The Psychology behind Pay

What is money? We know it’s the stuff in our pockets, the numbers in our accounts and the stuff we wish we had more off! Money is something we all use and to some extent think about day in day out, yet we never really stop to ponder what it really is. I would suggest that in essence, money is ‘value’ and it’s worth knowing this because in a work place context, it represents the value we place on an individual’s skills and experiences.

The issues around money as a motivator is a complex one. One of the earliest writers on the subject, Frederick Herzberg concluded that money is a poor motivator but can certainly be a de motivator! Certainly many managers understand that money is not a good motivator on a day to day basis and I am sure many will agree with Herzberg. So what can we do to ensure money is not a de motivator? It goes without saying that we need to have suitable systems in place which allow us to pay people on time and regularly. That should be relatively easy these days and even the smallest company can outsource this to a payroll supplier. Far trickier is how we set the levels of pay within our company (and how by definition place a ‘value’ on our staff).

One of the biggest mistakes employers make is to keep pay as secretive as possible.  This presents a couple of difficulties; the first being that it doesn’t engineer trust (have something to hide?) and the second that it is increasingly becoming untenable because of equality and diversity legislation. So what to do instead? I realise this is somewhat counter intuitive but why not be open about pay. At the very least be informative as to how you set and award your pay. People might not always completely agree with their pay but if it’s transparent, perceived as fair (next to some sort of objective criteria) and they understand the rationale behind it (e.g. I get around 60% of the average market rate for my skills and job role), it’s far more likely to be accepted.

I’ve seen different ways of setting pay in organisations from internally focused systems to those that peg their rates to the market one. One which places more focus on the latter is better in my opinion. That doesn’t mean pay needs to be the best in the market but if it is at least competitive, it demonstrates the company places a suitable value on the individuals skills next to other employers. Lastly all of this should be done to make pay as minor an issue on a day to day basis and your attention should switch to creating the sort of work environment which really does motivate people on a day to day basis!

What is trending in the world of HR in 2014?

As we look forward into 2014 it’s interesting to look at pioneering companies for examples of HR practice. These companies not only provide alternative examples of how an organisation might structure and manage its staff, but also perhaps, an insight into what organisations of the future might look like.   

Towards the end of 2013, US companies Netflix and Zappos shared insights into their organisations. Netflix built their HR philosophy on minimising employee control and having a ‘context’ driven leadership model in order to encourage empowerment. Zappos meanwhile started a process to completely scrap their hierarchy, creating instead a ‘holacracy’, without managers and job titles. Going forward, employees will be allocated into semi -autonomous work circles. Zappos say all of this is in order to boost innovation, empowerment and reduce bureaucracy. Whilst all of this might sound extreme, Zappos arguably represent the logical conclusion of the employee engagement agenda. After all surely you engage staff by empowering them?

 

 

Within more traditional sectors, we saw GlaxoSmithKline scrap individual employee performance related pay. This was on the basis that their previous remuneration policies were driving damaging behaviour. Seemingly running contrary to many in the sector, Swedish bank Handelsbanken, got on with running their successful bank without short term bonuses and by devolving decision making to branches (progressive yet refreshingly old fashioned). Both examples were encouraging; I have long been a sceptic of individual performance related pay and the damage it has caused in the banking sector has been huge.

What does this tell us? The previous examples are a curious mix of companies looking for sustainability and innovation. Netflix, Zappos and even Handelsbanken have accepted that you simply cannot control every facet of your organisation and to try and do so is counter-productive. They are talking about terms such as empowerment but backing these words up with meaningful action. Crucially these companies make their decisions based on a desire to be a leader in the market place.  Is 2014 the time for more companies to get on board with this philosophy?

Understanding Individual Performance in an Organisation

Employee performance is a favourite topic of mine because it is one which is often very misunderstood and in this blog I want to give you a sense of why I think this to be the case!
 

Let us start with a simple scenario. Sam is a very competent saleswoman and she works for a company who we will call ‘Old School’. Sam is in charge of selling a product which has become less easy to sell in recent months. Customers seem to be buying a competitor’s product which better meets their requirements. The recently implemented Old School CMS is time consuming and clunky whilst the company have recently introduced additional reporting procedures to try and control cost. All of this has created more bureaucracy for Sam. Her figures show a decline in performance from the previous year and going into her quarterly review, Sam feels frustrated, vulnerable and unsure about what to do.

During the meeting, her manager Nick, suggests that Sam should try harder to sell Old School’s products. “Yes it is tough but you need to be more innovative in your approach and need to try even harder” he tells her as he awards a ‘Requires Performance Improvement’ grade. Sam had already being working very hard but at least she is now sure about what to do. She leaves her review meeting feeling completely demoralised and the first thing she does is to phone a recruitment agency. The question is was Sam to blame?

A traditionalist like Nick might say yes. Yet what this example hopefully shows, is that an individual’s performance is actually impacted by many different factors out with the control of the individual. In Old School we saw external changes to the market in the way of new competition as well as significant internal change imposed upon Sam. What we’ve seen is the greater system impact her total performance leaving Sam stuck as something of a bystander to events. The renowned late American industrialist Edward Deming talked about the 85/15 rule – that in certain circumstances the system was responsible for up to 85% of an individual’s actual performance. We could argue about the actual weighting of this ratio but he highlights a very important point. If Nick had understood this he could approach the problem differently and work with Sam to look at the decline of performance in a more constructive way.

 

The misunderstanding of the multifaceted nature of performance can be hugely detrimental to business success and individual wellbeing. I’m not saying for one minute we have an abdication of individual responsibility, but surely if we recruit the right people in the first place and they pass their probation period, they’re competent to work for the company? I’ll leave you with one last thought, imagine how nicer work would be without a blame culture…

What do you think, does this example resonate with you?

The problem with Performance Related Pay...

I read an article in today’s Guardian which referred to performance related pay in the civil service. It got me thinking - I understand George Osborne plans to introduce greater performance related pay to the Civil Service in 2016. I don’t have an issue with reform of the civil service (although I don’t pretend to know much about the civil service if I’m honest) but I do have an issue with performance related pay. On the face of it, performance related pay seems like a logical thing to do. No doubt politicians think it is a good way to ensure results and demonstrate to the public that they’re being tough yet fair. After all “reward” equals “pay” right?

The unfortunate thing is there is very little (in fact next to none) evidence to show that performance related pay actually works! There is however evidence to show it can be damaging and actually drive the wrong behaviours. For many decades respected industrialists and academics have told us that money is a poor motivator. For example Frederick Hertzberg told us in 1959 that money is important to an extent - but only to a limited extent. Karl Dunkers ‘candle problem’ published way back in 1945 showed the limitations financial incentives have in driving results to complex problems. The fact is the ‘carrot and stick’ approach which encompasses things like performance related pay and performance appraisal rarely works and when it does, does so in limited circumstances.

The most powerful human motivation comes from within and there is a lot of evidence to support this. If you’re sceptical, apply this to your own life and you will see it makes sense. For example do you bust a gut to finish that 10k because someone is going to pay you? Do you volunteer with your local sports club because you will get punished? No of course you don’t. A cursory glance at some of the most successful entrepreneurs in the world is revealing. People like Branson or Zuckerberg talk about solving problems, coming up with innovative solutions, creation, having mastery of their work. In fact money is a consequence of their success rather than the driving factor.

Yet in late 2013 we’re still in a situation where politicians and many companies think the best way to motivate people is through performance related pay.

What's wrong at Grangemouth?

For a while things seemed to be going from bad to worse at Grangemouth. Depending on who you believe or what you read, there were various parties to blame. However truth is rarely black and white. Perhaps there is also another way of analysing the situation which has lessons for companies across the globe.

I look at Grangemouth and I see a classic ‘them and us’ culture. The question is where does this culture come from? Often this sort of culture is entrenched in the organisation but it comes from a set of unhealthy assumptions that will have existed for a long time.

If we look at the social science research about human motivation and productivity at work - how much is really achievable in a command and control structure? Whether you like it or not, if you insist on putting in layers of ‘management’, you are putting in place controls which stifle empowerment and extend your communication lines – they ultimately make people remote from the company.

Why do we empower? So we can raise human productivity but to do so properly we have to believe that people are inherently trustworthy individuals who can manage themselves. We have to start treating people like adults and sometimes the adults need to accept they’re adults too. We need to get away from this ‘carrot and stick’ (reward and punishment) approach to work because as Dan Pink tells us, there is no greater amount of research built up over the course of decades to show it just doesn’t work.

Does HR Work? Pt Two 'The Negative Influence of Employment Law on HR'

First of all, apologies for not producing an article in August! I’m going to blame some holiday time and the Edinburgh festival (which was exceedingly good this year).  So here I am in an increasingly dark September and ready to continue with my series of blogs entitled ‘what’s wrong with HR’. In this article I’m going to talk about employment law and the negative effect, I believe, legislation has had on the role of HR departments.

Ask people about HR and the chances are that they will talk about a function that is there to hire and fire. I often found myself resisting this charge because to me HR was always about enabling people to work effectively, to boost performance and reduce cost. It was heavily based on psychology and evidence gathered over the course of a century. Indeed this was why I got it into it in the first place. But it has become clear this was my perception rather than the one held by people at large and indeed it wasn’t one which stood up next to my own experiences as an HR employee. In my defence a cursory glance at the Human Resource Management books in the library of Edinburgh Napier University is far more likely to support my original view of things. So why the disconnect between the boffins in the library and the public and practices of many HR departments who have adopted the role of hirer and firer?

Some of this has been undoubtedly brought about by various Westminster governments, particularly the Labour one. I recently chatted with a colleague from the CIPD, a person who is a little longer in the tooth than myself (but with age comes lots of experience)! He told me that when he started his career in the late 70s, employment law was pretty much “on one pamphlet of paper”. Oh how things have changed! We now live in an age where employment law is on many, many pamphlets of paper!

The ogre of employment law has grown and this hasn’t been helped by a growing blame/get rich quick litigation culture and the growing cottage industry around it which includes law firms through to HR/Employment law companies who promise to ‘keep your business safe’.

To be fair I understand within this climate why a company must address and comply with employment law and it is natural this should fall under the remit of HR. Unfortunately and with a few exceptions, HR at large has become concerned with what I will unapologetically call “ar8e covering”...I know you wouldn’t encounter such a term in the Harvard Business Review but this is my blog and I’m only bit part academic.

What is the result of this ar8e covering? Many HR departments have become convinced that their very purpose in life is to prevent litigation. The trouble is I’d argue that this has had damaging consequences for their businesses. Unless you’re a law firm your company doesn’t exist to prevent litigation - it surely exists to supply a product or service? Unfortunately the need to prevent litigation doesn’t sit well with enterprise. In practice this mind set of ar8se covering manifests itself in anti innovation tools such as draconian staff handbooks aka patronising rule books. Then there is my most hated bogey man of all, the appraisal system.

 It seems many HR departments do employment appraisals, not just because they mistakenly think it will improve performance, but because they think it important to have a paper trail “in case something goes wrong”. Indeed if you go along to any performance management presentation from a lawyer this is what you will be told to do – make sure you have a paper trail and an appraisal system. This is regardless of the fact that most appraisals are completely useless at fulfilling the paper trail role, a point a good employment lawyer recently made to me in private.

“Ahh but litigation damages company reputation and costs money” I hear many HR people and lawyers say. True it undoubtedly can but this doesn’t let HR off the hook. Rather I think it’s about keeping it in perspective. I’ll bet you the cost of defending and losing an unfair dismissal is far less damaging than nurturing an a8se covering culture. True the former will cost you some money but the second will eventually put you out of business.  Ask any entrepreneur if innovation and bureaucracy go hand in hand and listen to what they say. In fact if the best thing your HR department does is to keep the company compliant, I’d suggest you outsource this responsibility to one of the employment law companies because I’d wager you’ll find it cheaper than the cost of employing a HR manager.

Furthermore if we look at the employment law burden it’s not actually as onerous as many believe. The media like to report the horror stories such as the discrimination claims against city banks where huge pay outs are awarded. These are proportional to the company wealth, particularly ugly cases and are the exception to what really goes on. In fact the median pay award in 2012 according to law firm Morton Fraser for unfair dismissal was £4,560. The reality is tribunals don’t want to put companies out of business. Changes to employment law in July of this year should further reduce the risk to businesses.

So what should a company do? By all means have some sensible measures in place to prevent litigation; have good employment contracts and yes, have a sensible handbook with corresponding policies and procedures (but please, please resist the temptation to have a handbook written in patronising legal language). You might even want to have a good relationship with a reputable employment lawyer as a prudent measure. However don’t let them rule the roost and above all else, try to accept that you can’t mitigate against every eventuality and accept that to attempt to do so is damaging.

In fact the best way to protect your business is to adopt an altogether different mind set – that people are Innocent until proven guilty and that most people are trustworthy who want to do well. Build your company and HR practices on this basis. Be very questioning of your existing employment policies in terms of what they really do for your business and why they are in place. Treat people like adults, support them and engender a culture of responsibility and true empowerment as your principles. Can your HR department support with this? If not, question why they are there.

Am I an idealist? Unashamedly so. But I recently read that the famous proponents of the sort of trusting culture I mentioned, WL Gore & Associates, have never made a loss in their 50 year plus history. So there must be something in it.

In the meantime, I’m going to be happy to continue to tell people why my version of HR is much more than hiring and firing.

As ever happy to hear your thoughts!

Does HR Work? Pt One "Recruitment"

This year, The Chartered Institute of Personnel and Development (CIPD) have been trumpeting the organisations 100 year anniversary. 100 years is quite a landmark and it prompted me to reflect on the HR profession and my experience of it.

Therefore in this brand new series of blogs I’m going to explore some of the main areas of the profession and cast a critical eye over them.

First up is Recruitment...

I read a statistic recently which reckoned that companies underestimate recruitment costs by up to 95%! This is because they fail to see the associated costs of recruitment such as management time. This is quite staggering but it didn’t massively surprise me. Recruitment is certainly an expensive pursuit but it’s also important for other reasons which were best explained by a colleague of mine and experienced Financial Director, Jon Brigain.

 
Jon used to work for a leading soft drinks company with a reputation foged in adrenaline sports and I recently asked him how they maintained their culture in such a vibrant and fast moving company. His answer was simple and to the point - “Recruitment”. Jon said their policy was to only recruit people who bought into their values and would thrive in their culture. One of the key ways they achieved this was through a transparent recruitment process – essentially it was important that the candidate knew exactly what he or she was getting themselves into. I found this fascinating but there is a science behind this too which is to do with motivation. Human Behavioural Psychology tells us the most powerful type of motivation is intrinsic as opposed to extrinsic motivation. That means you ideally want people who want to work for you more so than because they have to i.e. it’s a job and they want to be paid (which is extrinsic motivation).
Recruitment is also an opportunity to get things off on the right foot with your new employee and also leave those who aren’t successful with a favourable impression. In HR circles we refer to this as the candidate journey i.e. the process from attraction to hire (or rejection) which I often liken to treating the candidate like a customer. This is an area where many companies fall short. Remember the old marketing adage about people being more likely to share a bad experience? We live in a connected world where thanks to social media every Tom, Dick or Harry can easily tell the world about their bad experiences. If you treat your candidates badly don’t be surprised if it hurts your business reputation.  It is therefore very important to think about how you get your candidates in the first place...

So I now come onto the relationship between HR and the Recruitment industry. Many laymen and women think HR and Recruiters are the same (I commonly hear recruiters being described as HR) but this is a mistake because they’re quite different. Recruitment is about placing people in companies and is really quite a lucrative business because it’s essentially sales. Now I want to make it clear that I’m not here to trash the whole recruitment industry because I realise there are good recruiters out there and I recognise there is a need for good recruiters too.

Professional recruiters can be particularly important in markets which require very specific hard to get skills or experiences, such as in senior level appointments or specialist roles. However I do have an issue with the practices of many high street recruitment companies.  If you haven’t had one yourself, speak with a friend or a colleague and I guarantee you it won’t take long to find someone who has had a bad experience with a recruitment agency. I also have an issue with the way many HR professionals are so blasé about their use of agencies.

So if we think about intrinsic motivation and transparency, as I had mentioned earlier, what do recruitment agencies do to help you achieve this? A typical recruitment agency advert on any given day on any jobs board, will read something like this: ‘We have a need for a marketing assistant in a leading company within an exciting industry’...such an advert contains no real information whatsoever about the company or the sector (this is to prevent the candidate going straight to the client company and thus the recruiter loses their fee). By what definition is this providing transparent information to the candidate? What bothers me is the HR communities collectively limp response. Yes I get that sifting CV’s is time consuming and agencies do this, but you know what – get over it! If your HR department’s response to a vacancy is to quickly pass it over to an agency, I’d be asking them some hard questions.

However I did say that sometimes you do need to use recruitment agencies so there might be some good answers to those hard questions. But there is a right way and a wrong way of using a recruitment agency. To do it the right way, it should be about partnering with a company which really understands your values and whose candidate experience will match your own expectations. There is a lot to be said for outsourcing things your less good at but it might be that a Recruitment Process Outsourcing (RPO) company is a better bet than a high street agency if you’re recruitment requirements are regular and more standard. Your HR people should really know the difference between the two...

Inside companies themselves, recruitment systems, procedures and processes are often sub-standard. Poor use of recruitment agencies invariably starts because of poor internal practice. I have witnessed processes which are inept to the point that they result in increased cost and a poor candidate experience.  Remember we're talking about a fundamental company task here! A typical hallmark of such a process is that it is 'reactive' and in such senarios application of technology is often hap hazard at best.

You may also want to look at recruiting yourself. I do appreciate the internet and social media has become something of a double edged sword - giving easy access to candidates yet at the same time making it easy for the wrong candidates to apply.

However clever application of technology can be incredibly effective. We have had so many advances in technology that commercially available candidate management systems really do allow you to streamline processes and rather than see the Internet as a source of angst see it as an opportunity! For instance the capacity now exists to advertise multiple adverts at the touch of a button. Couple these technological solutions with candidate focused process mapping (when looking at processes you can't forget the candidate is the customer!) and tools such as psychometric profiling and we have a whole suite of methods available to help HR reduce the 'risk of recruitment', be cost effective, improve candidate experience and get that all important candidate fit. It’s also a place to be inventive with the interview itself – Jon told me he used to take people on a night out and to the climbing wall! Why not?!

I’ve been critical here and I also realise there are plenty examples of good recruitment practices but my feeling is that HR to date is way behind the curve on where it should be with this most fundamental of people tasks. So in this respect at least I’m going to have to say the profession isn’t cutting it. What do you think?