People are a unique resource. You have no direct control over their behavior, and you cannot manage them like physical or intellectual assets. Because of this, you must have a well-planned strategy in place to make your employees feel valued and respected. Recently, there has been a move to replace the term “human resources” with “human capital.” Neither name can substitute for a solid HR (or HC) strategy. If I feel like coal when you call me a “resource,” I’ll probably feel like a greenback if you call me “capital”—and if I feel like either when you use the term, you are doing something wrong. It is actions and appearances that count, not names. Your HR strategy must both appear to value me and actually value me. Good HR bears large similarities to customer service—and why should it not? After all, if you do your job well, your employees and their families and friends will be your most loyal customers.
As you contemplate outsourcing your human resources functions to an Administrative Services Organization, we want to give you some pointers to make your decision a success. HR outsourcing requires careful planning on your part—you still need to determine your compensation plan, performance appraisal methods, and discipline policies. An outsourcer will implement whatever you choose, but you should make the final decision on what exactly is implemented.
Your employees will only give you results when they feel valued—when they feel like people and not like mere assets, when they feel that their contribution is justly paid for. Your compensation plans and rewards systems must ensure that they feel valued and that their work is recognized. There are a myriad of theories about employee compensation and rewards. A complete overview of the subject would take dozens of blog posts like these. Here, we will only basic principles, along with the latest in compensation theory. We will focus on salary and leave the hot topic of medical and retirement benefits out because of time. A good compensation system needs to accomplish three things. It must:
- Attract quality employees who will give your business their best
- Incentivize employees to perform well once they are hired
- Encourage employees to stay with your business for the long term
During the last century, many different types of compensation schemes have been tried out in businesses across the nation and around the world. Each type has its strengths and weaknesses, and none of them work for every workforce. Your compensation plan must match:
- Your product or service (cars, computer chips, accounting reports, consulting work, etc.)
- The type of work your employees do (production, analysis, administration, etc.)
- The generational diversity of your organization (different generations value different types of compensation)
If your plan does not fit any of these elements well, it will probably fail to attract, incentivize, and encourage good employees to come, work, and stay. To illustrate this point, let’s contrast a high-profile industry of today with an industry that enjoyed similar renown 60 years ago. We’ll start with a Ford factory of 1950 or earlier in which employees are paid based on the number of cars they assemble. This compensation plan fits well for several reasons, including:
- It was a production-based job that lent itself well to an output-based compensation scheme.
- The job task required little creativity, which enabled employees to single-mindedly focus on speeding up the process without reducing product quality.
- The generation that worked in factories in the 1950s took great pride in their work. Ever fearful of another Depression, they were careful to give everything their best in order to keep their jobs.
Let’s now contrast this with the modern software firm. Many software firms use a compensation system where employees are simply paid—and in free time as well as money. They are given a loose schedule to adhere to and have lots of free time to tinker around. In some companies—such as Google—they are actually required to tinker around on non-directed projects for a certain amount of time every month. Google Chrome began as one of these individual employee projects. Such a system strikes many modern executives as somewhat anarchous, but it works well because:
- Freedom inspires creativity, which is absolutely critical in software production.
- Producing good software cannot be done on a tight schedule like assembling a car can. Strict deadlines and tough oversight tend to lead to buggy software that hurts the company’s image.
- The modern generation of employees values work-life balance above money, feeling that money is of no use if one does not have time to enjoy it.
In contrasting these two examples, we can see two critical things. First, today’s employees value different things from yesterday’s employees. Today’s workers want to spend their lives working at something they enjoy, while yesterday’s workers wanted to work hard at whatever job they could get and then enjoy a long, leisurely retirement. Second, today’s job tasks tend to require more custom work. While mass production was a common element in past jobs, today’s economy is made up mainly of individualized jobs with a lot of custom work that require a high degree of creativity. Much of our cars and other consumer products are made by robots—the factory worker of the 1950s in many cases is now the programmer of 2010. The average type of job in today’s economy requires a compensation plan very different from the average plan 50+ years ago.
Before leaving the subject of compensation, we should address the subject of bonuses. Bonuses are popular because they are taxed differently and because people like to receive huge amounts of money at once. However, they tend to be based on short-term performance, which can be a serious problem. Let’s simply ask ourselves the question: if we are granted a large salary bonus based on this year’s fiscal growth, and the best route to short-term growth will hurt our business five years from now, how tempted are we to take the short-term growth anyway? What if the bonus is for $5,000? What about $18,000? Now how about $40,000? Let’s say we’re an executive: $120,000? That is why more and more corporations are considering offering bonuses in the form of stock—stock is only valuable if long-term growth is achieved. Don’t use bonuses that encourage your employees to steal from tomorrow to make greater gains today.
To know how your employees are performing, you need performance appraisals. The first rule of these appraisals is to not conduct them only when something is wrong. If appraisals become associated with discipline or low productivity, they will become a latent fight every time you call one. You need to hold them regularly, even during good times. Second, you need to remember that you get what you measure. Whatever you choose to assess in a performance audit will become everyone’s focus. Your employees will tend to react in a way that makes them look good by your measuring standard. For example, if you measure project time vs. overhead time to cost your company’s projects, your employees will tend to avoid clocking overhead time for fear of being disciplined for taking too much. This might not be your intent, particularly if your business requires a fair amount of overhead time for internal tasks.
Many performance appraisals measure only outputs. This is fine as long as outputs are the only thing that matter. If the way outputs are achieved matters, then you need to look at the way your employee arrives at those outputs. As an example, suppose your sales team disallows high-pressure tactics because of a belief that they decrease customer loyalty. If you only measure the dollars your highest salesman produces, you do not know if he is ignoring policy and using high-pressure tactics anyway. If your technical writing firm produces documents, you need to ensure that your writers are not plagiarizing any existing work in order to produce faster. If your marketer places sexy billboards next to a school, you might have some kickback from the community—or the law! It is probably safe to say that for most job tasks, the means of achieving an output do matter. When they do, you need to measure those means.
Naturally, measuring the means for achieving an output is more difficult than simply measuring the output. You often have to rely on subjective scales in a survey that coworkers fill out about a specific employee. The results of such surveys require someone with at least basic statistics training to analyze. These surveys often ask questions about character traits (honesty, work ethic, and leadership style) or behaviors (polite with customers, responsive to emails, and good at multitasking priority tasks). There may be rater reliability issues, where the survey results do not accurately reflect the employee’s work. On the other hand, the way an employee is perceived by coworkers often matters just as much as how that employee actually works. Companies are built upon ethical values, interpersonal relationships, and dedication. A good performance appraisal will measure these elements alongside outputs to ensure that every employee brings value to the table.
Even when contracting out your human resources functions to a third party, you still need to establish discipline policies. How forgiving will you be of your employees when they show up late the first time? How about the second time? What if the local traffic report is awful for that day—will you make an exception? What is your policy for handling sexual harassment complaints? What about drug tests or fraud accusations? Here’s a big one: interpersonal conflicts—how will you handle them?
We could write an entire book about this subject, but you don’t have time to read it—that’s why you’re considering outsourcing to us. Let us give you a few simple principles as you plan your disciplinary policies and procedures.
- Any policies leading to discipline should be written down. A verbal-only policy is too easily misinterpreted and is difficult to enforce fairly. You also want to avoid “phone tag,” where policies keep morphing as they are transmitted from one person to the next—you might not recognize your own rule when it gets back to you.
- Your policies need to be enforced consistently, or they will become meaningless. Worse, inconsistently enforced policies can open you up to legal liabilities such as discrimination charges. However, this does not preclude granting exceptions, as long as there is good logic for any exceptions made (see item 3).
- Your policies should provide a little leeway in order to keep employee morale high. Low morale leads to low productivity. Allowing employees to leave early to respond to a family emergency without penalty, for example, will increase their loyalty to your company.
- Like with performance appraisal, you want to avoid establishing any perverse incentives for your policies. For example, if your policy automatically disciplines the lowest producer, then no one will volunteer for large time-consuming projects.
- Also, you need to be aware of possible unintended consequences of your policies. For example, if you make a huge deal about miles on company cars, don’t be surprised if your employees take a much more time-consuming route on side roads because it’s a shorter distance (such as driving straight through D.C. instead of taking the Beltway around it).
These guidelines give you a good beginning to establishing sound company policies. Now, you need to determine how the discipline procedure will work. Will you give a written or a verbal warning first? Will you involve the HR outsourcer on the first step or later in the process? How personal or impersonal do you want the process to be? Are you willing to make post-warning exceptions, or do you require that an exception be granted before a potential offense? Your answer to these questions will have a big impact on employee attitudes toward your policies—and you.
As you design your compensation plans, determine your policies, and decide how to measure performance, keep your employees in mind. Make certain you treat them like people, and they in turn will respect you and give their best efforts to your business. Careful planning will lead to spectacular results. Let us lend our expertise in helping you develop sound compensation plans, good performance appraisal strategies, and effective disciplinary policies for your workforce.