I M P R O V I N G T H E P R A C T I C E O F M A N A G E M E NT A new deal for the 21st century workplace By Kevin Aselstine and Keri Alletson March/April 2006 Reprint # 9B06TB11 Ivey Business Journal Online is published by Ivey Management Services, a division of the Richard Ivey School of Business For subscription information, please contact: ibjonline@ivey.ca www.iveybusinessjournal.com To order copies or request permission to reproduce materials, please contact: Ivey Publishing, Ivey Management Services c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario N6A 3K7 Tel: (519) 661-3208, Fax: (519) 661-3882, Email: cases@ivey.uwo.ca Copyright © 2006 Ivey Management Services prohibits any form of reproduction, storage or transmittal of this material without its written permission This material is not covered under authorization form CanCopy or any other reproduction rights organization A new deal for the 21st century workplace As these authors write, a new paradigm is settling in and occupying top managers’ waking hours It’s one that focuses on workforce effectiveness, managing talent, and reinventing the core employment value proposition The companies that will win in this era are those that deploy people in new ways to accomplish their business objectives and deliver both personal and organizational growth At the same time, the strategies they are using – such as improving customer intimacy and innovation - are more people-intensive than ever before The result is increased pressure to retain talent, to build succession plans for current leaders, and to develop new ways of “incenting” employees to achieve business growth objectives Across the board, organizations around the world are experiencing challenges in maintaining the right mix of people, with the right skills, available at the right time By Kevin Aselstine and Keri Alletson Above all, there appears to be something of a crisis in employee motivation and “engagement” at work As the new Towers Perrin Global Workforce study1 shows, less than one in Canadians are highly engaged by their work Globally, only 14 percent of employees are highly engaged Many more (62 percent globally and 66 percent in Canada) are only moderately engaged, creating a substantial retention risk and also affecting the organization’s ability to excel Moderately engaged workers are not only significantly more likely to leave the organization (see Exhibit 1), but Kevin Aselstine is the Managing Principal, Towers Perrin, Toronto Keri Alletson is a member of the global research team that conducted the Global Workforce study, on which this article is based They can be reached at kevin.aselstine@towersperrin.com or keri.alletson@towersperrin.com T he start of the century has seen a number of discrete changes in the workforceworkplace arena, varying in size and impact Considered individually, these changes present nothing more than another bump in the road for organizations Considered collectively, they add up to a red flag for all employers, in Canada and around the world This article will examine these red flags, share new research on the views of employees, and propose a “new deal” for workforce management Exhibit 1: Highly engaged employees are more likely to stay Highly Engaged 1% 2% Moderately Engaged 8% 3% Disengaged 10% 12% 9% 30% 9% 12% 26% 38% 63% 29% 48% No plans to leave Not looking, but would consider another offer Actively looking for another job Made plans to leave current job Plan to retire in the next few years The new workplace Many mature organizations are experiencing sharp Source: Towers Perrin Global Workforce Study — Canada increases in operating costs, driven by legacy issues and workforce programs such as pensions, benefits, and The Towers Perrin Global Workforce study examines current attitudes about work with over 85,000 full-time salaries At the same time, small and large employers alike employees in 16 countries, on continents are under pressure from shareholders to accelerate growth -1- Ivey Business Journal March/April 2006 are also considerably less likely to contribute to the achievement of broad company objectives This issue is often characterized as poor morale, but it more likely stems from an organization’s failure to create an engaged workforce that encourages employees to exert the discretionary effort required to help their company truly succeed (see side-bar) This is a somewhat complex topic, but the issue boils down to a fundamental lack of alignment between what the employer and the employee expect of one another This can be thought of in a number of different ways – the “employer promise”, the “performance contract”, or the “employment value proposition.” For the sake of simplicity in this article, we refer to this mutual commitment as “the deal” in joining an organization, and making a contribution What does the “old deal” look like? For much of the last century, the “deal” was fairly clear In exchange for their labour, employees could expect a high degree of job security and a slow but steady increase in their expected total compensation Learning and development were provided, as long as they were specific to the job Career-long loyalty was rewarded with financial support in retirement years (in the form of pension income and/or retiree medical subsidies) Organization structure meant that with annual increases and the gradual accumulation of relevant experience, the best people could climb the ladder within their units, and set their sights on a management role In part because there was essentially just one career ladder/path available within a department, organizational titles proliferated A simple illustration of this approach can be seen in Exhibit We use this model to examine both the Exhibit 2: Total rewards strategy should reinforce the human capital strategy Employer perspective: Increasing shareholder value Strategy Employee perspective: Meaningful, rewarding work Human Capital Strategy Workforce demand vs Workforce supply Organization capabilities Competencies Demographics Staffing and selection strategy Organization values Values Change management and communication strategy Total Rewards Strategy Pay External influences Benefits Over the past decade or so, this deal has been under significant pressure as organizations have flattened, cut costs, used technology to increase productivity output expectations from existing staff, and faced escalating competition both for workers and for customers We are now reaching a point where constant tweaks to the “old deal” no longer work for either employers or employees Let’s examine some of the major changes and stresses on the current workforce management system Internal influences Red flag: Rising labour costs Corporate pension plans designed in the Learning and Work Development Environment mid-twentieth century are increasing in both absolute cost and volatility, Aligned employee behaviours that yield desired business results influencing corporate cash flow and long-term financial viability Health care © Towers Perrin costs continue to increase in double digit increments each year (in Canada, the employer and employee needs from the “deal” current annual average per-employee cost is about perspective, factoring in external elements that will also $2,5002) While individual salaries have increased only by influence the strategy The organization’s “human capital” three to four percent each year for the last several years, strategy basically looks at how to staff the business plan this figure does not reflect “real” salary inflation The The organization’s “total rewards” strategy, derived from total cost of direct compensation for the employer is that strategy, defines the value proposition for employees higher, in part because many organizations are making ©Towers Perrin Source: Towers Perrin Health Care Cost Study, Canada 2005-2006 -2- Ivey Business Journal March/April 2006 exceptions to salary structure and customizing “individual deals” when they need to acquire specific talent Inadequacies in current salary systems are driving many organizations to use alternative salary pools and/or creative job titling to accommodate their real recruiting and retention needs planning techniques, labour cost modeling, and involving employees to “optimize” investments in total rewards, to broader solutions such as off-shoring and other workforce alternatives Organizations that don’t employ these or similar techniques that take a longer-term view face potentials risks that could have drastic implications for their workforces Over the past five years there have been many highprofile examples of companies in dire financial straits, driven in part by the cost of legacy HR programs Fortunately, there are many solutions to managing this kind of spiraling cost, ranging from sophisticated workforce Red flag: The rising cost of stress Canadian organizations are experiencing increasing employee absenteeism and rising disability claims, both of which are affecting productivity and driving up insurance costs Stress, to some extent, is a feature of modern life, but the consequences of stress The Towers Perrin definition of employee engagement are now rising at a rate of billions of dollars in lost productivity each year In the Global As employee engagement markers, Towers Perrin uses a set of nine key Workforce study, employees expressed frustration indicative responses that have been developed and tested statistically that they are less and less able to realize work/life over a number of years with many different employers The items examine both “emotional” and “rational” aspects of the employee’s balance In Canada, only a third (33 percent) relationship with the organization believe their organizations help employees balance work and life Because this is a social issue as well The first five items, the “emotional” aspects, relate to people’s personal as an economic issue, work-life balance and stresssatisfaction and the sense of inspiration they get from their work and related disease will continue to grab media being part of an organization: headlines, and be reflected directly or indirectly in I really care about the future of my organization financial results For example, in 2002, Statistics I am proud to tell others I work for my organization Canada reported that employees missed an My job provides me with a sense of personal accomplishment average of nine days per employee per year - an I would recommend my organization to a friend as a good place to increase of almost two days per year over the work results reported in 19973 In some sectors, such as My organization inspires me to my best work healthcare, the figures are even higher The remaining four “rational” markers relate to the relationship between the individual and the organization: Red flag: Increased employee mobility According to the new Global Workforce study, only about one third of Canadian workers plan to stay with their current employers Another ten percent plan to retire shortly This leaves about 57 percent that are either open to other offers or are already on their way out the door I understand how my unit/department contributes to the success of my organization I understand how my role is related to my organization’s overall goals, objectives and direction I am willing to put in a great deal of effort beyond what is normally expected to help my organization succeed I am personally motivated to help my organization be successful Recruiters are fully aware of the increases in employee mobility in recent years, and the consequent challenges in attracting and retaining the right talent More Canadians are starting their own businesses, seeking more control over their work arrangements Perhaps more importantly, employees now believe that they need to change jobs more frequently to ensure continued salary growth and career advancement As the idea of a “job for life” is fading, employees recognize they need to build their “employability” If their job doesn’t enable High scores on all nine items indicate a state of true “high engagement” Organizations can benchmark all or part of their employee population against industry, geography or other relevant norms, to determine the extent to which their own workforce is engaged, and to understand issues standing in the way of improving employee engagement and productivity Statistics Canada, 2003: “Work Absences”, Perspectives on Labour Income -3- Ivey Business Journal March/April 2006 them to develop the skills that ensure they continue to be “marketable”, they will seek learning opportunities elsewhere The whole area of career advancement, skills development, and opportunity for growth is one that most employers will need to examine more closely, as this aspect of the “deal” is having a strong influence on employee retention and engagement levels As we saw in Exhibit 1, the level of engagement has a significant impact on retention, with highly-engaged employees much more likely to stay what is being communicated internally by their own management The erosion of trust in the employer-employee relationship is a thread running through the Global Workforce study results, with employees expressing an overall desire for greater transparency and access to information Yet, at the same time, employees are willing to volunteer their personal accountability for agreedupon performance goals They expect the same of their managers, as well as their senior leaders, but no longer take trust for granted For example, only 36 percent of Canadians now believe that senior management communicates openly and honestly with their employees Higher job turnover rates, and corresponding lower average length of service increase direct costs for replacement, and decrease the organization’s ability to build long-term customer relationships and implement long-term strategies that are people-dependent Red flag: A decrease in the supply of labour For most of the 20th century, employers were able to acquire the “talent” they needed, even if at times specific Red flag: Transparency and the erosion of trust skills were premium-priced The reality of population Mass lay-offs over the past decade started a decline in demographics in North America and Europe means that the trust that employees previously held in their the ready supply of replacement labour that has existed organizations and in corporate management in general since the end of the Second World War – including the This was compounded by a spate of corporate scandals, mass entrance of women into the workforce - can no elevating the importance of corporate governance longer be relied upon Canadian birth rates are down, initiatives At the same time, the world-wide web allows and clearly, as less young people are born, there are fewer prospective job-seekers a unique window into the culture new entrants in to the workforce Our immigration of organizations not available in the past; employees have numbers are not sufficient to fill the gap In one of the easy access to the external “spin” on what is happening possible scenarios we examined, Canadian organizations in their own organizations and can easily compare it to could be short by million workers, or 10 percent of our Characteristics of the Characteristics of the working population, by 2017 20th century “old deal” 21st century “new deal” The situation is similar for our “Job for life” “I’ll work ‘til I’m bored” largest trading partner – Life-time loyalty “I’ll go where I can learn and grow” traditionally a competitor for “People as cost or asset” “Individual investors of human capital” talent In the U.S., estimates based on Bureau of Labor “Aspire to become the manager” “Aspire to build my resume” Statistics projections show a Annual cost-of-living increases Compensation tied to competencies workforce deficit of 14 million Guaranteed real salary growth through cost of living Opportunity for real salary growth through skillskilled workers and a further adjustments and “annual raise” building and career advancement million unskilled workers by “Holiday bonus” based on recognition and loyalty Performance bonus based on impact and results 2020 Executives accountable to shareholders for financial results Executives accountable to shareholders for financial results – and for talent management Training you need for your job Skills you want to develop Red f lag: Changing employee beliefs about their rewards Organization’s reputation for product excellence Organization’s reputation as a good employer One of the greatest areas of change is in employee attitudes about their work situations and their current rewards4 The current data “Rewards” refers to the total compensation employees show that employees not believe that their rewards receive, including all elements of pay, benefits, learning are commensurate with their contribution Particularly and development, and work environment -4- Ivey Business Journal March/April 2006 in developed economies, many suggest that they have put in significant extra effort over the past few years, to help their employers survive a tough economic period Now that corporate results are starting to improve, employees are expecting their rewards to improve in tandem Interestingly, the majority of respondents are focused on a broader array of rewards than we’ve seen in prior years While direct compensation remains at the top of the list in attracting people to a new job, employees appear to be relatively realistic about the level of pay overall Their focus appears to be more on “pay for perfor mance” than in prior years; fairness and transparency in pay and promotion policies is also more A new deal: Where to start The essential question that management must ask and answer is: What is our fundamental belief about the role of people in driving our success? One way of answering this question is to start with a model such as the one shown in Exhibit Starting with desired business results (such as revenue targets), one can establish the desired customer behaviours that ensure financial success Using customer research, it’s fairly easy to understand what is needed from the workforce, both in terms of employee behaviours and in terms of staffing requirements From there, it’s a logical step to develop a total rewards strategy that supports and drives the required employee behaviour To develop a strategy that will be sustainable over Exhibit 3: the years to come, People systems and programs should help drive financial performance organizations need to understand both what they expect/require from their People systems Employee Customer Financial workforce – and what and programs behaviour behaviour performance employees expect from their employer Clues to the “new Staffing Engagement Customer ROI satisfaction deal” lie in examining the Compensation Values Revenue growth Customer loyalty Benefits Customer Net earnings employee perspective service Customer value People Stock particularly looking at which development performance Productivity/ workplace conditions operational Workforce influence employee retention relations Adaptability and employee engagement Organizational Retention (see Exhibit 4) Interestingly, management Learning what employees are looking Work environment for in a new job is fairly similar around the world, © Towers Perrin with some obvious variations based on local market practices, different age groups, etc However, the factors prevalent This idea of equity in the exchange of labour that influence retention and engagement differ widely for reward is key, and it shows that employees are realistic across countries and industries in relative importance This about producing more value if they expect more is an especially important finding for multinationals that compensation may need to rethink their approach to workforce management, and develop strategies that, while globally This employment value proposition – or “deal” – is consistent, are customizable by workforce segment and/ at the heart of the changes we’re seeing, both in the or country A more complete examination of current economy at large, and in the workforce itself There is employee views may be found in the Global Workforce clearly something broken in the current notion of Executive Report, which is readily available online employment To resolve these issues, it’s time for a “new deal” at work -5- Ivey Business Journal March/April 2006 Exhibit 4: Top ten drivers of attraction, retention and engagement in Canada Pay Benefits Competitive base pay Competitive benefits Salary increases linked to individual performance Competitive retirement benefits Learning and Development Top 10 Attraction Drivers Career advancement opportunities Learning and development opportunities Work Environment Challenging work Work/life balance Calibre of co-workers Reputation of the organization as a good employer 10 Pay Base salary Retirement Fairly compensated compared to others doing similar work in my organization Learning and Development Benefits Top 10 Retention Drivers Opportunities to learn and develop new skills 10 Work Environment Organization retains people with needed skills My manager understands what motivates me Satisfaction with the organization’s people decisions Senior management acts to ensure the organization’s long-term success Appropriate amount of decisionmaking authority to my job well Reputation of the organization as a good employer Pay Salary criteria are fair and consistent Benefits 10 In combination with government programs, benefit programs generally meet my needs Top 10 Engagement Drivers Learning and Development Improved my skills and capabilities over the last year Appropriate amount of decision-making authority to my job well Opportunities to learn and develop new skills Work Environment Senior management interest in employee well-being of the organization Reputation as a good employer Input into decision making in my department focuses on Organization customer satisfaction Employees understand how to satisfy customers Key principles of the “new deal” Every organization has unique needs and characteristics, and it would be simplistic to suggest a one–size-fits-all solution There are, however, a few predominant themes emerging from this data which should inform those organizations wishing to develop a 21st century approach to “the deal” Vision and values Employees currently express a fair amount of skepticism about senior management’s vision, ability to inspire, and interest in employee well-being Employees want to see the organization’s vision and mission put into practice by visible leaders They want to be proud of working for a financially-strong organization that is recognized as an “employer of choice” and also as an innovator – a company with a future They care about customers and are frustrated when they don’t understand business decisions, or can’t see how they can impact important business metrics like revenue growth or profitability They want to be inspired to excel – and they realize that performance is built one person at a time, so place great importance on the “people” decisions made by senior management Learning and opportunity to grow Employees recognize we’ve reached the end of the lifetime loyalty “old deal”, and that organizations need to be more flexible about staffing levels, including considering outsourcing and other non-traditional ways of staffing business plans They’re responding by acknowledging their need to acquire the skills and experience they need to remain marketable and ultimately “employable” Personal growth, the acquisition of new skills, and the opportunity to increase one’s personal “employability” are critical, even if the new skills are not necessary to fulfill the requirements of their current role Across all countries in the study, access to career development and training opportunities were critical in driving engagement – in fact, it could be said that “maintaining my personal employability or marketability” is tantamount to the new loyalty For most employees, career opportunity, by definition, includes access to talented colleagues and to senior leaders Organizations that can’t retain their top talent may find others following their leaders out the door Effective front-line management The third main theme concerns front-line management ©Towers Perrin e: Towers Perrin 2005 Workforce Study – Canada -6- Ivey Business Journal March/April 2006 Employees rely on their immediate supervisor or manager not only for advice, direction and support, but also to provide context for the organization’s broader direction and to interpret the actions of senior management The relationship with front-line managers plays a critical role in determining whether or not employees are – or can be – highly engaged Most organizations today are providing insufficient support to managers, at least in terms of their “people-management” role We foresee a flurry of corporate activity here, as management acts in two main areas: (a) revising the criteria for manager roles to include “softer” skills and (b) developing more comprehensive support for those in supervisory roles advertising, the ‘seventies saw the rise of the corporate strategist The ‘eighties saw the birth of sophisticated financial re-engineering, followed by a decade-long focus on technology starting in the mid-nineties We believe that the next cycle is already beginning, focusing on workforce effectiveness, managing talent, and reinventing the core employment value proposition The companies poised to win in this era are those that deploy people in new ways to accomplish their business objectives and deliver both personal and organizational growth Customized rewards Instead of rewards systems that have built up as a hodgepodge of programs over time, organizations need to develop systems that tie to organizational goals and drive the right employee behaviours What employees expect from their employer can vary significantly by geography, by role and by workforce demographic Organizations need to take the expectations of employee segments that are critical to the delivery of the business strategy into consideration and build rewards strategies that can be customized as needed Understanding what the different groups value is a critical first step for employers to be able to effectively optimize the investment in rewards Employer reputation The fifth main theme is the emergence of a distinct reputation as a good employer Just as consumers choose products based on brands, employees are starting to choose employers based on their “employer of choice” brand Just as it takes time, discipline and effective investment to build product reputations or brands, a company’s reputation as a good employer is earned over time by adherence to a variety of factors These include talent management practices, leadership behaviours, effective front-line management, opportunities for career development and relevant rewards Employer reputation emerges in the workforce data as a core driver of retention or engagement in almost every country, and its importance will only grow over time The human capital era has begun The focus of the business world tends to shift as management adapts to new ideas and possibilities Just as the nineteen-sixties saw a new focus on marketing and -7- Ivey Business Journal March/April 2006 Reproduced with permission of the copyright owner Further reproduction prohibited without permission ... Characteristics of the working population, by 2017 20th century “old deal 21st century new deal The situation is similar for our “Job for life” “I’ll work ‘til I’m bored” largest trading partner...A new deal for the 21st century workplace As these authors write, a new paradigm is settling in and occupying top managers’ waking hours It’s one that focuses on workforce effectiveness,... red flag for all employers, in Canada and around the world This article will examine these red flags, share new research on the views of employees, and propose a new deal for workforce management