2013-05-21T13:19:46-04:00 Ed Lawler http://www.huffingtonpost.com/author/index.php?author=ed-lawler Copyright 2008, HuffingtonPost.com, Inc. HuffingtonPost Blogger Feed for Ed Lawler Good old fashioned elbow grease. tag:www.huffingtonpost.com,2013:/theblog//3.3095810 2013-04-18T14:03:54-04:00 2013-04-18T14:03:58-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
For decades, researchers have studied the relationship between attitudes and work behavior. Literally, tens of thousands of studies have been done. The results show clear patterns of relationships and causation. Despite the definitive results of these studies, there are many articles in the popular press and professional magazines touting exciting new discoveries and insights concerning how worker attitudes relate to their performance.

I am afraid that I may sound a little bit like a curmudgeon when I say this, but nevertheless here goes: There is nothing new with respect to how attitudes and performance are related. Article after article puts old wine in new bottles, in many cases this does more to confuse than clarify.

What is new is the frequent the use of the term "engagement." Over the last decade, engagement has become the most frequently used term to describe how employees relate to their work. Unfortunately, adding this term to our vocabulary when we talk about attitudes and behavior has done more to confuse than to clarify.

Rather than spend time identifying and correcting the most common misstatements with respect to attitudes and performance, I would like to briefly review what we know and have known for a long time about the relationship between work attitudes and performance.

1. Employee job satisfaction sometimes is related to employee performance but in most cases it is because performance causes satisfaction not because satisfaction causes performance. People who perform well tend to be rewarded better and feel better about themselves and their jobs. As a result of the impact of performance on attitudes, there often is a relationship, although a weak one, between satisfaction and performance.


2. Dissatisfaction causes turnover, absenteeism, and positive attitudes toward joining unions. Not surprisingly, when people are not getting what they expect from work they are dissatisfied and they look for ways to correct this condition. Quitting, not showing up for work, and joining a union are all viable methods for improving their work-life. The key point here that it is wrong to assume that by making employees happy, organizations can improve their performance. It may reduce turnover, absenteeism, and union elections and as a result lower some costs, but it will not cause employees to be more productive.


3. Motivation is caused by the beliefs and attitudes of employees have about what the consequences of good performance will be. When employees feel that they will receive rewards that they value as a result of their performance they are motivated to perform well. This is true whether the rewards are, what psychologists call "intrinsic awards", that is things that people feel such as increased self-esteem or a sense of accomplishment, or by "extrinsic rewards" such as promotions, pay increases, and praise from others.

Because of the relationship between motivation and performance, organizations need to focus on individuals performing well if they want to increase individual and organizational performance. They need to create attractive work environments that reward individuals for performance. If they do this, they will have motivated and satisfied employees. It is as "simple" as that.

What about engagement? It is hard to make a definitive statement about the importance of engagement because the way it is defined and measured in surveys differs greatly from one situation to another. In some cases, it is largely discussed and measured in terms of employee job-satisfaction. In other cases, it is defined as putting forth extra effort (i.e. as motivation). When it is defined by whether individuals put forth extra effort, from a performance point of view it is a performance positive. When it is defined by satisfaction, it is unlikely to cause good performance.

Perhaps, the most common way to measure engagement is by a group of survey items that include measures of satisfaction, effort, and commitment to the organization; in other words, a potpourri of items looking at different types of attitudes that have different relationships to performance. As a result, it is often difficult to make a definitive statement about whether engagement is the cause, consequence, or just a correlate of individual and organizational performance. It also is difficult to know how to improve engagement and what the results of improving it will be.

It will be interesting to see whether the term engagement continues to be broadly used. Personally, I am ambivalent about it. I believe we need a general term that describes how individuals feel about their work situation, in essence, a counterpoint to profits; but I am not sure that engagement is the best term for this. It does not provide the kind of information and data that organizations need to effectively manage the motivation and performance of their employees. In order to do this, organizations need to know how satisfied, motivated, and committed their employees are to the organization. They can only know this by looking separately at measures of these attitudes. Having done this, it is possible to diagnose the work situation, provide change advice and insights about how individual organizational performance can be improved.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2989460 2013-04-01T14:54:58-04:00 2013-04-01T14:55:03-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
Companies spend money to train their managers to do them well, and of course there is the time that is lost by the employees arranging and doing the interviews. For some jobs, organizations may interview 10 or more applicants. However, the greatest cost of job interviews is not the wasted time of the interviewer, it is the fact that they are poor at identifying how effective applicants will be if they are hired, and they can easily lead to lawsuits.

Years of research on job interviews has shown that they are poor predictors of who will be a good employee. There are many reasons for this, but perhaps the key explanation is that individuals simply don't gather the right information and don't understand what the best predictors of job success are. A careful analysis of the background of individuals and their work history and work samples are more accurate predictors of success on the job than are the judgments which result from interviews.

On the legal front, job interviews are frequent generators of lawsuits because interviewers often ask the wrong questions, (e.g. those having to do with age, gender, sexual preference, etc.). Furthermore, because they are not valid predictors, they can have an adverse impact on hiring minorities and other protected groups. As a result, they can and do create lawsuits against organizations. At last week's NFL assessment camp, professional teams asked college football players about their girlfriends, their art preferences, and whether they like girls. Not only are these questions unlikely to tell teams how well someone will play pro football, they are illegal. Much more likely to predict success in pro football are the skill tests they administer.

Are interviews good for anything? Does it make sense for organizations to do job interviews at all? In some cases, it may. They may be a good recruiting device. When they are used for recruiting, they should occur after the decision, with respect to hiring, is made. In short, instead of interviewing people in order to determine whether they should be hired, the best approach is to make the hiring decision first and follow with the interview. This allows the individual conducting the interview for the company to focus on acquainting the recruits with what it's like to work for the organization and answering the job candidate's questions. This may be a very positive use of everyone's time as there is a great deal of research in the field of organizational psychology that shows realistic job previews are a major contributor to employees not turning over during the first few years after they take a job. Interviews that focus on what the job is like can give individuals a realistic idea of what work will be like in the organization. After finding this out, they can decide whether or not to take the job. If they do take it, they are much less likely to be disappointed and turn-over.

There is one problem when the interview occurs after the selection decision is made. The psychological commitment to seeing that the new employee succeeds, which is often generated when the interviewer makes a decision about whether or not to hire somebody, is lost. However, this advantage that interviews create can be maintained by allowing the interviewer a veto if they feel that a terrible mistake has been made.

What about Twitter and email based interviews? Should they replace face-to-face interviews? Unfortunately, there is little research evidence on this issue. My guess is that if the job involves significant use of social networks, they should be used because they can serve as a "work sample." Otherwise, there is little reason to believe they will be more successful than face-to-face selection interviews.

Overall, research results are clear. Interviews should not be used to select employees. I am not naïve enough to think that after reading this, most organizations will stop doing selection interviews. I am hopeful, however, that some will stop and others will give serious consideration to whether or not it is worth the time and effort that they put into them and as a result, decide to do fewer and to give them less weight in the selection decision process.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2013:/theblog//3.2481982 2013-01-22T13:50:29-05:00 2013-03-24T05:12:02-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
The reason why programs are not sustainable is simple and potentially easy to correct. They never become integrated in the standard operating procedures of organizations. They are always add-ons. When something else comes along and attention shifts to a new program, or when disruptive change occurs, they are prime candidates for elimination or inattention.

All too often companies' efforts to improve their social and environmental sustainability have suffered the same fate as other programs. They produce initial gains that soon dissipate. This does not have to happen, however. Organizations can potentially perform well financially, socially, and environmentally for long periods of time. However, they cannot do this by simply doing business as usual with respect to financial results and adding programs having to do with social and environmental improvements.

Simply put, organizations must make environmental and social performance a part of the way the corporation operates just as much as it does financial performance. Unfortunately, recent surveys which have been done as part of our research programs at the Center for Effective Organizations show that most organizations do not integrate social and environmental performance into the way the organization operates. Social and environmental performance is not always measured. They are not always on the table when new projects and products are being considered. They are not part of the training programs of organizations. Individuals are not selected based on their knowledge or interest in social and environmental performance.

Perhaps the most serious omission of all is that the performance of individuals is not appraised based on how well they perform environmentally and socially. For most people, it is their productivity and financial results that are key to their success. How they achieve them and what outcomes they produce in terms of the environmental impact of the organization and the impact it has on the employees is rarely, if ever, front and center.

Our surveys of board members and HR executives show clearly that most large organizations have not integrated environmental and social performance into their way of doing business. Until they do, they will not be sustainably effective and will continue to be criticized and vilified for their poor social and environmental performance.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.2325978 2012-12-31T14:21:47-05:00 2013-03-02T05:12:02-05:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
But before we accept the loss of many low skilled manufacturing jobs as a major negative for the U.S. and that it should be halted and perhaps even reversed, it is important to put it in the context of what we know about the social impact of simple, repetitive work. The fact is that this type of work often has numerous negative impacts on both individuals and society in general. This was highlighted recently by the news about riots taking place in Foxconn's Chinese factories.

Even in China, low wage repetitive work can create major conflicts between workers and corporations and be destructive to society. We learned this long ago in the U.S. and it resulted in major U.S. corporations offshoring repetitive, manufacturing work or upgrading it through technology to the point where it became skilled work. In terms of social sustainability, repetitive low skilled work is a major negative. It causes employee dissatisfaction and turnover, stress-related mental and physical health problems, dysfunctional union/management relationships and large social class differences in wealth.

The bottom line is that instead of complaining about offshoring manufacturing jobs, we should be focusing on keeping and creating the right kind of manufacturing jobs. What kinds of jobs are those? In essence, I am talking about the kind of knowledge work jobs that exist in the high-tech world and the advanced manufacturing plants of some major manufacturers. We can only keep these jobs in the U.S. if we have a skilled workforce who can meet the challenges that knowledge, information technology, and engineering present.

It all comes down to having a well-educated workforce who can add significant value to products and services. People should design and build machines that manufacture products and they should maintain and service them; they should not do simple, repetitive manufacturing work. It will be very interesting to see what kind of jobs Apple creates when it moves some of its manufacturing of computers to the U.S. from Asia. Hopefully, it will create "good jobs" and, of course, pay competitive wages.

Although keeping low-skilled, repetitive work in the U.S. can provide a short-term way to reduce unemployment, it is not what we should be focusing on. As China is finding out, this kind of work has a significant downside and is not a sustainable, economic model for countries that value human sustainability and a high-quality of work life.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.2165842 2012-11-27T16:17:00-05:00 2013-01-27T05:12:01-05:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
Most engagement surveys ask questions concerning a number of distinctly different attitudes that employees hold. Some of these attitudes affect turnover, some affect work performance, and still others have little or no impact on employee behavior.

Many individuals who interpret the data have limited knowledge about what the causes and consequences are of employee motivation, satisfaction, commitment, and involvement. As a result, they don't correctly interpret the data collected in engagement surveys.

This doesn't have to be. We have decades of research on employee attitudes that clearly establishes the relationship among employee attitudes, beliefs, and behavior. Let me quickly review this research by starting with two common beliefs that are incorrect and then discussing three research findings that should be kept in mind when employee engagement data are interpreted.

Fallacy #1: Money does not motivate -- it is only a "hygiene" factor.

For decades the discussion of whether or not money motivates behavior and how it motivates behavior has been prominent in the organizational behavior literature as well as in the mass media. Writers have gained book sales and visibility by saying that it does not motivate performance (note the popularity of the recent book, Drive), and that it is only a "hygiene" or dissatisfier factor. The simple fact of the matter is that for many people, it does motivate performance. Study after study has shown that when significant amounts of money are clearly tied to specific behaviors, those behaviors are more likely to occur.

Fallacy #2: A happy worker is a productive worker.

Starting about the middle of the 20th century and proceeding for several decades, organizational psychologists conducted many studies that correlated job satisfaction with performance. The results consistently showed low or no correlation between the two. In some cases, there was low correlation only because performing well made employees more satisfied, not because employees worked harder because they were satisfied. This is a particularly important point when engagement data are interpreted. As we will see next, there are reasons to worry about employee job satisfaction, but not because of the impact of increasing satisfaction on performance!

Truth #1: People differ in what they value.

There are large differences in what people value. In order to understand how to motivate somebody, it is critical to know what an individual values. There are a number of indicators of what a person values. Perhaps the best one is watching the choices individuals make when they have the opportunity to choose a reward, say receive a raise, a promotion, or a day off. It is also possible to get a reasonable understanding of what they value by looking at their characteristics. Yes, age is a predictor, as is gender, but overall they are relatively poor predictors.

Often the best way to find out what people value is to ask them. Usually, they are pretty good reporters of what they value. However, sometimes they don't have a high level of self-awareness, or they may feel that it is necessary to give a politically correct response. This brings me back to the original point that watching the choices they make is oftentimes the best indicator.

One last point: it is critical to avoid stereotyping and assuming that people of the same race, age, and gender are similar in what they value. Even within what appears to be relatively homogeneous groups, there are often enormous differences in what individuals value.

Truth #2: Expectations lead to motivation.

Motivation is best understood, influenced and predicted by understanding the expectations that people have. Simply stated, people engage in behaviors that they expect will lead to rewards they value. Thus, it is critical to know individuals' expectations of what their behaviors will lead to.

There are a variety of outcomes that may be tied to work behaviors. High performance may lead to more money, feelings of accomplishment, high job security, and a host of other positive outcomes that can cause people to perform at a high level. The key from an organizational point of view is to understand what people see as the consequences of different kinds behaviors and to create a good alignment between what the organization needs and what individuals expect to be rewarded for.

Often, simply setting goals for individuals can make a major impact on their motivation. If individuals accept the goals and see the behavior as worthwhile, they will be highly motivated to pursue these goals.

Truth #3: Satisfaction leads to membership, not performance.

Satisfaction is a good predictor of absenteeism and turnover. Earlier, the point was made that happy workers are not necessarily productive workers. On the other hand, they are likely to be individuals who will stay with an organization. Essentially, when employees say they are satisfied with their job, they are indicating that there is no reason for them to look elsewhere for an alternative situation. They are not necessarily saying that they are motivated to be productive, but they may be saying that they will be loyal to the company and speak well of it to others. This is different from them being motivated to perform well. Indeed, happy workers tend to RIP (retire in position) unless they are somehow motivated to perform at a high level.

Looking at the results of employee engagement surveys and developing action plans based on them requires looking at the items on the survey in terms of what they measure. Do they measure satisfaction? Do they measure motivation? Once this is done, and only once it is done, does it make sense to think about action items such as making work more interesting, providing more job security, or rewarding performance with bonus plans?

Yes, engagement scores are indicators of how good or bad a work situation is. In most cases, it is better to have higher rather than lower engagement scores, but in order to take action directed towards improving organizational performance, the items need to be looked at separately and used to make data-based changes that will drive employee retention, performance, and commitment.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.1973923 2012-10-17T11:48:59-04:00 2012-12-17T05:12:02-05:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
Considerable research shows that today's high level of executive compensation has created an enormous societal gap between the top earners in the country and the rest of the population. Compensation has become so high that it significantly affects the profitability of even relatively large corporations. Perhaps less frequently noted are the pay plans that provide such a big performance incentive for individuals that they can lead people to take risky and even illegal actions in order to make their pay -for-performance compensation plans pay off.

The standard justification for the high pay of CEOs and other top executives is that the market demands it. It is argued that if you do not pay CEOs at or above the market, they will leave and go to a competitor. There are a number of problems with this argument. Perhaps the most important one is that numerous studies have shown that CEOs rarely move from one company to another, and when they do, they are usually less successful than internal candidates. In short, at least at the CEO level, there is little evidence that an efficient market for talent exists that is based on compensation levels.

Market data are a constantly escalating and flawed indicator of what executives should be paid. Few boards are willing to pay their executives below market. There are several reasons for this. Board members typically want to be looked upon positively by the CEO and other senior executives in order to get on and remain on corporate boards. A board member who argues for paying individuals below the market is not likely to be a respected or valued board member, at least in the eyes of the executive team of the company.

Some members of corporate boards have an even greater self-interest in making sure that the compensation of the CEO continues to go up, up, and up. They are the CEOs of other companies. You don't have to be a compensation expert to realize that if you vote for one of your peers to have a higher salary, you are in effect voting for your own salary to go up, because it is based on what will be a higher market.

If boards continue to rely on comparative compensation data to determine what CEOs should be paid, executive compensation will continue to spiral upward and out of control. What is the best way to stop the cycle of ever-increasing executive compensation?

One option that is gathering support in Europe is mandatory shareholder votes on executive compensation packages. This action does seem to be effective with respect to those extreme outliers who are easily identified by investors as greatly overpaid. It is not clear, however, that it has or will stop the continuing overall increases in executive compensation.

The group that is best positioned to change executive compensation is corporate boards. Unfortunately, there is little evidence that most board members are concerned about the high level of executive compensation.

For boards to change their stripes when it comes to executive compensation, major changes need to take place in who is on corporate boards and on their compensation committees. It would mean fewer CEOs on corporate boards. It would require more board members who understand talent management and are concerned about the societal impact of corporations. Another effective change would be to have a board membership that is dominated by strong, independent directors.

If boards do not reduce how much executives are compensated, there is a good possibility that further government regulations will be created and that large shareholders will become more active. Personally, I would rather see boards step up and reduce executive compensation. They are positioned to do a more informed job than regulators and investors.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.1900123 2012-09-20T17:42:12-04:00 2012-11-20T05:12:01-05:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
Why do companies try to keep pay secret? When asked this question, executives usually cite the potential conflicts that might arise and the dissatisfaction that would occur if pay were made public. They go on to point out that they would have trouble justifying some of the pay levels that exist and some of the pay decisions they have made. In other words, secrecy helps them cover up their bad decision-making; and with secrecy, they do not have to correct the problems or defend what they have done.

But does secrecy help reduce the amount of dissatisfaction with pay that exists? It does not! There is a considerable amount of research that suggests that keeping pay secret contributes to greater pay dissatisfaction and worse pay administration.

As far as dissatisfaction is concerned, data that I collected over 40 years ago show that when employees do not know what other people earn, they overestimate what their coworkers earn and end up being more dissatisfied than they would be if they had accurate pay information.

It is also clear that with secrecy, managers can make poor pay decisions because they do not have to defend them. It also reduces the motivation of managers and organizations to adhere to corporate policies and to make good decisions.

In some respects, pay secrecy is particularly dysfunctional in those companies that do an outstanding job of administering pay. All too often, a clear relationship between pay and performance that may be very motivating becomes blurred and unclear because of secrecy. In addition, valuable talent may leave because they think they are paid less than others even when this is not true.

Some companies have made pay public and have actively gotten employees involved in the pay decision-making process. One of the most visible companies with this practice is Whole Foods. It recognizes that employees can responsibly make pay decisions and understand information about how much other employees are making.

If anything, the growth of websites like Glassdoor makes secrecy an even more outdated practice than it used to be. With the salary information that is regularly posted on Glassdoor, individuals can get a considerable amount of information about how their pay compares to others in their company and other companies. What is not clear, however, is whether the information on Glassdoor is accurate. A good guess is that it is on the high side. Thus, the information employees get from Glassdoor may make their own pay look worse than it is, and may cause them to be more dissatisfied with their pay than if they knew what others were actually making. In any case, between Glassdoor and the potential for someone to hack into the company pay system, it is hard to believe that pay is 100 percent secret in most corporations.

One final point about why pay secrecy is an obsolete practice: as already mentioned, when pay is secret, managers are often tempted to make and do make indefensible pay decisions. These decisions, if caught in audits or as a result of individuals sharing pay data, can lead to lawsuits that prove to be very problematic for organizations.

Perhaps the best way to summarize pay secrecy is to say that it has become an old-fashioned, obsolete management practice that has a much larger downside than upside. It is time for organizations to enter the world of pay transparency.

Crossposted from Forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.1825142 2012-08-24T14:06:43-04:00 2012-10-24T05:12:11-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/ Effective Human Resource Management: A Global Analysis. The results clearly show what HR needs to do to become a key strategic force in major corporations. But, and it is a big but, they also show that HR is not doing what needs to be done. This is in spite of the fact that now more than ever, the time is right for HR to play a key role in business strategy development and implementation.

HR appears to have some influence when it comes to how staffing relates to strategy and how organizational structure relates to implementing strategy. But our results suggest that HR plays a less prominent role when it comes to the development of strategy, the consideration of strategic options and other strategy areas, including acquisitions and mergers.

A number of HR practices and programs are significantly associated with a stronger strategic role for HR, including:

• Having an HR strategy that is integrated with the business strategy


• The use of information technology


• Focusing on HR talent development


• Having HR activities that focus on organization design, organization development, change management, employee development, and metrics


• Using computer systems for training and development


• Having effective HR metrics and analytics


• Having an HR staff with technical, organizational dynamics, business partner, and metrics skills

Helping to set and implement the strategic direction of the organization requires developing and assessing the organization's human capital and creating the organizational capabilities required to support the strategic direction. It also requires shaping strategy by providing the unique perspective available via the lens of someone who has knowledge of the talent market and human behavior. This requires HR executives to understand business strategy and how it relates to organizational capabilities and core competencies and how those connect to pivotal talent and organization design decisions. In this role, HR executives need to use their knowledge to help the organization set its strategic direction and develop its business plans in ways that are consistent with a talent decision science.

Overall, being a strategic contributor demands that high levels of business knowledge and skill be present in HR. It also requires information systems that have the right metrics and analytics, and organization designs and practices that link HR managers to business units. Last but not to be overlooked is the need for the effective and efficient delivery of HR services. Providing good services is the price of admission; if HR cannot operate effectively as a mini business, it is hard to convince others that its input on business issues is worth anything.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1689872 2012-07-23T17:03:36-04:00 2012-09-22T05:12:05-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
Criticizing performance appraisals has a long history. For decades, the literature on talent management has pointed out the flaws in most performance management systems and in some cases recommended completely abandoning them. The problem with abandoning them is that they are vital to effective talent management.

I cannot imagine a company doing a good job of managing its talent without gathering information about how well individuals perform their jobs, what their skills and knowledge are, and what their responsibilities and performance goals are for the future. These types of data are simply fundamental to the effective management of the talent of any organization (and to its overall management).

A decade ago, I did a study on performance management in over 50 firms and found that every firm had a performance management system. In some cases they were functioning reasonably well. There were, of course, organizations that did not have an effective system and were saying that they expected to either redesign their system or cease doing performance appraisals. The latter is what you would expect organizations to do if they followed the advice of many of the critics of performance appraisals.

Recently, I took another look at whether organizations are doing performance appraisals. The results of the survey of one hundred relatively large U.S. corporations provide some interesting data on whether organizations are doing performance appraisals. The bottom line is that every company responded that they do have a performance management system, and only six percent said that they are considering getting rid of performance appraisals for some or all of their employees. In short, the death of performance appraisals is not occurring and is unlikely to occur.

Companies reported that on average 93 percent of their salaried employees receive a performance appraisal, and typically they receive at least one every year. Only one company reported that they had recently stopped doing evaluations for 50 or more of their employees. The survey did find that, on the average, companies are not more satisfied with their performance management systems than they were ten years ago. However, the vast majority, about 85 percent, report that their system is at least moderately effective.

The obvious conclusion is that companies will continue to do performance appraisals despite their shortcomings and despite the many criticisms of them that appear in the management literature. In my opinion, organizations have no choice. Instead of wasting our time debating whether to eliminate performance appraisals, we should be talking about how to make them more effective. The key is to make them part of a complete performance management system, which includes goal setting, development, compensation actions, performance feedback and a goals-based appraisal of performance.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.1594606 2012-06-14T17:20:19-04:00 2012-08-14T05:12:09-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
The debate over what to do about excessive and inappropriate executive compensation has been going on for decades. A few steps have been taken to correct the inappropriate compensation levels that are revealed every spring. The most visible recent step is the mandating of shareholder votes on executive compensation packages. In the United States, they are required, but the result is not binding. Only in a few European countries -- the Netherlands, Norway, and Sweden -- are they binding. EU regulators are now pushing for binding investor votes on executive pay.

The expectation is that binding votes will cause corporations to be more conservative with respect to the total amount they pay their executives and that their pay will be more driven by corporate performance. There is some reason to believe that this is true, but binding votes will not make fundamental changes in compensation practice unless shareholders make active, informed use of their votes. In other words, shareholders must actively consider the compensation plans of their companies and cast informed votes on them.

Executive compensation is an extremely technical and complex issue. To say the least, it is hard for shareholders to cast informed votes based on the information they typically get. Although most large investment funds have the knowledge to evaluate executive pay plans, many shareholders do not. All they see is the total compensation of executives and the financial performance of the company. Based on this, they are outraged, delighted, or as is most commonly true, oblivious to the executive compensation practices and policies of their company. This leads me to the point that even instituting binding votes will not be necessarily effective in improving executive compensation. Something more is needed.

I believe a mandatory audit program is the best way to improve the quality of executive compensation pay practices. The annual audit program should include a report to the shareholders on whether they should or should not vote in favor of the executive compensation amounts and practices of their company.

The compensation audit would be conducted by independent firms that have the same type of role that public accounting firms have with respect to the reporting of corporate financial results. Their audit would be based on an analysis of the executive compensation programs, policies, and amounts that corporations report. It would require corporations to develop a statement of objectives for their executive compensation program. The statement would include the types of performance it is expected to motivate and the market position it is trying to achieve for executive pay. The audit firm would then look at the actual plan and determine how well it fits the objectives laid out for it by the Board.

If the audit firm determines that the plan does not have a structure and payouts that are consistent with the objectives stated by the Board, they would issue a noncompliance report to be distributed to the shareholders. In addition to providing boards with expert guidance, the audit process will be a powerful motivator of restraint with respect to compensation amounts. It will also put pressure on the Board to analyze the impact of their company's executive compensation practices. It should force Boards to think through the objectives and the positioning of their company's executive compensation plan. Further knowing that the opinion of the audit firm will go to the shareholders, it should motivate the Board to pay particular attention to the credibility of the plan. An audit will also provide the shareholders with the information they need to make an informed vote on the executive compensation programs of their company.

At the present time, I am not aware of any group calling for executive compensation audits to occur and, of course, they are only likely to become a much needed addition to the corporate governance framework and practices if shareholders begin to call for them. This year's executive compensation Arab Spring has shown that there is a need for change and that shareholders are increasingly unhappy with executive compensation practices. Hopefully this will lead to shareholder groups looking beyond binding votes for ways to improve executive compensation.

Crossposted from Forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.1497622 2012-05-08T12:06:14-04:00 2012-07-08T05:12:08-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/ recent survey by Lloyds found that executives believe a talent shortage is the number two risk facing business today, up from twenty-second place in 2009. There is no doubt that organizations need to increase their focus on retaining the right talent and creating systems that encourage their talent to develop the right skills. By making the right moves today, organizations can greatly reduce the risk of losing top talent and assure that they will be able to respond effectively to the business opportunities a recovering economy offers.

What should companies do? Should they return to their pre-recession approach to talent management or significantly change the way they manage talent? I think it is a great time for organizations to adopt a new approach to talent management. It is definitely not time to go back to business as usual. All too often the talent management practices and the overall HR practices of organizations have made them rigid and unable to respond to significant changes in the business environment. Witness the problems that most organizations had adjusting to the recession. Witness also the problems they have had adjusting to disruptive technologies and changes in customer preferences.

As one CEO said to me about his HR department and their approach to talent management, "I call HR the 'BPU'." Needless to say, I followed up by asking him what BPU stood for. His response was "Business Prevention Unit." He went on to add, "Every time I ask HR if I can make a change, they tell me about the problems it will create and throw cold water on the idea of altering our talent management approach." He also complained that they go on to advocate such things as treating everyone the same and promising long-term career development opportunities to individuals in order to assure fairness and retention.

The problem with the traditional approach to talent management is that it creates an inflexible, difficult way to change organization. It makes it hard to change the competencies and capabilities of the organization when it needs to change its products and services. All too often, talent management policies and practices become BCPP, that is "Business Change Prevention Policies," and HR functions become the CPU, the "Change Prevention Unit."

What kind of practices do organizations need to adopt in order to increase their agility and position them well to profit from the recovery? In order to be more agile, they need to adopt talent management practices that allow them to change the skill set of their employees and motivate them to change their behavior. They should not be adopting practices that are focused on retention. The key practices that will accomplish great agility include abandoning the traditional job description approach to talent management and adopting a skill based pay system that includes pay for skills and skill acquisition. A market pricing approach is needed that will reflect the individual's value in the market, not his or her job's value in the market. Skill-based pay does a much better job than paying according to "what their job is worth" of retaining those individuals who are critical to the organizations skill needs. Jobs don't have a worth; individuals do, and at a time of economic expansion it is particularly important that individuals be paid what they are worth in the market.

How about long-term employment relationships and job security? It is time to accept the fact that job security is not something that most organizations can promise or should promise. Individuals should be given realistic security commitments and accurate information about their continued employment but they should not be given some vision of "tenure." To be specific, they should be told that as long as they perform at a high level and their skills are needed by the organization, they will have a job. They should, of course, be given information about the type of skills the organization needs and the need the organization has for agility and change. Promising individuals a job regardless of what happens to the business environment is the wrong practice. It does nothing to encourage people to change and ultimately in a rapidly changing world proves to be a key change prevention factor.

Overall, the future belongs to organizations that can manage a flexible, motivated work force. This can only be accomplished by policies and practices that encourage talent to be agile while motivating them to perform well. Going back to the pre-recession policies that dominated large corporations won't accomplish it. New practices are needed, and now is the right time to implement them.

Crossposted from Forbes.com.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1375739 2012-03-26T15:29:36-04:00 2012-05-26T05:12:01-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
I think that this is a flawed conclusion. The alternative to this profit-above-all approach is a sustainably effective approach that focuses on the triple bottom line of people, planet and profit. Organizations that practice and integrate sustainability thinking put it into all of their operations -- they do not just work on what leads to profits. They integrate sustainability into their very DNA, and everything proceeds from that. These organizations measure themselves in all three areas and structure and design their operations to perform in ways that have a positive impact on all three.

Another huge difference is that sustainably effective organizations don't look at green or sustainable initiatives as special programs -- as mere window dressing. One-off social or environmental initiatives are not enough. A sustainably effective organization makes much deeper and more comprehensive organization changes.

Sustainable performance is a part of everything the company does -- from how employees are managed to the overall structure of the organization and how work is designed. It must be part of the company's identity and embedded into every aspect of the organization. My recent book, Management Reset: Organizing for Sustainable Effectiveness, explains what organizations must do to make this happen.

A number of CEOs see the value of the sustainable effectiveness approach, including Kenneth Chenault of American Express and John Mackey of Whole Foods. In fact, Chenault has said that in order to pursue profits, corporations must act in ways that protect and enhance the world we live in.

Many organizations still have the "profit-above-all" mentality. They focus primarily or exclusively on the obvious financial gains that exist from doing the right things environmentally and socially. If they do something that does not immediately have a positive affect the bottom line, they usually deem it a philanthropic act and strive to get public recognition for it.

The problem with organizations that adopt a bottom line orientation toward sustainability is that they only do those things that are visible and have a quick financial payoff. They do not go beyond them to search for practices and policies that make sustainable performance a core issue in everything the organization does. They look for cost savings and try to avoid fines, public criticism and other negative outcomes. They spread a good veneer over the organization, but they do not change the essential nature of the organization.

BP had a long history of being fined for damaging the environment and having a high employee accident rate even before the Deepwater Gulf of Mexico explosion. Does anyone remember the company's "Beyond Petroleum" marketing efforts? BP started a highly publicized green energy business in order to improve its image, but it did not alter its commitment to profits above all else. And it did not redesign itself to achieve triple bottom line performance.

The "problem" with the sustainable effectiveness approach is that it takes strong leadership at the top of a corporation to put it in place and a willingness to live with the reality that at least in the short-term it may not be the most profitable way to run a corporation. Thus, there is the issue of why a corporation should commit itself to this approach.

One reason for adopting the sustainably effective approach it is that if more and more corporations adopt it there will be less and less need for government intervention into the private sector. The most important reason, however, is that it will lead to a world in which all of us will enjoy a higher quality of life. Let's hope more and more corporations and their executives see the world this way and commit their organizations to sustainable effectiveness, not just sustainability programs.

Crossposted from forbes.com.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1296638 2012-02-27T12:06:35-05:00 2012-04-28T05:12:01-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/ Financial Times, Time Magazine, and Business Week have all run multiple stories in the last month that focus on capitalism. And of course, there are the Occupy demonstrations, which while offering no cures, are very critical of the capitalist system. Even to a believer in capitalism, which I am, the criticism is not surprising. High unemployment rates and growing income differences have created a population that is dissatisfied with big business.

Saving capitalism can only be accomplished by making multiple significant changes to it. One group that is perfectly positioned to make many of the needed changes are the CEOs of major corporations. They, more than any other group shape the direction that major corporations take and are highly visible beneficiaries of capitalism. Let's look at two changes CEOs can make that will go a long way toward saving it.

CEOs have consistently said that the major objective of their corporation's is to maximize shareholder value and that this is what they should be accountable for. This view ignores the sometimes unintended and sometimes intended negative consequences of corporations being focused on a single bottom line. Included among the consequences are the high-risk behavior that led to the failure of financial institutions in 2008 and 2009 and the negative impact that many businesses have on society and the environment.

CEOs need to make it clear that they and their corporations are committed to having a positive impact on employees, society and the environment. This does not mean forgetting about financial performance, but it does mean, as William Weldon, the CEO of Johnson and Johnson has said, "Targeting a fair return to shareholders, not a maximum return."

Of course CEOs must do more than just say their corporations are committed to triple bottom-line performance; they must live it and require that the people who work for them live it. They need to, as Chris Worley and I point out in our recent book, Management Reset, to specifically design their organizations to perform well in all three triple bottom line areas.

Classic bureaucratic organizations are not designed to do this. CEOs will have to lead their organizations through a significant redesign process. IBM's Samuel Palmisano is a good example of someone who has done it. He not only has said that IBM is about triple bottom line performance, he is working hard to see that the organization lives up to it. Similarly, Patagonia has recently become a "benefit corporation" to make it clear just how focused it is on social and environmental performance.

Executive compensation is one of the hot-button areas receiving a lot of criticism lately. This is an area where CEOs can easily and quickly make changes that will help rescue capitalism. The kinds of changes that are needed are clear and obvious. Executives regularly get increases to their already high compensation, even if their organization is not performing well financially, not to mention having negative social and environmental impacts. This must stop.

CEOs should receive executive compensation packages that only pay off well for them when their organization is producing good returns for its employees, its shareholders and the environment. Nothing is more damaging to the credibility of capitalism than CEOs getting large bonuses when their employees get small or no pay increases and shareholder value declines. Even more egregious is CEOs getting enormous severance packages when they a leave a poorly performing organization.

Perhaps the key change CEOs can make in this area is in the amount of total compensation that they receive. Today, their compensation is simply too high. How high? Last year at least six U.S. CEOs made over $50 million dollars. By every measure it is much higher than it has ever been and it is increasing despite the economic conditions that exist today. It has created a Grand Canyon like gap between CEOs and their workforces. CEOs don't have to take high levels of compensation; they can refuse them when they are not deserved.

Many CEOs are particularly to blame for the high compensation levels of senior executives. Not only do they accept excessive compensation packages for themselves, they sit on corporate boards and approve them for other CEOs. They can make a powerful statement by limiting their pay and that of other CEOs.

I can go on about other things CEOs can do to save capitalism, but I have already laid out an ambitious program for them, so I will stop here and offer one last thought. Ultimately, CEOs have the most to lose if capitalism is abandoned. It is very much in their self-interest to ask: What can I do to save capitalism?

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2012:/theblog//3.1210811 2012-01-17T18:02:11-05:00 2012-03-18T05:12:01-04:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/
The arguments justifying high levels of executive compensation usually cite pay for performance and scarcity of talent. The credibility of the pay for performance argument actually increased when the recession began in 2008. As it should, executive pay, particularly CEO pay, dropped dramatically when the stock market and economy collapsed in 2008.

In addition to providing a credibility boost, the 2008 drop in executive compensation provided an opportunity for corporate boards to orchestrate a long-term reduction in executive compensation. It is very difficult to reduce someone's compensation when there is no performance decrease to justify it. Simply saying that because executives are paid too much they will receive a reduction in pay is a hard thing for boards to do.

In 2008, the recession reduced pay, so "all" corporations had to do to reduce executive compensation was to have plans that did not provide the lavish pay and benefits that their past ones did. Of course doing this required that they do something they have been willing to do for decades -- not be driven by their CEO's demands for higher and higher compensation.

In the case of many corporations, not changing their pre-2008 executive compensation programs was an option that "at best" was likely to lead to a slow return of executive compensation amounts to the prerecession level. Only by creating new plans with lower performance goals could they quickly return executive pay to its pre-2008 levels.

Rather than taking advantage of a rare opportunity to reduce executive pay, most boards decided to create new plans with less demanding performance targets. It is now clear that because of these new plans, executive compensation has returned to its pre-recession levels and is headed higher. However, the economy and the market value of most U.S. corporations has not recovered from the 2008 recession, nor has the compensation of the American worker.

Household income in the United States has dropped almost 10% since the beginning of the recession and shows no sign of trending upward. This is creating the worst possible social dynamic. Most members of society are seeing lower income levels, while executives are enjoying record levels of compensation. It is bad enough for executives to have a compensation level that is growing faster than that of a typical worker; it is much worse to have the compensation amounts of workers and executives going in opposite directions.

To add insult to injury, there are a number of CEOs who have been fired recently and have gotten extremely large severance packages. For example, Carol Bartz at Yahoo! got an estimated $10 million package, and Leo Apotheker at Hewlett Packard got a $13 million package after working for HP for less than a year. It is hardly surprising that there is rising social discontent with how wealth is acquired in the U.S. -- witness the widespread "occupy" demonstrations.

Crossposted from forbes.com]]> tag:www.huffingtonpost.com,2011:/theblog//3.1136946 2011-12-12T18:52:39-05:00 2012-02-11T05:12:01-05:00

Ed Lawler http://www.huffingtonpost.com/ed-lawler/ Harvard Business Review article, the road to top jobs in major corporations is shifting. The article, which details research findings relative to "The New Path to the C-Suite," discusses how the functions of marketing, finance and human resources (HR) are evolving. But perhaps the most crucial finding points to the struggles HR executives face when it comes to gaining clout in the C-Suite.

This is not the first time the effectiveness and influence of the HR function has been called into question. A variety of magazine and newspaper articles over the last several decades have pointed out that HR is often an administrative unit, which adds little strategic value. Some have taken this a step further, saying that the HR executives frequently clash with others in the organization due to a lack of business understanding. In fact, I interviewed a CEO a few years ago who called HR the "BPU or Business Prevention Unit." He complained that his HR executives were good at identifying what not to do but were poor at identifying what should be done to make the company more profitable.

The Human Resources Reset

A number of forces in the business environment have created new opportunities for HR to become a truly significant contributor to the performance of organizations. To be competitive, organizations increasingly depend on their ability to be agile, and be creative in the way they manage and organize their people. These are areas where HR can and should be a source of expertise. There is a great need for talented HR professionals who understand business strategy and are able to use data about talent management to impact organizational effectiveness. But in order for this to happen, there must be a reset in the way the HR function is managed and structured.

Attracting Top Talent

HR needs to recruit and develop individuals with the same level of business competence as those in other functions, e.g. marketing, finance. To do this, salaries must be comparable to those in finance and marketing (not the lower ones that are currently offered).

HR tends to have siloed career tracks; that is, individuals simply move up the hierarchy within HR departments, often specializing in one of its areas: benefits, compensation or training and development. Talented HR individuals don't tend to rotate out of HR into other functions and they very rarely become general managers or CEOs.

Reconsidering the Corporate Structure

In the typical corporation today, HR spends a great deal of time on administrative activities, assisting managers throughout the organization with their personnel management activities. Because it is demanding, this type of work almost always takes precedence over work concerning strategy development and analyzing how talent affects organizational performance.

While the growing use of information technology has helped slightly in reducing the time it takes for HR administration, it has not had a significant impact on HR's role with respect to business strategy; an organizational structure change is needed in order for HR to play a more strategic role.

HR should be divided into two groups: one that handles administrative and support services, while a second handles strategic talent management, organization design and sustainable organization effectiveness. The second should be headed by a chief organizational effectiveness officer, who reports directly to the CEO.

HR can be a key function -- but only if the structure of a company positions it to take on business strategy issues. The approach to HR that worked several decades ago is no longer relevant today. Major changes must be made.

Crossposted from forbes.com.]]>