Eliminating Waste in Business: Run Lean, Boost Profitability (2014)
Chapter 5. Human Resources
A Source of Value or a Source of Waste?
99 percent of all employees want to do a good job. How they perform is simply a reflection of the one for whom they work.
—Mark S. Hoplamazian, President, Hyatt Hotels
It is not difficult to find someone who feels like the human resources (HR) department is a source of waste and frustration. Whether it is outdated forms with no meaning, a constant barrage of repeated signatures, sexual harassment seminars—or just about any of the functions HR performs, in fact—it seems that there is always a perceived waste of money associated with the HR department. How did such an important function become such a source of waste?
The HR department is responsible for many functions in an organization. In the case of human resource management, responsibilities include manpower planning, job analysis/description, wage analysis, recruitment, performance appraisal, training and development, employee motivation, benefit administration, dismissal, and labor relations.
HR: SUPPORT OR BUSINESS FUNCTION?
There is a debate as to whether the HR department is a support function or a business function. In our definition of any department, the deciding factor as to whether it is a support function or a primary business function hinges upon whether the department directly affects the production of the product or administration of the service to the customers. Based on this definition, functions like human resources, finance, information technology, and quality control are support functions. That being said, these support functions are still a necessary part of business, but this changes the level of control that these functions should have.
Unfortunately, in the administration of these HR activities, many organizations introduce waste. Much of this waste is created because HR tends to forget they are a support function and that their job should be to support others, not to control. And some of this waste is created because activities occur in which there is no added value. For instance, employee evaluations are a key function of human resources. One such example is the use of an electronic Excel file or an online system with multiple steps to create the evaluation. Once you get the right form, you have to enter goal and performance information. Then, the employee has to enter their performance information into the form. Finally, you have to review the employee’s self-evaluation and add your comments. After you do all of this, then you schedule time with the employee to discuss the evaluation, which may take anywhere from 15 minutes to an hour. All told, this process can take 45 minutes to a couple of hours per employee.
If this information provides value or dictates future pay increases, this time is well spent, but in fact the employee evaluation process rarely accomplishes anything except to create a paper trail used to discipline employees.
So, in order to limit the waste in each of these areas, you need to analyze the value that each activity offers the organization. As a support or business function, if value is not added, then the process should be dropped. As we’ve said time and again throughout this book, any service or function that doesn’t add value is inherently wasteful.
Note Much waste is created in HR because it is treated as a business function. Instead, HR should be treated as a support function. To make this switch, every process must undergo a value analysis.
For example, while we are sure it happens at some point in some organization somewhere, we personally have never seen an HR professional thoroughly engaged in productivity and manpower analysis. This is likely due to a lack of formal training in doing these types of analyses. HR professionals tend to be involved in the implementation of staffing decisions rather than the analysis of labor. This can lead to a lack of understanding the number of workers needed in each department. With such a knowledge gap, the HR department depends on the management staff to decide how much personnel is necessary. Since managers often look to add labor to resolve efficiency and effectiveness problems, this lack of knowledge of productivity needs by the HR department can lead to overstaffing. A healthy relationship between managers and HR professionals includes checks and balances where HR understands enough of the needs to challenge excess staffing requests. The manager should control and HR should support when needed. Managers and HR professionals should make sure their needs are communicated to each other to avoid these problems.
When it is necessary to hire personnel to fill a role, HR recruitment personnel can draw from the wrong candidate pool, leading to a poor hire. When HR doesn’t fully understand the needs of the organization, ineffective staffing is the result. When managers don’t fully understanding the job market, they are more likely to give HR a poor definition of the position’s requirements. So lack of understanding by both departments drives waste in the organization. This waste can manifest itself in many ways. You could end up having an employee who is in a position that is not a good fit for his skills. Even if this is a good employee that the manager is happy to have on her staff, he still does not meet the business need that justify the role. This creates waste because the original needs are not being met. Also, an employee is doing work that might not be needed. Also, you could end up with an employee who has higher expectations of the role than what the company is actually looking for. In this case, the new employee is not challenged, and is undervalued and demotivated. This employee will likely look for a new job as soon as he realizes that the role is not a good fit.
If you combine the lack of knowledge of business needs and the lack of understanding of business roles, it is a formula that leads to poor HR decisions. We once analyzed temporary, part-time labor versus full-time labor. The prevailing HR opinion was that temporary or part-time labor was a cost savings over hiring full-time employees. This is because the company could avoid benefit expenses and could hire employees at a lower hourly rate.
Our analysis looked at the productivity level from units per hour measurement, the quality reject levels, and the product line. The goal of this analysis was to determine which products were best suited for temporary labor. I performed a multiple regression analysis based upon a large set of data to determine which factors drove high productivity and high quality. We found that in all product lines, the lower costs of labor did not offset the loss of productivity and quality gained with full-time, skilled employees. We made the decision to reduce the number of temporary employees and adjust our production methods to ensure that we maintained a stable and skilled workforce.
Note Perform productivity analyses prior to filling positions.
This is just one example of the prevailing knowledge of how to manage human resources can be incorrect and can lower company profitability. Over our careers we have seen companies copy a successful strategy from one organization, but with poor results. HR departments absolutely should be aware of trends in labor management, but also cannot afford to be ignorant of their company’s unique needs. This ignorance leads to bad decisions, such as relying on a steady stream of temporary labor when what you want is a stable and skilled workforce. We show throughout this chapter that, in order for HR to provide value and not add waste, they must serve in a support function. It is job of HR to support management and help fulfill needs of the various departments. This process must be performed in an analytical manner so as to not create added waste—as well as to begin to eliminate existing waste.
Wasteful Hiring Processes
One of the key roles of HR is to provide a candidate pool for hiring and ensure that a proper hiring process is used to meet not only company needs but also legal requirements. We have mentioned how not understanding the needs of a position can cause waste. Where else is there waste in hiring? The waste is in the process itself. Figure 5-1 shows a simplified version of a hiring process.
Figure 5-1. Typical Hiring Process
Although these exact steps aren’t used in every company, it is typical. If you analyze this process, you will notice that the compensation analysis occurs near the beginning of the process. Thus, the compensation then affects the job description so that the hiring budget can be met. So in this process, meeting a certain employee cost is a higher priority than getting the right skills for the job. This is going to create waste. Having the wrong employee for the job at any cost (even a cheap one) is wasteful.
What we leave out of this simplified process are some of the very common HR practices used to build a pool of applicants. Many times, HR uses keyword searches to search resumes and HR personnel reviews of candidates to create an applicant pool. If HR doesn’t fully understand the role, what makes a recruiter qualified to review resumes and eliminate potential applicants? This process makes the art of creating a resume with clichés or keywords more important than having the right skills or qualifications.
Note Hiring must be controlled by the person in charge of the position.
Processes such as these drive waste by potentially eliminating the best applicant for the job or wasting resources reviewing resumes without the proper knowledge. This process works very well for established or frequently filled positions, but any position that has unique qualifications must follow a different process. Unfortunately, in our attempts to simplify hiring processes, we design simple processes that are supposed to fit all situations. Not having the right process for each hiring scenario is another source of waste, because it often leads to hiring the wrong person for the job.
This issue can be solved by creating two or three hiring processes. The decision points included with these processes eliminate the need for prescreening processes where sufficient HR knowledge is not available. The compensation process will also be modified to include the market rate for similar roles and adjust the budget for the role. This ensures that a properly qualified candidate is found, rather than watering down the job description to justify a lower compensation rate. Businesses are a complicated set of coordinated processes, and the hiring processes must be designed to support these processes. In order to accommodate these needs, a strategic hiring process must be followed.
Non-Wasteful Hiring: Strategic Hiring
Good hiring practices start with a sound strategy and require some work, both prior to interviewing candidates and after hiring the best ones. Any experienced HR professional would likely know the work that is necessary, but unfortunately many lack the knowledge or resources to follow the process every time. This is a waste of the opportunity to capitalize on the talent of your people in HR and new recruits. Figure 5-2 shows the steps necessary for effective hiring. We describe each of these steps in more detail in the following sections.
Figure 5-2. Effective Hiring Steps
The key to creating non-wasteful hiring practices is to make sure that the processes fit the exact need. We wrote this section intended for skilled positions. Obviously, there are many unskilled positions in firms that can be filled with identical processes and likely handled through HR. However, for the skilled positions, the persons who understand those skills best must take the lead in the hiring process. Any attempt to do this in a one-size-fits-all, non-strategic manner will likely create waste.
Note Attempting to cram the hiring process into a one-size-fits-all approach, so that HR can that the lead, will likely create waste. Hiring should not be taken lightly and should be handled by those who best understand the needs of the position.
Many times, organizations skip the crucial first step of needs assessment. When a company decides to fill a position, there are a few key questions that the leaders must ask every time:
· Why is the position necessary? As simple as this question is, we find that leaders sometimes add people to fix problems caused by poor processes or lack of sufficient resources in other areas of the organization, such as up-to-date information technology. You must perform productivity analyses of current employees. By forcing yourself to answer this question, you may avoid hiring someone who is not necessary and, therefore, avoid waste.
· What gap does this job fill? Sometimes we hire to replace people who have moved on to another job. This is a great time to evaluate what work is lost by their departure and whether that work is necessary. Whether this is a new position or a replacement, it is a good time to upgrade or downgrade the role to fit your specific needs. Business, market, and industry needs change rapidly and employee skills and resources should change to meet those needs.
Note Just as businesses change, so does the need for positions. When positions are vacated, you should first analyze the need to replace the position. It might need to be replaced, but with a different type of job.
· How long will it take the new employee to be effective? If hiring a new employee is a solution to a specific need, you should have realistic expectations about how long it will take for the new hire to add value. Without realistic expectations, you are likely to be disappointed. If the company needs are quick and short term, you should perhaps consider outsourcing.
The job analysis portion of the hiring process is important because too often we start a job description with template language such as, “candidates should have a bachelor’s degree and should have 3-5 years of experience in a similar industry.” These criteria might not be what is actually necessary. Sometimes these are valid criteria, but what about fresh perspectives? What are the actual job duties? Do you need industry experience to do sales order entry or even engineering, or do you need the skills to do those jobs regardless of the industry experience? As a hiring manager, you need to know the answers to these questions.
If you are hiring a business analyst, for example, you may start by looking at a current job description for this title within the company. If one does not exist, maybe you do some research on what the typical duties of a business analyst are so that you can create a job description. If you know you need the position, why do you need the position? What duties do you need performed? You do not want to fall into the common mistake of finding existing job descriptions online. This is very typically what HR does. This act drives you to write a generic job description that does not meet your specific needs. You may also eliminate the best candidate through criteria that is not necessary for the role. HR should have minimal input in these steps. They do not do the job you are seeking. They do not even directly manage the job, so their knowledge is minimal.
Once you determine the correct characteristics for the job, you’ll know where to look for these candidates and how to attract them. You wouldn’t look for a seasoned engineer with a variety of work in her design portfolio on a college campus, for instance, so why would you assume a newspaper ad or a posting on an online job board will bring you the right candidate?
Attract Top Candidates
The method that you use to attract candidates will depend on the job analysis and requirements. There is not much specific to say here, other than you need to make sure that you understand the needs of your potential candidates. Needs can come from many places, so once you have the job description, create a profile of your ideal candidate. Needs might include flexible hours, autonomy, opportunities for professional development, or variability in tasks. The candidate’s personal and professional needs play a part in identifying them. There should be transparency about the job during the entire process. If you, as a hiring manager, know the person can work flextime or at home, as long as they work 40 hours a week, be sure to communicate that. It’s important for working parent to know.
In this part of the hiring process, HR’s input should be to help the hiring manager and the potential employees. Many times, this process becomes more difficult because HR has certain forms that need filled out and certain places where ads need to be posted, such as to fulfill affirmative action requirements. Typically, no one in the company knows the laws better than the HR department. Thus, they can be a tremendous source of knowledge. Be sure the laws are being followed, but also make sure not to overcomplicate the process at this point.
Select the Best Recruits
Companies use many methods to select recruits. Every company uses interviews as a method to evaluate potential recruits, and they may utilize other tools such as testing, social networking reviews, or reference checks. The interview process is probably the most unscientific of all of these, with the possible exception of reference checks. There are resources available to prepare interviewees to give favorable responses to the standard interview questions like, “What is your greatest weakness?” or “Tell me about when you have overcome a difficult situation at work?” Many times there are interview forms to fill out as a record to support that the interview was fair and there were good reasons to hire or not hire. Of course, there are limits to what you can ask because of potential discrimination issues, so most personal questions are off limits. The reality is that the only value in an interview is the ability to get an idea of the person’s personality and how well the person would fit into the team. The rest of the interview process creates waste. You may weed out the very poorly prepared candidates with the interview process, but any person who has taken the time to prepare and has a decent EQ (a measure of emotional intelligence) will do fine in the interview.
When you conduct an interview, it is more instinctual than anything. You are looking for basic aptitude to perform the work. You are also looking for attitude and personality to see how well the person will work and fit into the team. Avoid the typical interview questions where you can and try to make the interview more conversational. This allows the candidate to relax some as well as overcome any coaching or preparation that a candidate may have had.
Note Interview for fit and personality. Let the other selection tools help you measure other qualifications.
Personality tests can measure decisiveness, energy, enthusiasm, results orientation, maturity, assertiveness, sensitivity, openness, tough-mindedness, emotional intensity, intuition, recognition needs, motivational needs, sensitivity, assertiveness, and even ability to trust and likelihood of deviant behaviors. IQ tests measure intelligence. Industry-specific knowledge tests can reveal how much the candidate knows about the industry. Many companies use drug or nicotine tests to avoid potential liability or ensure lower insurance costs. These are just a few of the tests available, but many of these are necessary only when you have a tight candidate pool or you have questions about specific candidates that you would like to hire. Many HR departments standardize these tests for all new hires without regard to potential weaknesses in a specific candidate. This can be a large waste of resources.
Note Most personality tests are basically the same. Save money by using free tests.
Many of the tests are expensive and not that helpful, and are just moneymaking ventures for the companies that create them. The better, more psychologically sound tests can frequently be found for free in academic literature. A brief search through Google Scholar will provide many of the most accepted psychological tests. These tests can easily be placed on a site like Qualtrics or Survey Monkey at very little cost. An intern or someone in HR could then cull the data to see if it matches desired personality characteristics. If you don’t feel comfortable doing this, pay an academic researcher to find the right tests for you, set up the survey, and set up an easy-to-use program to manage the incoming data. This one-time investment will be significantly cheaper than paying an outside company anywhere from $75 to even $500 per candidate!
Note Pay a one-time investment to set up candidate testing. Never pay a reoccurring per-candidate fee. EQ tests (discussed next) are the most important and predictive.
Current research shows that the best test to give to new hire is an emotional intelligence test.1 Emotional intelligence (EQ) accounts for about 75 percent of the variance in candidates’ success rates.2 So, if you are going to spend your money on any new-hire test, we recommend a good, sound EQ test. Then, remember that the differences among all the other tests are just based upon who patented a particular test. Figure 5-3 shows many of the typical pre-hire personality tests. No matter which one you use, they all end up creating the same four quadrants, which originated, believe it or not, from Freud and other psychologists. There is basically no difference among the tests in their ability to predict the success of new hires.
Figure 5-3. Similiarities Among Personality Tests
In addition to the waste of paying for these tests and analyzing them, savvy candidates may be able to fake the results of some of these tests. There is also the question of whether positive scores on these tests actually result in higher performing employees. In many positions, with some basic intelligence as a foundation, a loyal and hardworking employee can be trained to do whatever is necessary.
Another area where HR can help managers is by reviewing candidates’ social networking web pages. Frequently, some less desirable candidates forget to clean up their online presence and leave clues about their poor decision making. This says a lot about a candidate’s EQ. There have even been some studies to show that the more a person engaged in social networking, the more narcissistic they are.3 Whether or not this is true, people blindly leave tons of details about themselves online.
Another source of waste are the candidate’s references. Reference checks are typically unreliable because potential employees will give you the best references that they have. Everyone can find at least three people who will say good things about them. Checking with the prior employer will get you a canned response confirming that the candidate worked at the company, but unless the HR department violates standard policy, that is likely all that you will get. We feel that for this reason, reference checks are a waste. So, if you decide to use reference checks, if the candidate will allow, ask for 10-20 references and then tell the candidate that you will call three of those references at random. Many companies have completely abandoned traditional reference checking now in favor of reviewing LinkedIn recommendations. Just like with reference checks, these are also biased, but at least there is very little time investment in obtaining them.
If you do continue to use reference checks, and if you don’t have a concern about a specific candidate, it is best to keep it simple and look at the qualifications and the results of the interview. Use a tool to help you figure out the best candidate without personal bias entering into the decision. The specific tool that you use will depend upon what you like, but one example is the qualification matrix shown in Figure 5-4. Each critical qualification is weighted on its importance and then each candidate is rated using a scale, such as 0, 1, 5, and 9, or 0, 1, 3, and 9. Although the qualification matrix is not a perfect method, if you solicit feedback from others who are interviewing the candidates, you will get a good idea of the best candidate for the job.
Figure 5-4. Qualification Matrix
Note Reference checks are usually wasteful. There are better and more analytical ways to judge a candidate.
Conduct a Gap Assessment
Once you have identified the best candidate, you should do a gap assessment prior to the start date. It is important to do this prior to the start date so that you have a plan to fill those gaps in the first few months when the new hire starts.
To perform this gap assessment, you should go back to the tool that you used to evaluate all of the candidates. It is rare to find a person who meets all of the qualifications that you want to have for the job, so there will be gaps, even with the best hire. If you use the qualification matrix example in Figure 5-4, candidate 4 met all of the qualifications except the one with the heaviest weight. Strictly looking at the numbers, you would select candidate 4, but you may have also selected candidate 1 because of the importance of qualification 3. In either case, there is a gap to be filled. You identified the gaps in the selection process so now is the time to come up with an action plan to fill those gaps. The goal is to have a fully productive employee within six months. That’s where training comes in.
Train to Fill the Gaps
Not all gaps can be filled with training, but many can. Gaps that cannot be filled with training are filled by giving the employee additional experiences. For instance, in my own personal transition into the hospital environment from manufacturing, I possessed the process improvement and high reliability skills but was lacking industry knowledge. In my first few weeks, I lined up time in various clinical and support areas to gain some firsthand knowledge of the operations and the challenges that each area faces. Although this is not a substitute for experience, it was a great opportunity to see current operations from a fresh perspective and identify opportunities for improvement.
If the gaps can be filled through training, make sure that the training is designed to give the new employee a way to demonstrate the new knowledge in the work environment. It may be necessary to repeat the training periodically to ensure relevancy and the ability to maintain the information. For example, in a sales career, it is necessary to train reps regularly in the newest products or services as well as in current sales techniques.
Motivation: Why It’s Wasteful and How to Do It Right
According to a recent Gallup survey, 70 percent of U.S. workers are “not engaged” or “actively disengaged” at work.4 This equates to an estimated $450 to $550 billion loss of productivity.5 “Organizations with an average of 9.3 engaged employees for every actively disengaged employee in 2010-2011 experienced 147 percent higher earnings per share (EPS) compared with their competition in 2011-2012.”6 In fact, the Gallup report also showed the effects of negative employee engagement. If you refer to Figure 5-5, you'll see that disengaged employees have major effects on companies. Unfortunately, there are more negative effects of disengaged employees than positive effects of engaged employees.
Figure 5-5. The Effects of Engagement on Company Outcomes. (Source: Gallup, “State of the American Workplace,” 2013, http://www.gallup.com/file/strategicconsulting/163007/State%20of%20the%20American%20Workplace%20Report%202013.pdf.)
Given these facts, a crucial job of HR should be to increase engagement and motivation. Right? Not really. Again, as with hiring, much waste is created by HR trying to control the motivation and evaluation processes. The bulk of the motivation should come from the employee’s direct supervisor or department. Likewise, every person is motivated differently. If you research reward systems, you will find ideas from employee engagement techniques to compensation techniques. Not all of these techniques will motivate all of your employees. Some can be quite effective though, such as building trust with your employees by setting clear expectations and then allowing them the autonomy to work on those priorities. Unfortunately, many HR professionals and managers tend to utilize one-size-fits-all techniques, which are not so effective.
We both have boxes full of plaques and certificates marking achievements that were recognized by current and former employers. These items did not motivate either of us to do our job or to work harder, likely because we are internally motivated. In fact, there have been times that we were upset by the wasted paper, wood, or plastic that went into the award and the wasted money that was used to fund it. There can be some degree of demotivation to the award in that employees might think, “Why don’t they care what would make me happy?”
Note Rewards should be hard to obtain and used only for extraordinary performances. Also, only use them for externally driven people.
Rewards can be effective if they are tied to performance that exceeds the norm. When they are expected as part of doing a normal job, rewards lose their value. Also, the person must have a personality that appreciates receiving awards. Typically, the only people who appreciate these types of rewards are those who have external need for recognition. (If you have paid money for personality testing at hire, you should have this information at your disposal.) Many people would rather have a bonus or extra time off work. If a plaque costs $250, you could likely save money by giving your employee Friday afternoon off or making Friday work-from-home day. This will then enhance productivity in the long term, thus boosting profits.
People spend as much time at work as they do at home, so companies obviously have concluded that activities to build the relationships within their teams are helpful. Scheduled volunteer activities, baseball outings, or retreats are just a few examples of team-building opportunities. The reality that these leaders miss is that work relationships are shallow and based largely on the need to get along with people, whether or not you actually like working with them.
Teams are not built by going into the woods and tackling an obstacle course or going to the bar after conducting a strategy retreat. Typically, team-building exercises have a physical nature to them. These can actually have a negative effect on employees who feel embarrassed by the inability to perform. Additionally, if the event happens over the weekend or during typically non-working hours, employees resent the time away from their personal lives.
Most importantly, if you think you need team building, you need to look at why you have a bad team. No team-building exercise is going to overcome deep, underlying problems within organizations. Teams are built through effective work, where the team members challenge each other and work together toward a common goal. Trust and respect must be present in all situations, especially from management. The relationships built in this way last longer and are less superficial than those developed through a “trust fall.”
Note If you think you need team building, stop. Figure out why you have issues first. Most often the issues are a result of bad management.
At least twice a year we are invited to some work-related celebration. We attend these celebrations out of obligation and leave as soon as we can without making our distaste for the activity obvious. This may seem to be a pessimistic view, but if you watch the interactions between people in these banquets, you can see that the majority of attendees are there for the same reason, to look good. The concept of pizza and meetings is not new to workers in any industry. If you meet certain targets set by the organization, everyone will enjoy a cheap pizza party to celebrate the achievement. If you fail to meet the targets, you will be chastised and there will be no party. Do these activities really motivate people? Or more likely, are people motivated by their internal values to do their best?
Again, find out will motivate your team. Banquets are extraordinarily expensive for the company and the employees. Costs can quickly exceed $10,000 on space and catering alone. Employees frequently need new attire and childcare. Have you taken the time to find out if employees are really motivated by these events? Your employees with externally driven personalities may appreciate these events. Likewise, those earlier in their careers, who have not become jaded by such events, might like them. However, most people are demotivated by celebrations and see them as an intrusion of time and money.
Picnics and Holiday Dinners
Along the same lines as these celebrations are the annual parties that companies throw for employees. Company picnics are common. A picnic may occur at the company site with free food and some entertainment. Maybe a facility tour for the family is available. In the few times that I have seen company picnics cancelled due to financial distress, HR managers have been concerned about the negative effect on the employees. What I have found is that employees are more concerned about having their jobs than whether or not they will be served a hotdog and some chips while playing corn hole with co-workers.
Additionally, the infamous holiday dinners provide no real value to employees. I have seen these a few times as a way to celebrate the holidays with employees. Although the free food is nice, how is this supposed to motivate an employee? What are you trying to motivate him to do? Eat? Not to mention the horrible statistic that states that 44 percent of males said they’ve had an affair with a co-worker at a holiday office party at least once in their lives.7 Whether you believe the validity of these frequently quoted stats or not, employers should certainly do everything they can to avoid potential lawsuits and chaos!
Note Don’t waste your precious resources on banquets, parties, and events that employees feel obligated to attend.
Bonuses can be a great way to motivate employees. In fact, for sales people who earn a good portion of their compensation from bonuses or commission, it is a great motivator. When the bonus is individualized and ties directly to their work, it is very effective.
Organization-wide bonus programs don’t motivate employees unless the company is small. We have seen many companies with profit-sharing bonuses where a percentage of all profits (regardless of the size) are split equally between all employees. Due to the small size, the individual employees affect the company profitability, so the bonus program motivates them to work hard to meet profitability goals. In larger organizations, the entitlement bonuses have the opposite effect. With organization-wide goals that seem out of reach and hard for the individual to affect, the employees become demotivated and just take the bonus if they are lucky to get one.
An entitlement bonus is the annual bonus that may tie to a few metrics but is normally paid out to employees as a reward. If an entitlement bonus is put in place and then taken away, you take an unmotivated employee who gets a bonus and turn him into an angry employee with no bonus.
In a large organization, bonuses should be split based upon department-specific objectives so that the individual can be motivated by the bonus program. Employees should know exactly how to accomplish the given metric and receive updates about their progress throughout the year. In fact, smaller quarterly or monthly bonuses are more motivating than one big, year-end bonus.
Wage increases can be an effective motivator if the increase is based upon performance. In the attempt to be fair and equitable, wage increases often take a socialist route, where the highest available increase is some small percentage, like 2-3 percent, which is based upon the achievement of some individual goals set earlier in the year. If the manager wants to provide a larger increase, she must promote the employee to a new position that pays a higher rate rather than just give a larger raise. Similarly, if the employee gets to the top of the compensation range for the current position, any raise would require a promotion.
These policies create an environment in which employees don’t feel that hard work is related to a large increase, so they are motivated to look for higher-paid positions rather than focus on doing good work. In my career, I have received as large as 20 percent increases in a single year, entirely based upon performance. With this potential, any employee who is financially motivated would be motivated to work hard. This also encourages an employee to stay with the company that is appreciating their work.
Employee of the Month
Does having your picture on the wall or a special parking spot motivate you? This is one of those laughable motivation techniques that is still prevalent. It is so laughable that a movie was created to show how ridiculous the practice is. At best this strategy creates unhealthy internal competition when the goal should be to improve the overall team performance. This technique is almost always wasteful and demotivating.
Note Employee-of-the-month awards are wasteful.
Motivating Without Waste
Given that so many of these techniques are wasteful, why do so many companies use them? The answer is simple. Because it is what they have always done. They’ve always had banquets, they’ve always had a Christmas party, and they’ve always had an employee of the month. Very little thought typically goes into the whys behind it. Employee satisfaction and engagement in America is horrible. Satisfied employees are better employees. So, in order to achieve these outcomes you must take a fresh approach to your motivational practices.
Know Your Employees
It may sound like a no-brainer, but it is so frequently forgotten—every employee is different! Numerous studies show that employees of smaller companies are happier. This is likely because the bigger the company, the more standard the policies, and the bigger the company, the easier it is to get lost in the shuffle.
Managers must sit down with their employees on a regular basis and ask them directly what they want to make them happier in their jobs. Take the approach of the sky’s the limit. You have to let employees know that you emphasize with their needs and wants. They may ask for things that are financially or otherwise impossible, but that doesn’t matter yet. After you have shown them that their opinion matters, you can negotiate for something that works. Then, you must follow up to make sure their satisfaction is increasing.
Also, you must follow up as needs change. An employee’s needs in their 20s are a lot different from their needs in their late 30s, with kids and family obligations. Likewise, the needs and desires of empty nesters will again be different. Different generations are motivated by different things. Different personality types are motivated by different things. Different positions in different industries are motivated by different things. Standard HR policies generally create more disengagement than engagement.
Note Every manager should know exactly what each employee wants to be happy.
Have Great Management
Numerous studies show that the number one demotivator is a bad boss. This might be a really tough realization, if it is your employees who are unproductive, but it is hard to argue with the multitude of studies. Employees must trust their managers. They must be able to trust that their manager has their best interests in mind.
Happy employees also feel that their managers are competent. It is nearly impossible to be motivated to work hard when you know your manager doesn’t know what he is doing or talking about. This does not mean that you have to know everything to be a good manager. Employees will typically love it when a manager says, “I don’t know how to handle this situation. That’s why I hired you. You are smart and capable.”
Manage Positively, Not Negatively
Through years of child development studies and workforce studies, we’ve learned an important thing: reward the good, ignore the bad. Instead, we tend to ignore the good and punish, or “coach” the bad. Rewards should be tied to positive accomplishments. If an employee has a weakness in an area, do not ask them to do that thing. You are never going to have the perfect employee. Instead, you should find employees that possess different skills. Then, nurture and encourage each employee to develop the skills that they are good at.
Healthy Employees Are Happier
Numerous studies have shown the impact of health on engagement. This gets worse when the employee feels that the employer does not support their needs. Do whatever is needed to help employees be healthy. Encourage sick employees to stay home. Encourage time off for doctor’s appointments. Give time off to go to the gym. Companies talk out of both sides of their mouths on this topic. They say that you should stay home if you are sick, but if you are sick too often, you get fired. They say they want you healthy, but they really want you at work. Implement policies that reward healthy choices. This is another reason not to have banquets, pizza parties, and donuts in meetings!
We discuss better motivators throughout the next sections. The key is that the motivators of the past are not only ineffective, but are many times demotivating.
The process of improving productivity is an operational issue that managers should address. HR professionals may be involved in pay-for-performance or piece-work productivity compensation. We discuss productivity in more detail in Chapter 8. Here, we look at HR tools that can be used to encourage productivity.
Education and Training
Education and training opportunities are undervalued in business today. This is considered an extraneous expense that is often cut as businesses look for ways to meet their budgetary needs. I once worked with a leader who had the opposite opinion. He preferred to hire people who wanted to get their education as direct labor workers. The theory that he had was that those employees may be more motivated to succeed due to longer-term career goals, they may be easier to train, and they may be promotable. Even though there is an expense related to subsidizing the education of these workers, they would be more promotable or exportable. Promotable employees build the internal talent of the company, and at a lower cost than finding experienced workers externally. Exportable employees are also good, because the next group of workers come in at entry level wages, which helps keep direct labor costs lower.
There is a famous story of a CFO asking a CEO whether the company could afford to train employees, only to have those trained employees leave the organization. The CEO asked the CFO if the company could afford not to train them. Companies that choose not to offer competitive educational opportunities to their employees fail to motivate good employees to stay. The reality is that there are always employees who choose to leave after being educated. Some companies minimize this by requiring employees to pass a probationary period prior to being eligible for educational assistance and then requiring employees to repay any expenses incurred if they do not stay at the company for some period of time after the education is completed. For a person who is intelligent and motivated without the resources to go to school full time, this is a good option. For companies, not only do you get an intelligent and motivated employee, you probably will have that employee for four-eight years, depending upon the amount of education that they get. Who loses in this deal?
Some employees have reduced what they will pay for employee education rather than eliminating it. Although this is a better option than eliminating the benefit, it is still short-sighted. In a competitive environment, the benefits package can have a great deal of influence over the decision to work for your company.
Note Invest in your people!
On-the-job training is less contested than educational assistance programs. Typically, specific training is targeted more at the work being done in that company rather than toward a degree. Even in these situations, you may hesitate to provide training due to the fear of losing employees. Don’t. You must have a competent workforce to succeed.
As mentioned, employee evaluations can waste time and energy without having productive outcomes. Over the years, I have talked with other managers and leaders who struggle with developing measurable goals for all of their employees, performing the measurements, and then using the measurements for the employee evaluations. There is no point in creating measurements so that you can check the box for HR. If the employees perform measurable activities that are important to you, measure those activities for the evaluation. If they don’t, don’t force a measurement onto your employees.
Companies have forgotten that the evaluation process is for the benefit of the employee rather than for the benefit of the company. The sad reality is that many employees get feedback only once a year when these evaluations are performed. Competent managers talk with employees frequently and give feedback in the moment so that positive behavior is repeated and negative behavior is avoided. In such an environment, the employee knows what to expect during their evaluation because they’ve been hearing it all year.
Now keep in mind that we believe in structured processes with measurable outcomes. This is different from evaluating people. We should not force our methods to evaluate employees to be like those that we use for equipment or processes. The evaluation form should be very simple. First, there should be a section to discuss whether all of the employee’s skills are relevant. This is so that the employee can benefit from feedback on where she can improve. Next, there should be a section about interaction with others. This is not an opportunity to be punitive; there are other processes for this. This is the opportunity to discuss areas for improvement and develop strategies to make those improvements. There should also be a section about the efficiency and effectiveness of the work performed. All employees need to be competent. This is the employee’s opportunity to understand where they need to improve. You may choose to talk about initiative taken or some other areas important to your business. The total number of sections on the evaluation form should be fewer than six. There should be a rating system on some kind of Likert scale and room for comments.
The outcome of the evaluation is a document that the employee can take with her, and that contains her goals and strategies for development over the next year. This document should not be used to create the compensation for the employee. The frequent use of evaluations to design compensation make the evaluation ineffective. Management is either overcritical or not critical enough because of this fact. The overcritical may not want to give high raises so they may be critical to avoid this. The under-critical may not want the employee compensation to be affected so they may sugar-coat the evaluation. The employee may feel more defensive because of the implication that the evaluation affects compensation. All of this leads to evaluations that do not benefit the employee; instead, it’s just a process that you must go through every year.
Note Employee evaluations are for the benefit of the employees, not the business.
Employee Surveys and Suggestions
Large companies tend to survey their employees as a way to better understand what drives employee behaviors. The idea to survey employees and have employee suggestion programs is a good one. One fundamental of a culture of continuous improvement is the need to engage the process experts in improving their own processes. The process experts are the employees. In a smaller company, the surveys may be less formal. Managers build good working relationships with their workers so that opinions and ideals can be shared freely. This should also happen in larger organizations, but unfortunately a culture of fear built by a structured employee evaluation program designed by HR professionals often prohibits employees from speaking freely.
As bad as it is not to solicit employee feedback at all, it is even worse not to act on it when you do solicit it. Not listening to employee feedback is a great demotivator. This does not mean that all employee ideas are good ones or that they should all be implemented. All employee ideas should be taken seriously and addressed, either by using them or by explaining why you are not using them.
In the days before computers, managers needed secretaries to perform tasks that they were not able to do in a workday, such as type a document multiple times until it was perfect. Now there is less of a reason for administrative roles. These roles include assistants to answer phones, file documents, manage schedules, and create documents. Don’t get us wrong. Most of those people that we know who do this work are very efficient and effective. The issue is not the quality of or need for the work that administrative assistants do.
The waste in this area stems from the fact that office processes are so inefficient that this work is necessary. In order to be effective, a person can focus on only a few projects at a time while managing their daily tasks. With this limited scope, an assistant is not necessary. We have worked in multiple companies where the need for administrative assistants was phased out. In one very large company, the CEO and CFO manage their own schedules, file their own documents, answer their own phones, and create their own work schedules. Truly great administrative assistants can be retrained to do other jobs. This way, they begin to add value and they are typically happier because they are building their resume with new skills.
Paid Time Off
One area where companies can save money as well as motivate employees is in the paid time off. Some industries have “use it or lose it” paid time off policies, where each year, the employee time off is reset. Typically, companies try to minimize the paid time off for employees and do a good job having policies to control this. The waste comes from the administration of the time off.
The most effective paid time off policy that I have seen was based upon managerial control. Managers were responsible for monitoring and administering time off for each employee. There was no fancy system to track each person’s time off. Sometimes, in the name of efficiency, we add work that makes us more inefficient. By centralizing control of paid time off, you take the power and decision-making away from management. You also take away management accountability, which produces weaker managers. Employee management is the job of managers. HR is there to help with issues.
Flextime and Working from Home
Many companies are embracing flexible work options. In fact, according to Gallup, employees with more flextime report a 44 percent higher well-being.8 Flextime allows workers to set their own schedules. Many companies encourage workers to work from home. Work-from-home workers work longer (46 versus 42 hours) and are slightly more engaged (32 percent) than employees who work on-site (28 percent).9
I worked with a consulting group whose employees spent part of their time working at home with a video link to the company. I could see that they were working, yet they avoided travel costs and the waste that happens from employee interpersonal interaction. My office phone rings to my computer and cell phone. I can take a work phone call anywhere I can get an Internet connection. I can make a presentation and even give control of my computer to someone around the world through the use of collaboration software. I have a faster Internet connection and better computer hardware at home than I have in my office. Most work-at-home people have a similar situation.
Unfortunately, there is a lack of trust in many organizations that prohibits people from working at home. Likewise, there is such an ingrained culture of thinking people need to be at the office, that it is hard to see the work world in other ways. Also, as noted in Chapter 2, it is hard for people to realize that they don’t need all the meetings they have.
Both of us get more work done at home than we do at work from a sheer productivity standpoint. The benefit of the office is the interaction with co-workers on team projects. Each company has its own individual needs. Obviously, a manufacturing line worker or a mechanic cannot work remotely. Companies should evaluate the work of each person and leverage technology to utilize the ability to work at home. As long as there are productivity expectations and measurement methods in place, this can allow companies to lower facility, utility, and maintenance costs, while increasing productivity and satisfaction.
There are many times your company does not need a full-time employee, but needs a consultant or part-time employee who is available two to three days a week. This schedule works well for many talented workers who simply cannot work nine-to-five jobs for various reasons. It also minimizes your company’s fixed labor expense.
Many accountants would argue that labor is a variable expense, but those of us who have managed a workforce understand that it is difficult to hire good people, so people are not a variable expense. When evaluating the use of a contingent workforce or temporary workers, you need to understand the role you are trying to fill. Companies are guilty of trying to maintain a large number of workers who work on a part-time basis in order to avoid employee benefit expenses. As a leader, you need to be careful not to do this. Forcing workers who want or need full-time employment to fill part-time roles only hurts you by giving the workers a reason to leave. Temporary workforces also require more supervision, training, and handoffs. The analysis that I did a few years ago that looked at employee productivity and quality based upon employment status showed with a high degree of confidence that temporary workers produced a lower-quality result with less efficiency than full-time employees.
A contingent workforce needs to benefit the employee and the employer. I have seen this work where a talented person with great experience worked 30 hours a week as a contingent worker because she was dedicated to being a mom. Her work was some of the best marketing work that I have seen and she maintained her family needs. The company benefited from her experience. She benefited from the flexibility.
When I worked at Core Systems, LLC at the turn of the 21st Century, there were a lot of families who worked there. Core Systems did not pay hourly workers a high wage. As a matter of fact, a person could make more money working at McDonald’s than at Core Systems. What I found out was that many of the workers worked there for the benefits. The health benefits were cheap in comparison to other companies and the network was flexible. This experience taught me something about people’s motivations. Managers assume that employee decisions are based upon salary, when in reality each person has his own needs. The topic of employee benefits includes much of what we have discussed in this chapter. In addition to these benefits, employee benefits also include investment and ownership options, health plans, and many other creative benefits offered by companies that understand that benefit plans can be a competitive advantage.
These are competitive advantages that differentiate your company from others and attract top talent. Benefit programs can be a disadvantage when they are cut and are not competitive. Good talent can be lost because the right benefits are not available. This is an important concept to consider, given the current state of the healthcare system and the implementation of the affordable care act. With medical costs increasing at a greater rate than inflation, companies struggle to minimize costs. Before you do this, make sure that you understand your employees’ motivations. You might just lose good employees that make you more money than their medical expenses because you are revising your benefit options. Also, realize that good healthcare enables you to have healthier employees, which again increases satisfaction and productivity.
HR metrics are many of the same metrics used by managers. Motivation methods need to be analyzed for a return on investment. As discussed earlier, bonus programs and wage increases should not be entitlement programs or ways to trick employees into thinking they are earning more money when, in fact, their wealth is dwindling.
There should be metrics that determine where your company stands in relationship to competition for the same labor. You need to consider the roles within your company and who competes for your skilled labor. In jobs such as information technology, sales, marketing, quality control, supply chain management, or others, the industry skills are less important than the technical skills. You are competing with the whole region in multiple industries for these workers. The analysis of compensation and benefits programs needs to extend beyond your own industry.
Productivity is the amount of something produced using labor resources. The product or service will vary depending on the industry, but the productivity concept does not vary. It is measured as paid hours per unit or as worked hours per unit. The unit may be a service or product, but is something that can be measured and understood.
Managers and accountants often argue about productivity. Managers want to meet 100 percent productivity, and accountants want to count only value-added activity. The percent productivity doesn’t really matter. What matters is that there is a consistent measurement method in place, goals for improvement, and progress toward those goals. The actual productivity measure matters only when there is a benchmarked comparison that you must make.
Note You must track, measure, and improve the productivity of all employees. If someone is not adding value, why are they doing their job?
Benefits and Compensation
Part of HR’s goals is to minimize cost and maximize talent. This is done in various ways. One method is to get comparative data on job descriptions and measure where you are in the range. You create a normal distribution curve and try to hire people below the median value for that job description and maintain overall wages around the media. Figure 5-6 shows how this curve may look.
Figure 5-6. Normal Salary Distribution for a Job Description
Another metric used to measure compensation is benefit cost per employee. The point behind this metric is to minimize this expense while maintaining a benefits package that will make your company attractive to potential employees. This metric helps you identify escalating benefits costs and should trigger some action to look for ways to reduce these costs.
As we stated, we are not fans of these metrics. Never try to normalize your employees’ salaries or benefits so that you fit a standard average. If you are paying significantly above average but have even better performance, who cares? You have found a formula that works for you!
As discussed earlier in this chapter, employee satisfaction is hard to improve. It is also hard to measure. Companies may use a survey tool like the Likert scale to measure employee satisfaction, but these measures are only as good as the trust the employees have in the confidentiality of the survey. If employees are truly unsatisfied then they will likely not trust the validity of the survey results, even when the survey is conducted by a third party. However, we strongly encourage you to track employee satisfaction on a regular basis. There are better measures of employee satisfaction.
Employee turnover is a good measure of employee satisfaction, because the ultimate measure is whether or not the employees stay. What is the right employee turnover percentage? This depends upon what you want for your company. Some amount of turnover is healthy. In a low wage job where training costs are relatively low and sufficient controls are in place to ensure quality, a turnover percentage of 25 to 30 percent may be okay, as long as the money saved by the low wages from new employees exceeds the cost to train the new employees and there is a sufficient workforce pool in the area. In a skilled labor job where training and risk of quality defects are an issue, a much lower turnover percentage would be acceptable. Here’s one formula for calculating employee turnover:
We caution you not to rely too heavily on turnover benchmarks. The job pool in your area is not likely to be the same as the benchmarking groups you are looking at. It is also a reasonable assumption that if you aim for average turnover along with average wages, you will have average performance.
Turnover can be quantified in monetary terms as well as a percentage of the workforce:
The final measure of employee satisfaction that every company should measure is the absence rate. Although a reasonable absence rate is to be expected due to health and family issues, an overall absence rate for the company or a department indicates how satisfied the employees are. Happy employees come to work.
If you monitor all of these metrics for employee satisfaction, you can identify if you have opportunities to improve.
Workers’ compensation is not just a cost of business that you try to minimize. It is a measure of both employee satisfaction and how well your internal safety programs are designed. If you have high or increasing workers’ compensation costs, you need to evaluate your training and safety programs for effectiveness. If you find that your processes are well designed then you may have an employee engagement issue.
Benchmarking can be an effective way to identify poor performance and workers’ comp issues. Your goal should be a workers’ comp per-employee cost of $0.
Recruitment is a key function of all HR departments. It is a vital role because the quality of your workers will often define the quality of your company. Because having the right people in key roles is essential to success, you have to be good at filling the right positions with the right people in a short time. The first way to analyze the effectiveness of your recruitment activities is to look at the number of good applicants you get from them. If the applicants you get don’t get hired, your recruitment source is ineffective. To have an efficient and effective hiring process, you need to have a high yield percentage.
A long recruitment process is frustrating to managers and to high-performing applicants alike. The time it takes to fill the positions is a key metric for monitoring how well your recruiting process works.
Notice that the recruiting metrics don’t highlight expenses related to the new hire. Recruiting personnel often get hung up on reducing the cost to hire employees and minimizing the total compensation. It is much more important to ensure that you are getting the positions filled with the right skills in a timely manner than it is to minimize the costs associated with hiring.
Human resource management can be a source of value or waste within any organization. In order to maximize the value while eliminating the waste, make sure that all efforts are in conjunction with management priorities and not due to bureaucracy. Efforts of human resource management need to be focused on strategies that provide the organization and employees value. Hiring should be based on the company’s needs. Employees should be motivated through techniques that truly motivate performance instead of cliché methods such as picnics and holiday dinners. Human resources employees must be fully engaged in business operations as a valued advisor to management and an advocate for employees. If HR works on improving these areas, there will be no need for a chapter about HR wastes.
1 Orr, Linda, “Sales Force Productivity: Definition, Measurement, and Determinants,” 2014, working paper.
2 Hunter, J. E., & Hunter, R. F., “Validity and Utility of Alternative Predictors of Job Performance,” Psychological Bulletin, 1984, 76(1), p. 72–93.
3 Panek, Elliot T., Yioryos Nardis, and Sara Konrath, “Mirror or Megaphone?: How Relationships Between Narcissism and Social Networking Site Use Differ on Facebook and Twitter,” Computers in Human Behavior, 29(5), September 2013, p. 2004–2012.
4 Gallup, “State of the American Workplace,” 2013, http://www.gallup.com/file/strategicconsulting/163007/State%20of%20the%20American%20Workplace%20Report%202013.pdf.
7 Ruth Houston, “Shocking Statistics Reveal Link Between Office Christmas Parties and Infidelity,” The Examiner, December 15, 2011, http://www.examiner.com/article/shocking-statistics-reveal-link-between-office-christmas-parties-and-infidelity.
8 Gallup, “State of the American Workplace,” 2013, http://www.gallup.com/file/strategicconsulting/163007/State%20of%20the%20American%20Workplace%20Report%202013.pdf.