People, Performance, and Pay: Dynamic Compensation for Changing Organizations

People, Performance, and Pay: Dynamic Compensation for Changing Organizations


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In the rush to reengineer, implement TQM practices, form teams, and embrace other popular business strategies, most organizations have overlooked a critical component of successful change: how they pay their employees. Even though their responsibilities and corporate environments have undergone radical changes, most employees are still paid in the same ways they were paid twenty-five years ago. Thousands of companies still dole out annual merit increases and determine pay levels on the basis of employees' knowledge, length of service, number of direct reports, and rank on the organizational ladder -- values whose relevance has faded in today's flatter, faster, more flexible business environment.

Now The Hay Group, which for the past forty years has set the standard globally for effective pay strategies, has addressed this important issue -- and once again has rewritten the rules for pay. People, Performance, and Pay identifies today's four most common organizational work cultures -- functional, process, time-based, and network -- and explains how to align innovative pay policies with each. With examples from LEGO, Hallmark, Holiday Inn, and other leading organizations, the authors explain how to assess an organization's current culture and determine what its future culture should be. They then demonstrate pay's role in such change initiatives, and how compensation must be integrated with other human resource processes, such as selection, training, and performance management. They also discuss the full range of pay strategies available today and how they can be best used to move the organization forward; for example, they recommend decreasing an organization's emphasis on base pay as it shifts from a functional culture to a process, time-based, or network culture. They also offer guidance on establishing team rewards, especially important in process and team-based cultures, and make a compelling case for putting more pay at risk through variable pay strategies. Here also is strategic advice on competency-based pay, performance-based rewards such as gainsharing, executive pay, and benefits programs.

As responsibility for compensation strategies and compensation decisions shifts away from the realm of the Human Resource Department, line managers and senior executives will find People, Performance, and Pay an invaluable reference for effectively using salary, incentives, and benefits to motivate and reward employees, improve quality, and increase productivity.

Product Details

ISBN-13: 9780743236539
Publisher: Free Press
Publication date: 01/15/2002
Pages: 288
Product dimensions: 6.12(w) x 9.25(h) x 0.90(d)

Read an Excerpt

Chapter 1 The Compensation Lag

It had survived two world wars, a national depression, and one earthquake, but in 1994, the World Series, the highlight of America's national pastime, was finally brought to its knees -- broken by a players' strike over the issue of pay.

The controversy that canceled the World Series and angered fans from coast to coast involved a handful of superstar athletes and an even smaller group of wealthy team owners arguing over already astronomically high salaries. Yet it nonetheless pointed to a basic dilemma facing every organization -- large and small -- around the world today: How, in the face of dramatic change, can we continue to motivate our employees, satisfy our customers, improve the quality of our products and services, increase our productivity and profit margin, and all the while stay on top of the competition? And what role, if any, should pay -- a powerful but often misunderstood force -- play in the process?

The solution thus far has been elusive, despite a growing army of experts and ideas. You only have to pick up a business magazine, watch television, or go to a bookstore to see what a booming business the business of rebuilding business has become. Not that there is anything wrong with reading such books, many of which are excellent, or listening to the growing number of experts, many of whom offer outstanding advice.

The problem is that most offer only a single answer, a small piece of the puzzle, one organizational strategy, perhaps. So, instead of trying to integrate new business strategies with new company goals, new organizational designs, and the changing values and attitudes of people, many organizations have simply kept adding the latest bells and whistles, the latest solution du jour.

As a result, they have created organizational monsters more dysfunctional than Dr. Frankenstein's, structures and strategies more complex and less efficient than a Rube Goldberg schematic. And, after more than a decade of pursuing the latest "business trends," many companies have, like the car-chasing mongrel that just discovered a superhighway, either been flattened by progress or collapsed in a tail-dragging, tongue-tied heap by the side of the road, exhausted, bewildered, and mad as hell.


The Wall Street Journal put the issue into perspective with a page I story headlined "Many Companies Try Management Fads, Only to See Them Flop." The article was a well-documented indictment of some of the most highly touted business and management trends -- including those in compensation -- of the 1990s.

"Process re-engineering, benchmarking, total quality management, broadbanding, worker empowerment, skill-based pay," it began. "The labels abound when it comes to the trendy remedies executives are using to try to breathe new life and competitive fire into their companies.

"But while these approaches may promise more motivated work forces and greater productivity, the results often fall far short. When this happens, companies find they must sharply modify, abandon, or find antidotes to programs that bring sweeping changes to organizational and humanresource management."

That is not to say that all business initiatives are mere fads, corporate alchemy that combines business school philosophy and consulting concepts to produce little more than fool's gold. Most successful companies, for example, are not giving up on quality simply because their early initiatives failed. Rather, they are looking for new and more effective ways of achieving their goals. And, they are looking beyond the normal demands of business in an effort to improve efficiency, productivity, and profits.


In the rush to change, many organizations have overlooked or mishandled what could well be one of the most effective tools at hand -- compensation. Never mind that pay is a major cost of doing business -- over $17 per employee hour worked. Never mind that compensation can be a critical force in supporting change. The fact remains, in most organizations compensation has largely been ignored.

This oversight, to a large extent, can be blamed on a lack of understanding of the changing role of pay and its impact on people. When we talk about compensation and its importance in motivating people and enhancing performance, our critics often turn to that business guru of gurus, W. Edwards Deming. "But Dr. Deming," they begin, "said that you can't motivate people with extrinsic rewards."

Although a brilliant management strategist, Deming unfortunately didn't fully understand the role compensation can play in today's organization. And most of the critics who quote him don't fully understand the point he was trying to make -- a point he made very well in a newspaper interview a few years ago. "We are all born with intrinsic motivation, selfesteem, dignity, an eagerness to learn," he said. "Our present system of management crushes that all replacing it with extrinsic motivation, by constantly judging people."

Deming is right in touting the merits of intrinsic motivation. Indeed, many organizations have stifled that aspect of performance -- and they have often done it through lousy pay and performance management strategies, as well as bad supervision and bureaucratic administrative practices. But to say that all extrinsic rewards are therefore bad is to miss the point. The fact is, a well-designed compensation program that is fully and properly aligned with an organization's values and culture does wonders for selfesteem and an eagerness to learn, not to mention performance.

There is no doubt that money directs behavior. If you think otherwise, just pick up today's newspaper. People switch jobs, trade stock, go on strike, even break the law, to get money. As the infamous Willie Sutton is reported to have replied when asked why he robbed banks, "Because that's where the money is."

In Western society, in particular, money has taken on a complex and significant role in defining and communicating the essence of both individuals and groups. With the possible exception of religion, there is no stronger force in determining identity, status, and personal value. In essence, pay is a proxy of self-worth. What else -- right or wrong -- has the power to communicate everything from where you stand in an organization to what you've done, to what you are able to provide your family, to how you are able to live, to your place in society? For most people, that power flows from their job or role -- from the work they do and from the compensation they receive for doing it.

That is not to say that compensation should in any way diminish the intrinsic rewards. They too, of course, remain a critical motivational tool. Oust ask the felonious Mr. Sutton, who in his autobiography admitted that money wasn't everything. "I loved it," he said of bank heists. "I was more alive when I was inside a bank, robbing it than at any other time in my life.")


Not only is compensation often misunderstood, frequently it also is misapplied. And, more often than not, it is completely out of synch with the rest of the organization's values and processes. The reason is clear: Although organizations have undergone dramatic changes, the strategies for assigning, administering, and implementing compensation have until very recently been frozen in time. As a result, compensation is no longer aligned with the organization's evolving organizational structure, work cultures, values, and business strategies.

It is a critical failing. Only now are people beginning to realize that pay in the current Zeitgeist of organizational change should play a much more significant role than in the past. Pay can no longer be seen as a mere expense and cost of doing business, but instead must be viewed as an investment that is closely linked to the long-term success of the organization.

Organizations are beginning to understand that pay should no longer be considered only in terms of specific jobs and current financial results. Compensation must inextricably be tied to people, their performance, and the organizational vision and values that their performance supports. Two of the most important factors influencing performance and results are an organization's climate -- its values and culture -- and its management practices, which include compensation. But, based on our own research, management practices hold more than twice the power of climate in influencing performance, and indeed, can heavily affect changes in the climate itself.

A force as powerful as pay cannot be trivialized. Think about the time and energy an organization puts into an executive compensation program and then multiply that by the number of employees in the organization. That's the sort of effort that must go into today's compensation program. An effectively designed, carefully aligned compensation strategy certainly won't make all of an organization's employees happy or satisfied. Nor will it eliminate all of an organization's behavioral problems. Such a strategy, however, will go a long way in improving performance and results.

Given such influence, compensation must be considered a long-term investment, which pays "returns" far beyond the current fiscal year, rather than a short-term cost of doing business. Take, for example, the company with the $10 million payroll. From a cost-of-doing-business perspective, a 4 percent increase is viewed as a one-time, $400,000 expense. If viewed from an investment perspective, however, it must be considered as a continuous $400,000 expense, which will only be compounded when another 4 percent increase is added next year. In this light, the need for continued individual and group growth, the need to continually "raise the bar," so to speak, and ask people to share the risks as well as the rewards becomes much more significant.

In many organizations, unfortunately, not everyone shares this enlightened "investment" vision of pay. Line managers, who are constantly driving home the message of continually improving speed, efficiency, and quality, are among the first to grasp it. But senior leadership, which often remains focused on cutting costs and increasing profits, usually has a tougher time seeing pay as anything more than a margin-reducing expense. And the human resources and compensation professionals often see pay purely in terms of attracting and retaining talent.

It is among this last group -- those most closely involved in pay -- that resistance to compensation change is the greatest. While they enforce and administer pay, they have not yet grasped this new concept of its importance in supporting changing values and improving the performance of people.

In a recent Hay survey of more than 1,500 human relations professionals, for example, improving quality and productivity were ranked as the top priorities for the coming year by 41 and 42 percent of the respondents, respectively. Yet only 25 percent thought linking pay to individual performance was a top priority; only 22 percent said linking pay to team performance was critical; just 14 percent thought tying pay to quality improvement was a major goal; and a mere 9 percent thought it was critical to survey employees about the company and their work.

So much for pay and performance and the importance of people in the equation. No wonder the human resources department is often viewed as a minor player in the organization -- out of touch with goals and values. No wonder more than one human resources or compensation vice president has had his or her head "taken off" by the board of directors for merely suggesting a pay increase based on traditional survey comparisons within the market -- a practice that worked fine in the past. Why, the VP is asked rather bluntly, is their organization hobbled in lockstep with market pricing when it had a worse -- or perhaps better -- year than the competition?

Good question. It isn't that the traditional pay strategies -- programs that worked so well for so long -- suddenly turned on us. What shifted were organizational values, work cultures, and business strategies. Although they largely have been overlooked, dramatic changes in the organizational rules have frequently rendered traditional compensation strategies ineffective.

Employees today are expected to work in teams rather than solely on their own. They are expected to keep learning new skills and to assume broader roles. They are expected to take more risks and responsibility for results. As a consequence, we are slowly coming to the realization that we may be paying for the wrong things, sending inconsistent messages about the company to its employees, or creating artificial expectations of continued advancement and raises, no matter how well the company performs.

This need to change compensation is in no way limited to U.S. organizations. In early 1994, for example, Hay held a number of conferences around the world to introduce the concepts of dynamic pay strategies. At that time, we found that many organizations in many countries were far behind what we were doing in the United States and some parts of Europe. On a similar tour less than nine months later, however, the mood had shifted dramatically. Everywhere we went -- Europe, Latin America, Asia, the Pacific Rim -- we found organizations clamoring for new compensation strategies. The waves of change that we had earlier experienced in the United States and parts of Western Europe had very quickly, we found, reached their shores. Today, we are helping many of those organizations design new compensation strategies that are aligned with their changing cultures and business strategies. Among them are a large Australian petroleum firm that is transforming its culture so that it can aggressively develop new markets and increase customer service, an electronics firm in Singapore that is developing new leadership competencies so that it can improve managerial effectiveness, and a Venezuelan utility that is beginning to use skill-based pay in order to boost performance, broaden the roles of employees, and eliminate a culture of entitlement.


It's not just compensation that must change, of course. In most organizations today, there is an increased awareness of the need for a total rethinking of the traditional ways of doing things, a revolution of the workplace. The cutbacks, downsizing, and layoffs that are such prominent features of the corporate landscape can no longer be viewed as solutions to short-term economic problems. Rather, they call for a fundamental change in the way we think about work and pay.

Among those traditional concepts that are beginning to be jettisoned is the view of work from a "scientific" management perspective that broke it down into its respective parts, and then broke those parts down into specialties and subspecialties. Take, for example, the traditional human resources department that continues to be used in many organizations. Within that department there is usually a benefits department. And within the benefits department there are "subspecialists" -- individuals who deal with health care benefits, retirement benefits, and compensation.

Increasingly, organizations today are giving up this multitude of specializations -- and the multitude of staff they require -- in favor of smaller staffs of generalists, supplemented when necessary by specialists from outside the organization who are brought in on a temporary basis. Thus the paradigm of specialization is beginning to shift. As this shift takes place, we have stopped defining jobs in a fight, vertical, functional manner, and have begun to ask people to do things more horizontally, a move that sacrifices depth but provides a team of broader, more well-rounded players.

This shift signals dramatic, and in the view of some, dire consequences for a lot of people. Many of those jobs and positions that daily we read are being eliminated are just that: gone forever. And no economic boom, however rosy, is going to bring them back. The successful organizational employee -- the one who will not only survive but move ahead in this brave new workplace, will be the one who can learn and expand his or her knowledge, skills, and competencies. It will be the individual who will be able to perform a variety of functions and frequently work as a member of a larger team.

Those who want to remain specialists will become "contract" players, the consultants, freelancers, and part-timers who will be used by the organization on a temporary basis. These individuals will leave the role or relationship after they have accomplished their mission or special project, whether it lasts two days, two weeks, or two years. As noted organizational expert Charles Handy wrote, "Less than half of the work force in the industrial world will be in 'proper' full-time jobs in organizations by the beginning of the 21st century. Those full-timers or insiders will be the new minority...."

One early example of this move toward utilizing a combination of "core" and "contract" employees was seen in the health care industry. A decade ago, during an industry-wide shortage of nurses, hospitals created their own registries in order to attract and keep the best available nurses. These hospital registries allowed nurses to sign up for a certain number of hours or days a week, rather than work a standard forty-hour-a-week schedule.

Today, of course, the acceleration of change is forcing most health care organizations to reengineer their core processes and redefine the roles of their core employees. In many hospitals today, the raft of "specialists" ranging from the housekeeper to the head nurse has been replaced by a small cadre of multiskilled people who -- as a team -- provide the full range of patient care.

Although still foreign to many traditional organizations, new approaches such as team-based processes and core/contract networks are slowly gaining acceptance in modem organizations that recognize the need to change.


While every organization and industry finds itself undergoing a unique set of changes, there are at least six major changes that are common to almost every organization. They are:

* rapidly expanding technologies
* growing global competition
* increased demand for individual and organizational competencies and capabilities
* higher customer expectations
* ever-decreasing cycle times
* changing personnel requirements

Each of these has been examined in great detail by other authors, but a brief review here is warranted in the context of changing organizational values and compensation strategies.

Technologies: Faster, More Accessible

Although the explosion of technology is widely acknowledged and accepted, many of the specific technological changes that have occurred have been either misread or not fully appreciated. The computerization of offices, for example, was initially viewed primarily as a way to enhance productivity. And productivity was defined as individuals being able to do more or higher quality work in a given span of time.

What occurred, however, was a much greater revolution. That piece of cable now linking employees had absolutely no respect for organizational charts or rules, and information began flowing freely across what had previously been impenetrable boundaries. New and ever-expanding networks were created linking employees not only with employees in other rooms, offices, even countries, but also with suppliers and customers. So, what began as an improvement of the traditional, specialized individual paradigm (it is, after all, called a personal computer) soon was itself creating new paradigms -- "nodes" of influence that emphasized networks and groups rather than the lone employee punching a keyboard. Ultimately, what started as a tool to improve individual productivity has become a tool to facilitate group communications. And, with such developments as local area networks (LANs) and the Internet, the dynamics of those group communications are continually expanding.

In a few short years, the computer has fundamentally changed jobs. The electronic spreadsheet alone eliminated huge numbers of jobs. What before the advent of computers had been done by roomfuls of mid-level analysts in finance, marketing, sales, and human resources can now be handled by one clerical person with a machine and software that can be purchased for a few thousand dollars from any discount electronics store.

And personal computers aren't the only technology to impact organizations today. Mobile telephones, fax machines, satellite links, and commercial air travel are playing a big role in reshaping the organization, reducing the significance of specific times and places for work (or almost any other activity), provided output is delivered on time. Flexible schedules, job sharing, telecommuting, and the growth of the virtual office all reflect this change.

Global Economics: Expanding Its Impact While Limiting Labor Costs

These technologies have given rise to a new breed of businessperson, a globe-trotting transnational who, although affiliated with one region or country, is really playing in a world marketplace. Indeed, the borders and barriers that traditionally have restricted the global market are coming down at a dazzling pace. In five short years, we have seen the Berlin Wall crumble, the former Soviet Union fall, a large part of Eastern Europe plunged into economic and political turmoil, the rapid growth of the European Economic Community, the signing of the North American Free Trade Agreement, the General Agreement on Tariffs and Trade, and the explosion of the Asian/Pacific market. Whether or not we support these changes, the fact remains: They are reshaping the global marketplace.

Increasingly, organizations -- even those that don't feel the impact of global pricing -- are being reshaped by forces outside of what they perceive as their market. Take, for example, the small business with a sales effort that is limited to one region of one country. It may not view itself as a global player. Yet, if the product it sells is produced in the United States, and the business's customers can get that product for less money or faster through another source in, say, Taiwan or Vietnam, then this small company may soon face the impact of global economics even though it considers itself a local player.

Over time, these global economics are narrowing the cost of labor as a percentage of a product's cost. As a result, a finite range of labor costs is evolving, beyond which an organization cannot stray and expect to remain competitive. In light of such change, many organizations are restructuring around teams and processes rather than individual jobs to increase cost effectiveness, as well as improve flexibility, speed, and service. These more efficient organizations require fewer employees, but employees with multiple skills and competencies. As Charles Handy wrote, the new organizational equation for success today is:

1/2 x 2 x 3 = P

Translated, it says that in today's marketplace, profit and productivity are best created by half the workforce, paid twice as well, producing three times as much.

Competencies and Capabilities: More Important Than Products

With increased competition, companies are rapidly finding that a good product or service alone does not ensure success. Instead, they must distinguish themselves by focusing on fundamental competencies and capabilities that will set them apart from the pack. To achieve this, organizations must maximize individual, unit, and organizational competencies -- those underlying attributes or characteristics that can predict superior performance. These competencies range from tangible attributes, such as skills and knowledge -- technical know-how, for example, or the ability to operate a sophisticated computer -- to intangible attitudes and values, self-image, traits, motives, and behaviors -- attributes such as teamwork and flexibility. These competencies will become a part of the organization's foundation and will be the focus of everything from hiring and training to marketing.

Take, for example, large service organizations such as insurance companies or health care providers. What will set them apart from the competition is no longer simply the quality of the insurance policies they write or the level of health care they provide, but also how fast they are in processing claims or providing treatment, and how sincere and friendly they are in addressing the needs of policyholders or patients. Organizations are increasingly differentiating themselves in terms of focus and strategic competencies rather than specific products, services, or markets. One electronics company, for example, may not think in terms of the particular pieces of equipment it makes, but in terms of its competency in miniaturization. Another may think in terms of dominating competition through time-based superiority -- emphasizing speed to market, simplicity, and self-confidence.

Customers: Driving Organizational Designs and Strategies

Next to technology, customers may be the most powerful force changing organizations. Being first to market with a product or service is no longer enough. Today's customers are demanding better service, faster response, higher quality, and a heightened sensitivity to their needs. They require products and services to be customized or individualized -- without erosion of accessibility, functionality, or reliability.

Consumers have quickly gone from accepting "any color as long as it's black" to "having it their way." Take ice cream: It is no longer enough to have vanilla, chocolate, and strawberry. It is not enough to have thirty-one flavors, or even the flavor of the month. Now you can go to the ice cream store and order chocolate-chip-cookie-peanut-butter-cherry-pie ice cream. It doesn't make any difference whether you are a commercial or retail customer. You can require and receive products tailored to your tastes and requirements.

When it comes to service and accountability, customers today also are less willing to recognize the geographic and ownership limits of an organization. "If you sell a product to me," they reason, "then you are responsible for making sure it works Don't bother me with your problems or principles, I don't really care. My bottom line: Either stand behind your product or service, or I'll find someone else."

Sound a little strong? Perhaps. But you would be surprised how many people are committed to this philosophy. Just ask anyone who has consistently maintained a successful automotive dealership over the past ten years. The ways in which imported attitudes forced U.S. dealers to shift their emphasis from sales and style alone to continuous high-quality customer service could themselves take up an entire book. A few have even turned to pay. One luxury car dealer in Texas, a client of ours, is creating a team-based reward program in which pay is in large part determined by customer satisfaction. Unquestionably, this is a very different paradigm from the car sales of old.

This increased emphasis on customers extends beyond what is traditionally thought of as the customer -- the retail or wholesale buyer of goods and services. Today, it also extends to the "internal customer," the supplier perhaps, or the coworkers in other departments or divisions. And it works in a variety of settings -- even in the middle of the ocean. Although it was named Black Magic, the yacht that New Zealand sailed in its lopsided America's Cup victory was successful because of its approach to business and not because of any curses or wand-waving. While other designers labored over their plans in isolation, the Kiwis involved most of the fifty-five-person crew -- who in effect were the designers' customers. The crew, for example, came up with the boat's deck plan.

As the challengers who were left in Black Magic's wake quickly discovered, organizations that reinforce bureaucracy and preengineered responses are rapidly being overtaken by those that provide customers with the best tailored solutions in the shortest time. To meet this shift in focus and attitude, new organizational designs are evolving that are aligned with customer needs and emphasize customer/company partnerships. As a result, new leadership skills must be developed, along with new measurement systems that not only integrate customer satisfaction and financial performance, but also facilitate strategic planning with key customers.

Boeing Co. took such an approach when it built its state-of-the-art 777. Not only did it involve a team of experts in design, manufacturing, and tooling, but it also brought airline customers into the planning sessions. So well did the approach work that the first plane built went together almost perfectly. Said the general manager of the 777 division: "It was just like Fisher-Price toys going together on Christmas Eve."

Speed and Simplicity: Keys to Competitive Advantage

Why have customers become so demanding? Part of the "problem," if you want to call it that, goes back to technology. Not only are today's customers more knowledgeable and aware, but they also have been spoiled rotten, brainwashed if you will, by the Religion of Real Time. They have come to expect everything from their hamburgers to their health care right now! If they can have a war brought into their living rooms, live from Baghdad, then, by gosh, they do not expect to wait around for a burger and fries, a new water pump for the family van, or a liver transplant for Uncle Fred.

You cannot blame them. We are living more in a real-time environment than ever before. The lag-time of yesterday ("We'll have a decision for you in a couple of weeks, Mr. Dithers. As soon as the information is mailed to us from the home office, we'll mail it to you.") has been eliminated by technology as simple as Federal Express and telephones. ("We'll have a decision for you in a couple of hours, Ms. Jetson. As soon as the information is faxed to us we'll modem it to you.")

While most of us are still struggling with the ever-increasing speed at which change buffets our organizations, we have come to accept that speed when it comes to reduced turnaround times and shorter product cycles.

To survive and compete in such an environment, organizations must move through their product/service life cycles at a faster pace. This everquickening rush to market can be found in a number of industries, especially those that dance on the cutting edge of technology. Locked into a battle-to-the-death with Nintendo Co. and Sony Corp. for control of the video game world, and hoping to "get the drop" on both, Sega Enterprises, Ltd., advanced by four months the scheduled release of its latest game player in the United States. Its marketing slogan for its new product said it all: "It's out there."

But speed to market alone doesn't insure success. At the same time, organizations must find simpler, more customer-friendly ways to deliver services and products. Control-oriented organizations filled with barrier-laden bureaucracies, time-consuming committees, and cumbersome approval processes are being scrapped. Instead, work is being redesigned and reengineered to increase flexibility and efficiency and empower employees.

People: Greater Diversity, More Value, Less Loyalty

Whatever their structure, whatever their business strategy, organizations are quickly coming to the realization that it is the performance of their "human assets," their people, that can make the difference between success and failure. Yet, as the organization and nature of work has changed, so too have the workers.

With the increased emphasis on technology, quality, and service, we are quickly moving away from a purely "mechanized" workforce to an "intellectualized" one. Consistency is no longer king. We no longer want people to act like robots, but rather to make their own informed, intelligent decisions, use good judgment, and assume more responsibility for the organization's performance. Such a dramatic change requires that people accept new values, behave differently, learn new skills and competencies, and often take more risks.

Empowering those people is a critical element of effective organizational change. As Gary Hamel and C. K. Prahalad argue in their book Competing for the Future, "Delegation and empowerment are not just buzzwords, they are desperately needed antidotes to the elitism that robs so many companies of so much brain power." Unfortunately, next to reengineering, empowerment has become the most overused and misunderstood business buzzword of the 1990s. In too many offices in too many corporations, it has become a hollow battle cry, a phrase paid only lip service by many managers and openly laughed at by employees still waiting to be somehow "blessed" with this new mantle of responsibility.

A major reason for these problems is organizational change itself. Few organizations in America today have avoided the throes of downsizing or reorganization. And even the most loyal employees may find it difficult to believe that they are an empowered, valuable asset when all around them other "valued assets" -- most likely their friends and coworkers -- are being cut from the ranks.

The problem is not just with those people who have lost their jobs or who fear losing them. As the workforce continues to shrink and more is required of everyone -- from the hourly worker to the CEO -- each person must add measurable value to the organization. That means acquiring new knowledge, new skills, new competencies, and new behaviors. Employment is no longer viewed as a lifelong commitment, but rather as a performance contract that is continually renewed. Employees are being asked to do more, do it differently, and share in the organization's risks and rewards. For most of us, that is a bitter pill to swallow. After all, we had come to expect a continually improving quality of lite, along with continually increasing paychecks and continued job security.

Just how much damage these changes have done to the employee psyche can be seen in the results of several recent studies. A 1993 study by a group of Fordham University social scientists found that Americans' sense of well-being had dropped to a twenty-year low. This Index of Social Health, which looked at sixteen categories including unemployment, came in at a weak 36 out of a possible 100 points -- less than half the 1972 high of 79. A companion Index of Social Confidence, which examines how Americans evaluate national performance in areas that shape the quality of life, including education, occupation, and living standards, came in at 34.

The results of a recent Hay study of employee attitudes were little more encouraging. Top management, for example, got favorable ratings from less than half of the four employee groups surveyed: middle management, professional/technical, clerical, and hourly workers. Less than 40 percent of each group felt that their company provided them with the training to advance. And 50 percent or less of each group said they were satisfied with their pay.

For companies that had gone through a downsizing in the past two years, the view was even worse. Employees in those companies thought they were treated with less respect and had less job security than employees in organizations that had not faced such cutbacks. The survey showed that 60 to 80 percent of the employees (depending on the group they were in) at downsized organizations still liked their jobs and the kind of work they did. Yet only 30 to 40 percent thought that the job made good use of their skills and abilities; 40 to 50 percent thought they had good job security, and less than 25 percent thought they were treated with respect.

Those are scary numbers, considering that many organizations are pinning many of their hopes for the future on the belief that employees will take a greater role in the decision making and a greater responsibility for the success -- or failure -- of the organization. We're not talking about just the few leaders and "star" performers, but the "average ideal" employees who, if truly empowered, become superior performers and drive the organization.

This sort of true empowerment, however, requires much more than new titles or even shifts in jobs, roles, and organizational structures. It requires a commitment not only to help employees obtain the new skills and competencies they need, but also to reward them when they use those skills and competencies to help the organization achieve its goals. One company that stands out in this regard is LEGO Systems, Inc., the manufacturer of those little plastic bricks that many of us -- or our children -- played with while growing up.

A recent employee attitude survey at the company's Connecticut plant, which garnered a 98 percent favorable response rote, is just one indication that the organization is doing something right. That something, according to managers and employees alike, is a transformed company culture, structure, and pay program that emphasizes teamwork and responsibility. In the packing department, for example, the traditional assembly line operation has been replaced with self-directed work teams, eliminating the need for several layers of supervision and creating a heightened sense of pride and responsibility on the part of the employees.

"There is a very positive atmosphere about this company," says compensation manager Raymond Patton. "You can sense it when you walk in here. You can sense it on the floor. People just love this company to death." Yet as glowingly as Patton describes the company, he is the first to admit that achieving a high level of employee empowerment is not something that happened overnight. It was -- and remains -- a slow, continuously evolving process that has not been without its share of problems. It is not a process, however, that most companies to this point have been willing to sustain.

Greater workforce diversity is another "people" issue that organizations are struggling with. Perhaps the best "snapshot" of the changing face of the American worker was taken by the Hudson Institute in its landmark Workforce 2000 Study. Among the study's findings, many of which already are proving accurate, between now and the turn of the century:

* The population and the workforce will grow more slowly than at any time since the 1930s.
* The average age of the population and workforce will rise, and the pool of young workers entering the labor market will shrink.
* More women will enter the workforce.
* Minorities will make up a larger share of new entrants into the labor force.
* Immigrants will represent the largest share of the increase in the population and workforce since World War I.

The impact of this increased diversity can already be seen in workplace attitudes. According to the latest Hay employee data, for example, minorities express more favorable attitudes than their counterparts in their commitment to their company and their chances of achieving career goals. But they are less positive than their nonminority coworkers when it comes to issues such as job stress, discrimination, and the fairness of pay. Although the survey noted few differences between men and women employees, issues such as flextime, job sharing, child care, and maternity leave have become critical as more women have entered the workforce. And, despite this supposed age of enlightenment in which we're living, the issue of equal pay for women remains a hurdle for many organizations.

Workforce diversity, like many of the changes assaulting organizations, is a two-edged sword. There is no doubt it has created a number of new management issues that range from the variety of food served in the cafeteria, to the need for flextime, to the facilitation of teamwork. Employee relationships, for example, more critical than ever in this time of teams, can be considerably more complex in a highly diverse workforce.

Despite these new management issues, diversity has quickly proven itself critical to organizational success, adding an important and much-needed dimension to our workforce. For starters, it has given employers a larger, more diverse pool of talent from which to choose -- especially important in a global economy. Depending on the type of organization, they may select independent creative self-starters, or more controllable, detail-oriented people. These choices can more easily help change the way work is designed. Perhaps more important, diversity also has introduced a broad variety of values and perspectives that were solely lacking in the white, male-only organization of the past -- values and perspectives that are not only required in today's more diverse marketplace, but also are critical in facilitating change.


How organizations react to these major changes varies, of course, depending on their business goals and strategies and Which of the changes are exerting the most "pull" within their environment. Yet if we examine their structures, cultures, and values closely, we see that in general there are four primary areas that organizations focus on in order to achieve their desired results.

These types of responses are not new. They have, to one extent or another, been around for literally hundreds of years. Yet the importance of each and the role it plays must continually change and evolve along with the rest of the organization. These four areas of focus or emphasis are:

* Technology. Broadly conceived as "ways of doing things," these responses range from low-tech approaches such as manual labor to state-of-the-art, high-tech computerized information systems.
* Customer Focus. Many organizations respond by granting the customer a key role in determining the culture and strategy of today's organization. How an organization perceives, understands, relates to, communicates with, and works toward satisfying customers is critical to its strategy and success. And the "customer base" is tar bigger than the retail or wholesale buyer. It includes suppliers, contractors, even other divisions or departments in the organization.
* Flexibility. Speed and adaptability are of the essence in today's global marketplace. Cycle and turnaround times continue to shrink. How quickly and effectively an organization can change the things that don't work, or improve those that do, is critical to keeping it competitive and profitable.
* Reliability. Despite all the new demands driven by change, such as better customer service, more efficient processes, and faster response times, an organization can't forget the major area of focus that has traditionally ruled an organization. Reliability, the ability to continually meet high standards, be they for quality, service, speed, or dependability, is essential in today's market.

The degree to which organizations utilize one or more of these key responses leads to the creation of broad strategies within and between industries. If they are to be competitive, organizations must make strategic decisions on work systems and design, management processes, and human resource practices (including compensation and benefits) based on these touch points.


Many of the changes already discussed also are forcing organizations to rethink their outcomes -- to reconsider how they measure value and success. Traditionally, organizations have measured their performance primarily through relatively short-term financial results: sales, growth, profitability, and key ratios such as earnings per share, return on investments, and return on assets. While these measures are still valid, today's faster paced, more competitive business environment is pushing organizations to find ways that better predict their long-term viability and shareholder value-in terms of both financial performance and less tangible assets such as name, brand, image, levels of quality, and customer satisfaction.

To that end, organizations must now look at the behaviors, organizational cultures, and business strategies that will generate long-term value -- everything from responsiveness and customer service to acquisition and organizational integration.

To better determine their long-term shareholder value, a number of organizations are turning to economic value added (EVA) models, which look at the total cost of the organization's true capital -- everything from machinery and real estate to what the organization is spending on research and development and employee training. Such measures, organizations are finding, while not "magic bullets," are much better predictors of their long-term success and viability.


As we have already noted, to this point most organizations have dealt with the forces of change through very narrow, specific strategic initiatives, such as quality, teams, and reengineering. Unfortunately, when organizations finally begin to rethink their pay strategies, they frequently continue taking a somewhat reactionary approach -- overlooking the connection to the overall structure and strategy of the organization, or to any other processes.

That is not surprising considering that, traditionally, compensation, like many other human resource processes, functioned somewhat independent of other organizational strategies. And, because most businesses -- although different in size, scope, and even industry -- tended to be organized along similar, very functional lines, most embraced a fairly standardized approach to pay.

Take the pay-for-points methodology made famous by our firm. The Hay Guide Chart Profile Method, a system that compares the value of jobs based on know-how, problem solving, and accountability, has been used since the early 1950s by literally thousands of organizations in a wide variety of industries around the world. Yet while the Hay system continues to work well in many of these organizations, others are finding that -- at least in its current form -- the traditional guidelines for pay no longer support their business and organizational needs.

As a result of this continuing disconnect between pay and other processes, a plethora of pay strategies somewhat miscast as "magic bullet" solutions has been developed, creating what we call the "Pay for ____ Syndrome" -- pay for skills, pay for teams, pay for competencies, pay for the latest management solution to come down the pike. And, because each of these strategies is considered in a vacuum, companies often find themselves jumping from one "pay for" program to another, searching for The Answer to all their needs.

Not surprisingly, with the scope and diversity of the changes that are taking place, there is no longer a single, ideal pay strategy for all organizations. Any number of these new approaches to pay can be very effective if they are tailored to -- and aligned with -- an organization's evolving needs, goals, and work cultures. In the "one organizational model, one compensation strategy" paradigm of the past, alignment was a virtual no-brainer. Today, however, it has become a major part of the equation. To jump into a brand-new pay strategy without fully understanding its fit with your particular organization is like attempting to tune a Ferrari after working for years on Model Ts.


There is no doubt compensation should play an important role in supporting changing organizational values, business strategies, and work cultures. An effective compensation strategy, although often overlooked, can be critical in effectively harnessing the forces of change and moving the organization forward. Nonetheless, the key is not in finding the newest, most innovative, or even the most mechanically efficient of these pay solutions. The key is in first assessing an organization's culture and then aligning it with its strategic goals: What kinds of people does it want? What does the organization want them to do? Only after those people have been selected and their expected goals and responsibilities identified can the organization design supporting and stimulating reward programs -- not trends, not fads, but dynamic pay programs that can evolve and change as the organization evolves and changes.

The solution to compensation, we strongly believe, lies not in tossing out the old standardized approach in favor of a new standardized approach. To be successful, organizations must take dynamic approaches that blend the body of compensation knowledge developed during the past fifty years with the latest, leading-edge approaches. But before they can even take that step they must -- as we have already noted -- carefully tailor compensation programs to their evolving needs, goals, and cultures.

Does this approach work? A number of organizations certainly believe so. Consider Trident Regional Health System, part of Columbia/HCA, the huge health care management organization. Saddled with a performance management system and merit pay plan that did not reflect its true mission and quality-driven values, the Charleston, South Carolina-based health system -- a beta site for TQM efforts -- developed a performance management and pay strategy based, to a great extent, on behavioral competencies such as teamwork, communications, and customer-mindedness. The results were very positive. As one of the senior executives told us: "A majority of employees are responding to what they need to improve upon. They feel they are more in control of their own destiny, because they are able to talk openly and honestly with their supervisors. After the first review cycle, not one employee came to us complaining about their pay."

He went on to add: "I don't know what it is going to look like in five years. But we've got a base to work from and continuously improve, and we have a feedback system that is going to allow us to effectively do that. I believe it is going to lead us closer toward something that is going to fit the high-quality hospital of the 1990s and beyond."

His organization obviously understands what many others are just beginning to grasp: that while compensation can help support change, to be effective it must be aligned with the organization's values, culture, and strategic goals. In the next chapter we will take you through the first step in achieving that alignment: assessing and understanding your organization's culture.

Copyright © 1996 by The Hay Group

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