In praise of HR: The soft stuff can actually lead to some hard competitive advantage

It’s not easy being an HR executive. Just when you are about to applaud the cultural compatibility of a proposed merger someone starts talking about upstream synergies in the value chain. Or you unveil an innovative executive training programmed and boardroom colleagues question its net present value and pay-back time calculation. Or there is a crisis and the company needs to cut costs, so your desk is their first stop, since surely training, recruitment and work-life programmers are easily expendable?

Such attitudes are common, but they are also evidence of startling business naivety. A company’s real, sustainable competitive advantage is almost always based on the softer, intangible parts that HR executives care about – and very seldom on the hard stuff that’s easier to capture in numbers, such as production capacity, cash reserves or even brand recognition.

The hard stuff is often also the easiest to imitate. Production capacity, stock and sales points are things money can buy. A skilled and motivated workforce, a company culture which draws commitment and loyalty and effective informal networks and processes, are much harder to emulate, no matter how much money you have.

In fact the world of business is full of habits and beliefs which are taken for granted and rarely questioned. As an academic, I like to examine the research evidence about what actually happens in the real world of business – rather than what executives and consultants think should happen. Much of the evidence shows that HR practices do indeed have bottom line value. Here are a few of my favorite examples.

Downsizing (almost) never works. But good HR practices will be one of the success factors

Firms engage in downsizing to boost their profitability. But does it work? It has obvious advantages – waving the hatchet lowers headcount quite effectively and leaves you with lower staff costs. But there are some risky potential disadvantages, such as lower commitment and loyalty among the survivors. Academic studies indicate unwelcome rises in voluntary turnover rates after downsizing, often leaving a company leaner (and lamer) than intended.

Professors Charlie Trevor and Anthony Nyberg from the University of Wisconsin-Madison decided to examine who could get away with a downsizing programmed or, put differently, what sort of companies did not suffer from a surge in voluntary turnover following a downsizing programmed. The answer was pretty clear: companies that had a history of HR practices that were aimed at assuring procedural fairness and justice – such as having an ombudsman who is designated to address employee complaints; confidential hotlines for problem resolution; the existence of grievance or appeal processes for non-union employees, etc. – did not see their turnover heighten after a downsizing effort. Companies with good work-life balance benefits – such as paid sabbaticals, on-site childcare, defined benefit plans, and flexible working patterns – also did much better. The surviving employees were more understanding of the company’s efforts, had higher commitment, and were confident that the downsizing effort had been fair and unavoidable.

So downsizing can work; but only if you have previously taken commitment to your people seriously.

The individual star never outweighs the organizational environment

Another myth which non-HR executives tend to harbor, is that star employees can easily take their virtual Rolodex and join a competitor – where they will make them just as much money as they did for you.

This is a painful underestimation of the value of a well-designed organization, and overplays the supposed portability of many star employees. Professor Boris Groysberg from the Harvard Business School examined top performing security analysts and what happened to their performance when they moved to another firm (for an even higher pay cheque); it pretty much always plummeted.

Even security analysts (who are often thought to be able to take their skills anywhere) were much more dependent on the specifics of the organization in which they were embedded than they, and their employers, realized. Hence, careful, firm-specific HR practices help certain individuals perform better – and they can’t just replicate that business in another company.

Losing a star performer can be a good thing – especially if they go to a client

Many top executives are just as frightened of clients or customers poaching their top employees, as they are of competitors’ advances. And, of course, losing your well-trained, top-performing employees is hardly ideal.

However, there is definitely a potential upside – as Professors Deepak Somaya, Ian Williamson and Natalia Lorinkova discovered. They examined the movement of patent attorneys between 123 US law firms and 109 Fortune 500 companies from a variety of industries. And they found strong evidence that if a client company recruited a patent attorney from a law firm, that law firm would start to get significantly more business from that company.

Hence, your employees leaving for your clients can be a good thing; they bring you valuable business. McKinsey understands and manages this process particularly well; when you leave McKinsey you automatically become an alumnus of the firm (rather than a deserter). The firm carefully nourishes its relationship with alumni, because they subsequently bring a large chunk of their business through the door.

Soft initiatives have real shareholder value

The final persistent myth that HR skeptics favor, is that HR costs money and that shareholders do not appreciate all sorts of soft measures, such as work-life programs. That used to be true in a bygone era, but no more.

For example, Professor Michelle Arthur, from the University of New Mexico, set out to examine stock market reactions to the announcement of Fortune 500 firms adopting such work-family initiatives. The results were very clear. In the early 1980s, the stock market would hardly react at all to such soft and fluffy initiatives; if anything the effect of the announcement on a firm’s share price was slightly negative (-.35%). However, that changed into the 1990s, when announcement of a work-family initiative caused an immediate rise in stock price by, on average, .48%. That may seem peanuts at first sight, but if you are a £5 billion company, it implies that even one such initiative would immediately increase the value of your firm by £24 million.

So executives who question the (shareholder) value of work-life initiatives are simply stuck in the 1980s; nowadays even the stock market recognizes their value.

Why isn’t this HR wisdom more widely accepted?

You may know the story of the inebriated cyclist searching for his bicycle keys under the lamppost, although he knows he lost them somewhere else. He tells a passer-by that he is looking for them under the lamppost because “it is light there, and I will never be able to find them in the dark” (where he had actually lost them). The story reminds me of the executive who is trying to solve a company crisis or gain a competitive advantage by managing the things that can easily be measured (production capacity, headcount, profit & loss). Those things may be easy to observe and influence but they are seldom the real root of the problem, nor do they really harness your competitive advantage.

To do that, you have to look where things are much more difficult to measure and manage – to the loyalty of your workforce, their motivation and job skills. Manage those things well and you are truly entering the light.

The price of obesity: How your salary depends on your weight

The world of business is still rife with discrimination. Women get paid less than men, people who are physically attractive earn more and are more likely to be seen as suitable leaders, and race determines chances of promotion. The business world in that sense is no different than other walks of life.

And the latter category – obesity – seems one of the nastier ones. Where discrimination based on race, religion or gender are at least generally looked upon as despicable, it seems much more socially acceptable to look different upon people based on their weight.

Obesity and income

Various studies have shown that overweight people are seen as less conscientious, less agreeable, less emotionally stable, less productive, lazy, lacking in self-discipline, and even dishonest, sloppy, ugly, socially unattractive, and sexually unskilled; the list goes on and on.* The stereotypes run so deep that even obese people hold these same discriminatory beliefs about other obese people. Therefore, it may come as no surprise that research has provided strong evidence that obese people are paid less than their slimmer counterparts.

However, my colleague at the London Business School, Dan Cable, and his co-author Timothy Judge from the University of Florida, suspected that this (generally) negative body weight–remuneration relationship might be different for men than for women. After all, as their overview of prior research on the topic revealed, the body weight standards that our media portray for women are considerably thinner than the actual female population, and often even thinner than the criteria for anorexia. Instead, the body weight standards for men represent a much proportional physique.

In order to examine this conjecture, they carefully collected weight and income data on 11,253 German employees and, in another study, on 12,686 American workers; the latter who were measured no less than 15 times over a period of 25 years, to also see how change in weight was related to changes in income. Then, they split the data and their statistical models into men and women. And the results clearly showed that men were treated differently than women; also when it comes to their income and weight.

Skinny women versus skinny men

Skinny women got paid substantially higher salaries than heavier women, yet this relationship was much less pronounced at the higher ends of the scale. Meaning that a female employee weighing 50 kilograms would get paid substantially more than someone weighing 60 kilograms, but the difference between 70 and 80 was much less severe. That’s probably because – as Dan and Tim put it – “the social preferences for a feminine body have already been violated”; you’re either skinny or not, but once you’re over the (rather extreme) threshold, we don’t care much anymore about the number on your scale.

Yet, this relationship looked very different for men. In contrast to the women in the sample, men of moderate weight would get paid substantially more than skinny men. But such a man of average weight would also get paid quite a bit more than an obese person. Hence, being skinny for a woman would mean more dosh, but for men it would mean less money – all in the order of magnitude of $10,000-15,000 per year.

Skinny men, indeed, are often regarded as nervous, sneaky, afraid, sad, weak, and sick, where men of well-proportioned build are associated with traits such as having lots of friends, being happy, polite, helpful, brave, smart, and neat. Dan and Timothy concluded that the media – in the broad form of magazines, fashion shows, actors and actresses, beauty pageants, Barbie dolls and GI Joes – distort our views of what is to be considered normal, and that the ripples of these views can be felt all the way onto our pay slip and bank account.

* For a thorough overview of all these findings, see Judge & Cable. Journal of Applied Psychology. 2010.

Big firm innovators: What large companies can do to be just as innovative as small entrepreneurial ones

Big companies are thought to rarely be the real innovators in an industry. Usually, radical change – whether a new technology or an entirely new business model – comes from outside the industry, and is introduced by an entrant into the field. On average that is true – research confirms it – and there are various reasons for that. It pertains to a phenomenon I called “collective inertia”; established players often seem paralysed when significant, paradigm-busting change is sweeping through their business.

Why big firms are often slow to adapt

That is because those existing players usually do not see an interest in destroying their own business and competitive advantage; newspapers were reluctant to move into on-line media because it cannabilised their existing business, traditional airlines were reluctant to embrace the low-cost model, and steel companies shunned away from minimill technology. These new technologies and business models ate into their current business and therefore they were not keen, to say the least.

There is often also a softer, almost psychological component to it. It pertains to phenomena such as the success trap, escalation of commitment, and the Icarus paradox in business. Years of continued success have wedded the firm to its own proven formula and business model, and the new, initially often inferior technology is not something they believe in and particularly want to get involved with.

Hence, we see that existing players in an industry usually are not the inventors of radical new innovations and often even late adopters – often too late… Quite a few of them do not survive the transformational turbulence in their business as a result of their own inertia.

However, Professors Lin Jiang and Marie Thursby from Georgia Tech and Justin Tan from York University discovered that there are some exceptions to this rule, and some incumbents do manage to be inventors during the stage of technological dirsruption. And that is pretty interesting, because those firms teach us what existing players can do to prevent missing the boat, and becoming obsolete when their environments change – a problem that clearly bugs many of them.

Big firm innovators

Lin, Justin, and Marie examined the semi-conductor industry, where the initial reliance on vacuum tubes was replaced by bipolar technology, which in turn was replaced by complementary metal-oxide semiconductors (CMOS). At present, that technology is under threat from nanotechnology. Using extensive patent analysis, Lin and colleagues examined which existing players did not succumb to the new entrants, and were able to contribute to the new technology. And they found three key, related characteristics:

First, the firms that were able to contribute significantly to fresh knowledge in the new and emerging domain had forced themselves to continue to scan for new technological areas. They had not just rested on their laurels, trying to make the most out of an existing technology. In spite of the technology not being under threat yet, their R&D engineers had continued to scan the environment for new, substitute technologies. And now this paid off.

Second, the firms that did manage to be inventors in the newly emerging domain had maintained a broad portfolio of alliances – specifically a portfolio of alliances that consisted of both firms that were pretty close to its current set of activities and firms that were in entirely different domains. Such a combination of alliance partners is thought to assure that the firm is exposed to really radically different things, but at the same time also to things that are more within its own familiar domain of comprehension!

Finally, the successful inventors had always maintained clear ties to sources of scientific knowledge in the public domain, by collaborating with university scientists, reading scientific publications, and so on.

Innovations usually consist of some form of recombination of other, existing sources of knowledge. The aforementioned results show that if existing, successful players in an industry force themselves to continue to access a variety of external knowledge sources – in the form of experimenting with new technologies, maintaining alliances, and accessing university sources – they can not only survive a radical change in their business but even contribute to it. Hence, do keep an active, open mind and door, and let knowledge flow in, even if you think you are currently doing just fine.

Flawed remuneration: Large bonuses don’t get the job done

The so-called “Yerkes-Dodson law”, not surprisingly, is named after two people called Yerkes and Dodson. Robert Yerkes and John Dodson worked as psychobiologists in the beginning of the previous century. They studied animal behaviour, among others, to try and understand the behaviour of humans.

Rats and electrical shocks

In one of their experiments – in 1908 – they placed a bunch of rats in a cage in order for them to explore one of two passages. One passage, labeled with a white card, contained a reward while the other one, labeled with a black card, led to an electrical shock. They wanted to test how quickly the rats figured out that white was a good thing, while black passages were to be avoided.
The one thing they varied was the voltage of the shock. Some rats received a mild shock which was not much more than a tickle, others were subjected to a shock of an intermediate level, while the third group was nearly fried to death each time the poor suckers merely sniffed at the black passage. Then Yerkes and Dodson compared the results.

Initially, as expected, higher shocks stimulated the rats to learn quicker; rats that received an intermediate shock were quicker to put into their tiny rat brains that black was to be avoided than the animals that received only a minor electrical stimulant. However, then it got interesting (rather than only cruel). The rats that received the high voltage fast-frying shock were much slower at performing the task. It took them much longer to figure out that white was good and black was bad – although they clearly had the highest incentives of all.

Apparently, making the stakes very high hampered these animals’ task performance, rather than making it better. And I could not help but wonder whether this same relationship as found in rats might not apply to, say, bankers.

Bankers and bonuses

Professor Dan Ariely, from Duke University, together with some colleagues designed a series of experiments with humans (rather than with rats) and with monetary rewards (rather than – to my slight disappointment – electrical shocks), to test what the relationship is for us humans between high incentives and task performance. That’s interesting because there are of course a lot of jobs around with pay-for-performance, for which we assume that high pay provides an incentive that leads to higher performance. However, it did not. Apparently, we’re the same as rats.

Dan and colleagues performed most of their experiments in India, where the financial rewards they gave for successfully completing a task could really represent a small fortune for a respondent. Believe me; these people were really motivated to get it right. As expected – and as for the rats – increasing the “pay for performance” relationship initially led to better task results. However, when the stakes were really high, people crumbled and could not get the job done. Apparently, a very stiff pay-for-performance relationship, paying people a near obscene amount of money if they succeed, actually make them less likely to perform well. It is not that these people are not motivated; they are too motivated. The very high pay killed their creativity, clogged their memory, and made them unable to solve the problem at hand. People who received less money for the same task did much better.

We assume that pay-for-performance motivates people, and motivation leads to better performance. However, the last step appears to be a flawed assumption. Large pay can surely motivate people, but too much motivation decreases their task performance. Hence, large task incentives like bonuses – used for traders, bankers an in many other industries – can be counterproductive. They cost you lots of money, but don’t get the job done.