health Insurance (OASDHI) program,
basic features, 505–506 540
communication and, 523 Older employees, early-retirement programs for, 193–196
criticisms of, 506–509 Older Workers Benefit Protection Act (OWBPA), 566
Minimum wage, 486, 639 Onboarding, 307–309
Minority groups. See Affirmative action; Diversity On-demand labor, 183
Misdirected effort, 366 One-way linkage, 76
Mission statement, 76–78 Online coding tutorials, 211
Mixed-motive cases, 117 Online learning. See E-learning
Mixed-standard scales, 337, 338 On-the-job training (OJT), 285–296
Mobile devices, 47–48 apprenticeship, 286–287
Money purchase plans, 546 behavior modeling, 289
Morale, 421, 695 e-learning, 289–291
Motivation internship, 287
expectancy theory and, 498–499 principles of, 286
intrinsic and extrinsic, 499 simulations, 287–288
to learn, 275, 276 Open-book management, 513–514
Motivational approach, to job design, 168, 169–170 Openness to experience, 248
Motivation to learn, 275, 276 Opportunity to perform, 280
Multinational companies, 644 Opposition, to an illegal employment act, 124
and global companies compared, 645 Organizational analysis, 270–273
Myers-Briggs Type Inventory (MBTI), 389 company strategy, 271–272
definition of, 270
Nail salon business practices, 172 strategic initiatives, 271
National Association for the Advancement of Colored People (NAACP), 245 support of managers and peers, 271
730 Subject Index
Organizational commitment, 436–437 Pay Satisfaction Questionnaire (PSQ), 445

Organizational goals, 77 Pay structure, 85, 456–491
Organizational performance. See also Performance concepts and consequences, 460
executive pay and, 519 definition of, 458
profit sharing and, 497 developing, 466–467
Organizational structure equity theory and fairness, 459–461
definition of, 147 executive pay, 482–483
dimensions of, 153 globalization, geographic region and, 472–473
GM recall and, 145, 175 market pay surveys/job evaluation conflict and, 470–471
nature of jobs and, 159–161 market survey data, 467–470
strategy implementation and, 80–81 matching organization strategy to, 525
structural configurations, 153–159 monitoring compensation costs, 471
work-flow analysis and, 147–161 pay grades, 469–470
Organization strategy paying for skill/knowledge/competency, 476–477
compensation strategy and, 524–525 problems with job-based, 475–477
matching pay strategy to, 525 Pay to Quit program, 464
Other characteristics, 164 Peers, as source of performance information, 353
Outcome fairness, 330, 425 Peer support, 280
Outcome-oriented contracts, 501 Pension Benefit Guarantee Corporation (PBGC), 545
Outcome uncertainty, 501 Pension plans, 196. See also Retirement benefits
Outplacement counseling, 432–433 Pension Protection Act of 2006, 547
Outputs, 147–148 Perceptual approach, 168
Outreach and follow-up wellness model, 558 Perceptual-motor approach, to job design, 172–174
Outsourcing, 8, 197–198 Performance. See also Organizational performance; Individual
to improve HRM effectiveness, 679–680 performance
transactional activities, 677, 679 self as source of information on, 351, 354
Overall cost leadership strategy, 86 training as solution to problems of, 273–274
Overcommunication, 164–165 Performance appraisals, 162, 321, 392–294. See also Performance
Overseas production, 490 management; Performance measurement
Ownership plans, 504, 514–515, 529 cultural differences and, 634
Performance feedback, 321, 323, 328, 360–363
Paired comparison method, 335 manager’s role in, 360–362
Parental discrimination, 108–109, 115, 142 recommendations for, 360–362
Parent country, 642, 643 Performance information, 350–355
Parent-country nationals (PCNs), 642 customers, 354–355
Pareto charts, 348, 349 managers, 350–352
Participation, in an investigation, hearing, or court proceeding, 124 peers, 353
Patterson v. McClean Credit Union, 106 self, 351, 354
Pay. See Compensation; Incentive pay subordinates, 353–354
Pay cuts, 201 Performance management, 84–85, 666–667
Pay for performance programs, 502–518 administrative purpose of, 324–325
balanced scorecard, 517–518 creating culture of continuous improvement, 325
differentiation in performance and pay, 502 definition of, 321
differentiation strength/incentive intensity, 502–503 developmental purpose of, 325–326
educators and, 527 legal guidelines for, 366–368
employee stock ownership plans, 515–516 perceived fairness of, 330
gainsharing, 516, 517 practice of, 321–322
group incentives and team awards, 516–517 problems with, 320–321
individual incentives, 509–510 process of, 322–324
merit pay, 505–509 purposes of, 324–326
ownership, 514–515 reformatting, 319
profit sharing, 510–514 reformatting performance evaluations, 319
types of, 503–518 strategic purpose of, 324
Pay grades, 469–470 system example, 332
Pay levels, 458, 461–474 technology in, 355–360
changing, 491 Performance measurement. See also Performance appraisals
decisions in, 463 approaches to, 331–350
employees as resource, 462–463 attribute approach, 336–338, 351
job structure and, 465–466 behavioral approach, 339–343, 351
key and nonkey jobs, 465 comparative approach, 333–336, 351
labor market competition, 462 contamination and deficiency of, 328–329, 346
market pay surveys, 463–465 evaluation of approaches to, 351
market pressures, 461–462 merit pay programs and, 507
point-factor system, 466 nonfinancial, 327
product market competition, 461–462 quality approach, 347–351
rate ranges, 465 rating errors, 358–359
Pay policy line, 467–469 results approach, 343–347, 351
Subject Index 731
Performance measures criteria, 326–331 Protected groups, 424

acceptability, 329–330 Psychological success, 379
reliability, 329 Psychosocial support, 403
specificity, 330–331 Public employment agencies, 210–211
strategic congruence, 326–328 Punitive actions, 424
validity, 328–329 Punitive damages, 125
Performance problems, 363–366
Performance support systems, 280–281 Quality approach, to performance measurement, 347–351
Periodicals, job advertisements in, 208–209 Quality emphasis, 29–33
Personal dispositions, 438–439 Quantitative ability, 247
Personal financial advisors, 217–218 Quasi-judicial agencies, 103
Personality and personality testing, 231, 257–258 Question harvesting, 248
Personality tests and inventories, 248–250, 254, 389–390
Person analysis, 270, 273–274 Race and racial identity, 245
Personnel policies, 204–206 Race norming, 237, 248
extrinsic and intrinsic awards, 205–206 Racial composition, of workforce, 36–39
image advertising, 206 Racketeer Influenced and Corrupt Organizations Act (RICO), 600
internal vs. external recruiting, 204–205 Rana Plaza (Bangladesh) collapse, 582
Personnel specialist, 213 Range spread, 469
Physical ability tests, 247, 254 Ranking, 333
“Pink Quota” (Europe), 256 Rater accuracy training, 359
Poaching employees, 207, 422, 433–434 Rater error training, 358–359
Podcasts, 209–210 Rating errors, 358–359
Point-factor system, 466 Raw earnings ratios, 484
Political systems, globalization and, 638–639 Raw materials, 150
Position analysis questionnaire (PAQ), 165–166 Readiness for training, 275
Poverty, 141, 641 Reality check, 382
Power distance, 635 Reasonable accommodation, 114, 121–124, 130, 239
PPOs. See Preferred provider organization (PPO) disability and, 123
Predictive validation, 229, 230 religion and, 121–123
Preferential treatment, 237 “Reasonable woman” standard, 128
Preferred provider organization (PPO), 556 Reasoning ability, 247
Pregnancy Discrimination Act of 1978, 108–109, 566 Reconstruction and Civil Rights Acts (1866 and 1871), 106
“Prima facie” case, 115, 118 Recruitment process, 84, 203–214
Principals, in agency theory, 499 extrinsic and intrinsic rewards, 205–206
Privacy image advertising, 206
employee tracking systems and, 358 internal vs. external recruiting, 204–205
Facebook’s European privacy problems, 71 personnel policies, 204–206
Private employment agencies, 210–211 software applications, 686
Private group insurance, 544–545 Recruitment sources
disability, 544–545 advertisements in newspapers and magazines as, 208–209
medical insurance, 544 colleges and universities as, 211, 212
Procedural fairness, 330 direct applicants and referrals, 208
Procedural justice, 426 electronic, 209–210
Process-flow analysis, 348 employment agencies, 210–211
Process redesign, 680–683 evaluation of, 212
identifying the process, 680 internal vs. external, 206–208
implementing the process, 683 recruiters, 212–213
redesigning the process, 681 Reengineering, 680, 683
understanding the process, 681 Reference checks, 243–244, 254
Productivity, 86–87. See also High-performance work systems Referrals, 208
globalization and, 617 Regulatory agencies, 102
union membership and, 615–616 Reinforcement theory, 498
Productivity Measurement and Evaluation System (ProMES), Reliability, 224–227
345, 346 of measurement, 225–227
Product market competition, 461–462 performance measurement and, 329–330
Profits, union membership and, 616 standards for, 228
Profit sharing plans, 504, 510–514, 546 Religion, reasonable accommodation and, 121–123
GM and UAW contract, 511, 512 Religious discrimination, 223, 235
Progression of withdrawal, 434–437 Remote wiping, 194
ProMES (productivity measurement and evaluation system), 345, 346 Repatriation, 302–303
Promote-from-within policies, 204–205 Representative of the firm, 692
Promotions, employee, 398 Repurposing, 290
delayering/banding and, 476 Research and development (R&D), 158–159
ProQuest Historical Newspaper, 169 Reshoring, 44, 680
Prosocial motivation, 441 Restructuring, 677–679
Protean career, 379 Results appraisal emphasis, 88
732 Subject Index
Results approach, to performance measurement, 343–347, 351 Self-motivation, 249–250

balanced scorecard, 344–345 Self-regulation, 249
evaluation of, 345–347 Self-selection, 208
productivity measurement and evaluation system, 345 Self-service, 7
use of objectives, 343–344 Separation. See Employee separation
Résumé fraud, 244 Service Employees International Union (SEIU), 577, 622–623
Retirement, “mandatory,” 238 Sexual discrimination, 101, 108
Retirement benefits, 545–549 Sexual harassment, 126–128
cash balance plans, 547–548 SFAS 123R, 515
defined-benefit plans, 545 Shared service center, 159
defined-contribution plans, 545–547 Shared service model, 7
funding, communication, and vesting requirements, 548–549 Shopping trends, 629
importance of diversification, 547 Sick leave, 549–550
Return on investment, 299 Silicon Valley work ethic, 535
Reverse discrimination, 104, 128–129, 424 Similar to me error, 358, 359
Reverse mentoring, 404 Simple ranking, 333
Rewards, 81. See also Incentive pay Simulations, 287–288
software applications, 687 Situational interviews, 241
Ricci v. DeStefano, 129 Six Sigma process, 32, 296
Rightsizing, 89 Skill-based pay systems, 477, 504
Right-to-work laws, 586 Skill differentiation, 174
Risk aversion, 501 Skills, 164
Robots, 75, 177–178 Skills management process, 274–275
Role behaviors, 87 Skill variety, 170
Role play, 232, 251, 313, 390 Sleep apnea, 431–432
Sleep deprivation, 442
Sabbaticals, 400, 414–415 SMART goals, 343, 344, 352
Safety, 672 Smartphones, remote wiping and, 194
as competitive strategy, 177 Socialization, 307–309
unsafe working conditions, 437–438 Social media
workplace violence and, 421, 423 for learning, 291, 292
Safety awareness programs, 134–137 union-related communications and, 599
identifying/communicating job hazards, 135–136 Social networking, 45–47, 210
injuries/fatalities statistics, 135 employment information and, 243
promoting internationally, 136–137 Social performance management, 356
reinforcing safe practices, 136 Social responsibility, corporate, 28–29
Salespeople, personality testing and, 257–258 Social Security, 538, 540–542
Sarbanes-Oxley Act of 2002, 40–41 Social Security Act of 1935, 210, 540
SBAR (situation, background, assessment, and recommendation), 174 Social skills, 250
Scanlon plan, 516 Software applications for HRM, 684–689
Scattergrams, 348, 350 compensation and rewards, 687
Scenario analysis, 681 recruitment and selection uses, 686
Scientific management, 169 training and development, 687–689
Section 401(k) plans, 546, 547 Sorting effect, 502
Securities and Exchange Commission (SEC), 520, 521 Specificity, performance measurement and, 330–331
Selection, 84, 161, 239–253, 666 Sponsored groups, 210
background checks, 244–245 Stakeholders, 4, 16
biographical information, 244 balanced scorecard, 27–28
cognitive ability tests, 247–248 Standard deviation rule, 118
educational background, 244 Standardized protocols, 152
honesty tests and drug tests, 252–253 Start-ups, and need for HR, 663
interviews, 239–243 State employment offices, 210
personality inventories, 248–250 Statistical planning models, 186
physical ability tests, 247 Steelworkers’ Trilogy, 607
software applications, 686 Stockholders, 4
summary of, 254 Stock options, 514
work samples, 251–252 Stock performance, union membership and, 616
Selection method standards, 224–239 Storytelling, 696–698
generalizability, 232–233 Strategic advisor, 691
legality, 235–239 Strategic choice, 78
reliability, 224–227 Strategic congruence, 326–328
utility, 233–235 Strategic human resource management (SHRM), 71
validity, 228–232 Strategic management, 70–76
Self-assessment, 381–382 administrative linkage, 74–76
Self-awareness, 249 components of process, 72
Self-evaluations, 351, 354 defined, 70
Self-governed teams (“circles”), 464 goal of, 68
Self-management skills, 281–282 HRM linkage and, 72–74
Subject Index 733
model, 73 Temporal stability, 174

strategy evaluation and control, 92 Temporary assignments, 399–400
strategy formulation, 72–80, 146 Temporary workers, 196–197
strategy implementation, 72, 73, 80–92, 146 Terrorism, 656–657
Strategic types, 86 structuring a global terrorist organization, 155
Strategy formulation, 72, 73, 76–80, 146 Test-retest reliability, 225, 329
HRM role in, 74–76 Third-country nationals (TCNs), 642
Strategy implementation, 72, 73, 80–92, 146 Thirteenth Amendment, 104
HRM practices, 82–86 Thorndike’s Law of Effect, 498
variables to consider in, 81 360-degree performance appraisal, 355, 382, 392–394
Stretch assignments, 394 Title VII, of Civil Rights Act of 1964, 102, 106–107
Strictness error, 359 protection against retaliation, 124
Strikes Total quality management (TQM), 30, 506–507
alternatives to, 605–606 Training, 84, 85–86, 162, 666, 672. See also Education; Employee
illegal, 620 development
management’s preparation for, 602–603 adopting for global businesses, 283
management’s willingness to take, 604–605 business success and, 272
Strong-Campbell Interest Inventory, 381 choosing a method, 296–300
Subject-matter experts, 164 competitive advantage and, 264, 265–267
Subordinates, as source of performance information, 353–354 in concentration strategy, 88
Succession planning, 406–411, 672 continuous learning and, 265–267, 380
Summary plan description (SPD), 548 as cost-cutting exercise, 311
Supply chain management, 257 cross-cultural, 300–303
Support network, 280 definition of, 265
Supreme Court, U. S., 103 employee development and, 379–381
Surveys, 681 evaluating programs, 297–200
Sustainability, 16, 132, 682 evaluation designs, 298–299
competing through, 195 financial benefits of, 299–300
Sustainability challenge, 16–42, 52 goals, 265
customer service and quality emphasis, 29–33 hands-on methods, 285
economic cycles, 17–22 managing diversity and inclusion, 303–306
empowerment/continuous learning and, 22–27 onboarding and socialization, 307–309
meeting needs of stakeholders, shareholders, customers, employees, software applications, 687–689
and community, 27–29 special issues, 300–306
SWOT analysis, 9, 78 youth programs, 277
Training design process, 267–296
Tacit knowledge, 266 definition of, 267
Taft-Hartley Act of 1947, 592, 607 employees’ readiness for training, 275
Talent architect, 691–693 group- or team-building methods, 293–296
Talent management, 24–25, 324 hands-on methods, 285
Talent management software, 231 learning environment, 275–278
Task analysis, 270, 274–275 manager support, 278–280
Task design, 80–81 needs assessment, 269–270
Task identity, 170 on-the-job (OJT), 285–296
Task significance, 170 opportunity to perform, 280
Team awards, 516–517 organizational analysis, 270–273
Team-based work design, 149, 174 peer support, 280
Team-building training methods, 293–296 person analysis, 273–274
action learning, 295–296 presentation methods, 283–285
experiential programs, 293–294 self-management skills, 281–282
team training, 294–295 task analysis, 274–275
Team leader training, 295 technological support, 280–281
Teamsters union, 583, 623 training resources, 273
Technic of operations review (TOR), 135 transfer of training, 277–282
Technology Training methods, 282–285. See also Employee development
improving health through, 685 audiovisual, 284–285
new technologies, 683 hands-on, 285
sharing economy and, 487 instructor-led classroom instruction, 284
start-ups, and need for HR, 663 on-the-job, 285–296
Technology challenge, 45–52 presentation methods, 283–285
cloud computing, 48 Training outcomes, 297
high performance work systems, 49 Transfer of training, 277–282
HRIS, 47 manager support, 278–280
mobile devices, 47–48 opportunity to perform, 280
social networking, 45–47 self-management skills, 281–282
virtual teams, 49 Transfers, employee, 398–399
Telecommuting, 451 Transitional matrix, 187–188
Teleconferencing, 284 Transnational process, 645
734 Subject Index
Transnational representation, 645 Voluntary employee benefit association (VEBA) trust, 568
Transnational scope, 645 Voluntary turnover, 433–449
Troubled Asset Relief Program (TARP), 482 behavior change, 435–436
Tuition reimbursement programs, 89, 90, 388 job satisfaction and, 437
Turnover, 409 job withdrawal process, 434–437
churning, 451 physical job withdrawal, 436
involuntary (See Involuntary turnover) psychological withdrawal, 436–437
voluntary (See Voluntary turnover) sources of job dissatisfaction, 437–444
Two-way linkage, 76 Volunteer assignments, 400
UAW v. Johnson Controls, Inc., 116 Wages. See Compensation

Uncertainty avoidance, 635–636 Wagner Act. See National Labor Relations Act of 1935 (NLRA)
Unconscious bias, 304 Wake County, N.C., 141
Underemployment, 195 Walsh-Healy Public Contracts Act of 1936, 487
Underutilization, 202 Wards Cove Packing v. Atonio, 103, 119
Underutilizers, 366 Wasabi Waiter, 232
Undocumented immigrants. See Illegal immigrants Wearable sensors, 430, 431
Unemployment, 190, 191, 195, 256–257 Web-based training, 289–290
insurance, 542–543 Webcasting, 284
offices, 210 Weighting scheme, 466
Unfair labor practices Wellness programs, 429–432, 567
employers, 591–592 Whistle-blowing, 435–436
labor unions, 592, 593 Wisconsin, collective bargaining restrictions and, 619
Uniform Guidelines on Employee Selection Procedures (Equal Women. See also Gender
Employment Opportunity Commission), 112, 366 compensation and, 485–486
Union dues, 121 glass ceiling for, 405–406
Unionization rates, 616–617 in workforce, 202
Unions. See Labor unions Workers. See also Employees
Union shop, 586 average annual hours worked, 535
United Electrical, Radio, and Machine Workers of America, 624 labor market competition and, 462
University placement services, 211, 212 Workers’ compensation, 543–544
Upward feedback, 353, 392 Workflow design, 147
U.S. Employment Service (USES), 210 Workflow processes, 149
Utility, 233–235 Workforce. See also Employees
Utilization analysis, 113 legacy workforce, 69
“Pink Quota” (Europe), 256
Vacation pay, 549–550 temporary workers, 196–197
Validation, expatriate workers and, 654 women in, 202, 405–406, 485–486
Validity, 228–232 Workforce analytics, 11
content, 231–232 Workforce changes and diversity, 33–39
criterion-related, 228–232 aging of workforce, 34–35
performance measurement and, 328–329 gender and racial composition, 36–39
Validity coefficients, 232, 250 generational differences, 35–36
Validity generalization, 232–233 managing, for competitive advantage, 37
Values, 370–371 Workforce sensors, 692
codes of conduct and, 521 Workforce utilization review, 202
Variable costs, 68 Working conditions, job satisfaction and, 437–438
Verbal comprehension, 247 Workplace safety. See also Occupational Safety and Health Act (OSHA);
Vertical alignment, 81 Safety; Safety awareness programs
Vertical integration, 158 violence in the workplace, 481, 483
Vietnam Era Veteran’s Readjustment Act of 1974, 108 Work redesign, 161
Violence, in workplace, 421, 423–424 Work samples, 251–252, 254
Virtual classrooms, 284 Work share programs, 201
Virtual job auditions, 251 “World’s Most Ethical Companies,” 79
Virtual reality, 288 World Trade Organization (WTO), 633
Virtual teams, 49 Wrongful discharge, 423–424
Vocational Rehabilitation Act of 1973, 108
Voice mechanism, 615 Yield ratios, 212

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Human Resource

Library of Congress Cataloging-in-Publication Data

To my parents, Harold and Elizabeth, my wife,

To my parents, Robert and Shirley, my wife,

To my parents, Patricia and Paul, my wife, Mary,

The Competitive Challenges

The Changing Role of the Human Resource

New Feature and Content Changes in This Edition

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editor, provided us with valuable marketing information, helped us in making major

Vondra Armstrong Nancy Bereman Georgia Chao

Fred Dorn Bob Graham Frank Jeffries

Karen Locke Gary Murray Mike Ritchie

Erika Engel Small Steven L. Thomas Charles Vance

noe78127_fm_i-1.indd xx 10/13/16 01:35 PM

Using Connect improves passing rates

Over 4 billion questions have been

INSTRUCTOR’S MANUAL MCGRAW-HILL AND BLACKBOARD

1 Human Resource Management: PART 4

1 Human Resource Management: Gaining a Key Terms 56

Strategy Implementation 80 Types of Discrimination 113

Equal Employment Opportunity Commission Introduction 146

Competing Through Technology Introduction 184

Types of Selection Methods 239 Ensuring Employees’ Readiness For

Competing Through Sustainability Creating a Learning Environment 275

Administrative Purpose 324 Diagnosing The Causes of Poor

Integrity in Action Competing Through Sustainability

Managing Benefits: Employer Objectives and Union Structure, Administration, and

PART 5 Management’s Willingness to Take a Strike 604

The International Context 616 Levels of Global Participation 642

Economic System 639 Software Applications for HRM 684

Integrity in Action Exercising Strategy 695

LO 1-1 Discuss the roles and activities of a company’s human

LO 1-2 Discuss the implications of the economy, the makeup of the

LO 1-3 Discuss how human resource management affects

LO 1-4 Discuss what companies should do to compete

LO 1-5 Identify how new technology, such as social networking, is

LO 1-6 Discuss human resource management practices that

LO 1-7 Provide a brief description of human resource

What Responsibilities and Roles Do

Administrative Services and Business Partner Services: Strategic Partner:

Strategic Role of the HRM Function

DEMONSTRATING THE STRATEGIC VALUE OF HR:

training effectiveness. Performance data included managers’ performance ratings and

THE HRM PROFESSION: POSITIONS AND JOBS

EDUCATION AND EXPERIENCE

COMPETENCIES AND BEHAVIORS

Example behaviors: Example behaviors:

Competitive Challenges Influencing

Figure 1.4 Competing through Competing through Competing through

U.S. Business Competitiveness

THE SUSTAINABILITY CHALLENGE

replace workers who retire or leave an occupation.