HRM Methods, Forced Ranking & Distribution Systems - Essay Example

Project I. Forced Ranking & Distribution Systems These particular HRM methods of performance assessment and employee development have been emplaced at big multinational firms like Ford Motors, Goodyear Tire & Rubber and Dow Chemical, the subjects of this case study. The innovative performance ranking system takes several forms, but essentially it groups workers into the best, the in-between, and the worst performers. Employees in the worst performing group are then deprived of regular bonuses for the first year and face possible dismissal if their poor ranking remains unimproved in subsequent years. 1) What are the pros and cons of the forced ranking and distribution systems It seems like a sound policy to rank employees according to their level of performance, with the rankings made as basis for the award of pay raises and incentives, including future promotion. This is nothing but performance-based compensation, which is one of the widely acknowledged HRM practices that contribute to business success (Dyer & Reeves, 1995; NC-DHHS, 2005). The employees' knowledge that such a reward awaits them if they perform well should keep them on their toes. Granting pay incentives and job promotions according to seniority and length of stay, which is the usual practice, does not motivate employees across the organization because the newer employees know that they will receive the same benefits and career boosts if they just stayed longer in the company and all they need to do is wait for their turn. While they thus wait for their time, you cannot expect them to exert themselves harder at their jobs. Even with a so-so performance, they tend to feel secure in their positions because of employment laws or labor union agreements that forbid dismissal without cause. With the forced ranking and distribution system in place, employees will strive to avoid being included in the worst performing group. The system in effect eliminates the dead wood and, as practitioners of the system claim, enables the organization to increase performance, motivate employees and open the door to new talents to replace poor performers. It also corrects the situation in which the poor performers get the same salary as the top and average performers. The downside of the system, however, is the perceived lack of a foolproof benchmarking method to measure performance. As noted in the case study, it is inherently difficult to differentiate between good, average and poor performance. Precisely because of this particular difficulty, Goodyear mistakenly fired one chemist who got a consecutive C ranking for poor performance but who, it turned out, had earlier patented a new type of aircraft tire without management knowing about it. In essence, the forced ranking and distribution system is an anachronism to the popular HRM model that sees companies setting up rigid screening processes to ensure that they hire only the best people (Storey, 1992; Guest, 1999). If these companies hire only the best, then how come there are poor performers to be found in their ranks Dow Chemical, for example, realized in time that the forced ranking system did not fit with its corporate philosophy of recruiting only the best employees. In addition, the forced ranking system is likely to provoke perceptions of status and discrimination, thus encouraging income comparisons and perhaps spreading envy as others see a fellow employee doing much better than them (Guest, 1999). Envy and jealousy could have prompted employees at Ford and Goodyear to complain that the system discriminated against certain type of employees. 2) Suppose any of Ford, Goodyear and Dow Chemical contacts you to modify its performance management system to avoid some of the problems that it has experienced. What would you suggest the company do If asked to suggest a performance management system that avoids the pitfalls of the forced ranking and distribution system, I would propose a system that emphasizes the HRM practices of empowerment, continuous improvement and training, and developing a high level of commitment (Korczynski, 2002). The employees' value to the company will be measured not by comparing them against each other but against agreed-upon performance standards. Unlike the forced ranking system whose performance criteria seem to be known only to managers, thus giving it an element of intrigue, my proposed method will judge employee performance based on a set of standards formulated with their participation and agreement. This allows employees a voice in decision-making, a process of empowerment that can make jobs more interesting and exciting for them (NC-DHHS, 2000). The employees will not be categorized into the best and worst performers except that those found to be performing below par will be asked to undergo the continuous improvement and training program set by Korczynski (2002) as good HRM strategy - without much fanfare and no diminution in their pay. Their prospect for advancement will not be compromised too. This plan proceeds on the idea that the employees so identified are basically good employee material having earlier passed the rigid recruitment process but they just backslid, perhaps because of the humdrum of the workplace or personal problems at home. More important, my proposed system will measure performance not by what employees failed to do or did wrong, which is the underlying principle behind forced ranking, but by what the employees are capable of doing. This means that performance will be based strictly on the employee's knowledge and capabilities not by the little mistakes he made at work. As the old saying goes, "to err is human..." 3) What advantages will your ideas have over the company's current system How will you measure the success of your ideas The chief advantage of my idea is that it does not have the divisive effect of forced ranking, designed as it were to foster harmony and cooperation within the company. Since it will emphasize the importance of in-house training, it promotes the HRM theory that even the most knowledgeable and skilled employee requires training or re-training to fit in the organization and become a valuable contributor to the team (Herriot & Pemberton, 1997). Under the company's current system, poor performers are summarily penalized and they often do not know what exactly did they done wrong. Worse, the standards by which their performance is measured are not known to be foolproof. The performance standards in my proposal will be based on the nature of the company's business. If it is Dow Chemical, for example, the employee's performance will be based on his knowledge of chemistry not on, say, how long he takes to mix a compound or how he takes long lunch breaks. A possible gauge of the success of my idea is the expected improvement in camaraderie and cooperation between managers and employees. Modern HRM models support employees' well being, which relates to their physical, emotional and psychological needs (Dyer & Reeves, 1995). Once these needs are met, you have a complement of highly committed and motivated employees. II. Stock-Based Pay The focus of this case study is Whole Foods Market and its extensive use of the stock-based pay as centerpiece of its HRM program on employee empowerment and satisfaction. Of 54,000 employees, 32,000 have taken the stock option and hold shares in WFM, whose common shares are among the most hotly traded at NASDAQ. 1) Based on the case, why does WFM pay its employees with company stock as well as money What business goals does this pay structure support Whole Foods Market adopted the pay structure of paying its employees more with company stocks than cash as part of its key philosophy of maximum service to customers, employees and investors, in that order of importance. The company's generous distribution of stocks to employees is service personified indeed because its high yielding stocks are listed in NASDAQ 100 Index and S&P MidCap 400 Index. The basic idea is that happy and contented employees translate to happy and contented customers. WFM is big on profit sharing, teamwork and employee empowerment and expresses these business goals through its stock option and stock purchase plan. The food store chain provides other incentive programs and equal opportunities for promotion and personal advancement of employees. 2) Why is the company planning to reduce the amount of stock that it pays to employees What do you expect will be the consequences of this change Whole Foods needs to set limits on the amount of stock that it generously pays to employees because of new accounting rules that require publicly traded companies to deduct from their earnings the cost of paying employees with stock or stock options. WFM is among those hit hardest by this rule because it is a heavy user of stock-based pay. Let us say WFM earns $147.5 million, the amount it actually earned in 2005, if the cost of stock-based pay it gave to employees is subtracted from profit, the total earnings would be down to $120.4 million, or more than 18 percent less. So if it wants to moderate the loss to 10 percent of earnings, the company has to cut the value of its option awards by 40 to 50 percent. Once Whole Foods begins paying more in cash than stocks, this is likely to alienate employees who have gotten used to the benefit, a condition that is capable of eroding organizational pride, breeding discontent and decreasing productivity ((Kyrczynski, 2002). Remember that the stock-based pay is the primary reason why WFM is currently ranked No. 5 in the Fortune list of "100 best companies to work for." 3) How can human resource management help WFM carry out this change in pay structure in a way that avoids negative consequences The expected blow on employee morale of the reduction in stock-based pay can be softened by an efficient inter-company communication program persuading employees that this change in the pay structure is necessary for their own good and the company's continued profitability. This implements the pain or threat theory of HRM, which was carried out at Chrysler when the automotive company was in financial trouble. Convinced that a sacrifice was needed to avert the crisis, Chrysler managers and employees agreed to a cut in their wages and benefits. For WFM employees, there will be no such drastic measure as cuts in benefits so it will not be difficult for them to see the problem from the management's perspective. The HRM department can conduct a series of orientation seminars and forums to convey this message to employees. II.A. Overview From the company profile, Whole Foods impressed me as a people-centered organization that goes out of its way to ensure the well being of employees. This is a high-commitment model of HRM that is the most ideal employment relationship (Storey, 1992). WFM tries to recruit the best people and once taken in, they are encouraged to work as a team and given a share in the company profits. Part of this equal sharing policy are the gain sharing scheme, stock and stock purchase plan and other incentive programs. This makes for a highly motivated workforce that accounts for its rapid trajectory of growth and the many awards and distinctions it has received through the years, capped by its No. 479 ranking in Fortune 500 in 2007. For the employees, the WFM stock is a literally enriching experience because of its blue-chip listing. When the firm paid its first dividend ever in first quarter 2004 following a $3.1 billion turnover in 2003, it was 15 cents per share. By 2005, the quarterly dividend was 30 cents per share. II.B. Fortune 500 Rankings The creation of a respectful workplace that treats people fairly and empowers them to make their own decisions has been instrumental in WFM's inclusion in the Fortune 500 list, which traditionally consists of automotive, software and other capital-intensive industrial and technology firms. The company profile points to an independent study conducted early on that attributes the success of Whole Foods to a staff that were all stockholders in the firm. This also earned the company its place in the select Fortune 500 list, which distinction came 25 years after it was established as a small store in Austin. Empowered employees that are allowed to hold stocks in their companies are common in the big corporations listed in Fortune 500 from year to year. II.C. Accelerating Growth In terms of growth, Whole Foods shows no signs of slowing down. This rapid pace of growth was shown in 2003 when the company amassed $3.1 billion in sales, up by nearly 60 percent from the $2.7 billion sales posted in 2002. Partly for this reason, Barron's named Whole Foods CEO-Chairman John Mackey as one of the world's top corporate leaders in 2006. As the value of the company stock keeps on spiraling, this attracts more investors and speculators until it reaches a plateau when the stock becomes over-subscribed. Once this happens, the tendency is for the company stock to go downward. This is the expected side effect of the phenomenal growth of any publicly listed company, which is temporary nonetheless because it is a cyclical process, such that after the stock hits bottom, it has nowhere to go next but up again. In relation to HRM, all the success and homage going WFM's way will create pressure for the company to do even better and distribute growth throughout its 270 stores in the US, North America and UK, and thus increases the risk of spreading itself thin. II.D. Growth Projection of WFM Whole Foods envisions itself to be the largest multinational food chain three years from now with strong presence in all four continents to better realize its "Whole Foods, Whole People, Whole Planet" motto. By then, the company projects itself to capture a place in the upper half of the Fortune 500 list to drastically improve its No. 479 ranking at present. As for the annual Fortune list of the 100 best companies to work for, WFM is expected to lord it over as early as 2008. Much of the company's growth has been achieved through mergers and acquisitions, which is expected to characterize its expansion into new markets overseas. II.D.1. Attainability of Goal In my view, the goal that WFM set for itself by year 2010 is reasonable enough and appears attainable. Three years seem too short a time to realize such an ambitious goal, but Whole Foods has demonstrated that it can achieve so much in that brief span of time. For example, in the Fortune list of the 100 best companies to work for, the firm was ranked 32 in 2002, up from the No. 48 position in 1999. In 2003, the company also dramatically increased its sales from $2.7 billion the year before to $3.1 billion. This kind of leapfrogging is not unusual for Whole Foods. As long as the current crop of managers runs the company and its operation reflects the same kind of dynamism, Whole Foods can easily achieve its goal. II.D.2. Basis of Growth Projection The company's growth projection is based on its successful conquest of the highly competitive markets of Canada and UK. WFM moved into Canada in 2002 with the acquisition of Wild Oats, which operated a store chain, while the UK entry was facilitated by the acquisition of the Fresh & Wild stores. Part of the expansion strategy is a Web-based campaign inviting anyone with suggestion for a new store location anywhere in the world. If the proposed area meets the criteria set by the company, it will immediately set up an expansion outlet in the new location. III. Stock Options or Grants Microsoft adopted the stock option as key HRM strategy to provide incentives to employees during the fast-growth period for the technology industry in the 1990s. As the value of Microsoft stock rose, many employees became rich by exercising their option to sell the stocks they received in place of cash pay. Then from a high $59.56 per share at end-1999, the bourse prices of Microsoft fell to $20 per share, after which the company announced that it would no longer reward employees with stock options. This form of incentive pay was replaced with stock grants, which means that shares of Microsoft stocks would be awarded selectively to the best-performing employees and that they could sell only at a specified time in the future. 1) In general, stock options are most valuable if the stock price rises above the exercise price during the life of the option, while stock grants are most valuable if the stock's value rises during the entire time that the person owns the stock. From the point of view of an employee receiving stock option or stock grants, is this difference significant Would this difference affect the kind of motivation provided by Microsoft to its employees There is a big difference between stock option and stock grant, especially as these concern Microsoft whose stock value appears to be on a roller coaster ride - up today, down tomorrow. Other technology firms experience the same difficulty as competition becomes tighter in this industry. With stock option, the holder may sell the stock when the share value is at its highest level and thus receive the correspondent profit. He cannot sell a stock grant during this high-yield period because it comes with the condition that he could sell only at a specified time in the future, when he is still connected with the firm. The restriction hints that in case the employee is separated from the company, the stock he received as pay will be worthless. Employees hold a stock grant face this sad prospect, and it is likely to cause demoralization and de-motivation. 2) Why do you think Bill Gates expressed "regrets" for using stock options to reward employees What drawbacks of the stock options could he have in mind The obvious reason is that the stock options granted liberally as incentive pay turned out to have swallowed a significant portion of Microsoft's profits. Thus, when the company abandoned stock options in favor of stock grants in 2003, it was noted that had the stock options been committed to employees in the previous 9 months, the firm's profits would have been one-fourth less. For this reason, other technology companies took the cue from Microsoft and likewise scrapped the stock option as a way of compensating high-performing employees. The drawback of the scheme was underscored by the federal requirement requiring firms that give out stock options to treat this payment as corporate expense. For startup companies that are growing fast in earnings and stock prices, the stock option may be useful but not for Microsoft, which appears to have passed its fast-growth years. 3) In terms of skills, abilities and other qualities, what kind of employees would be most valuable to Microsoft What other forms of pay besides stocks would you recommend for Microsoft to attract and keep the kind of employees you have identified The main concern of human resource management is the recruitment and hiring of the right people. The right people means not only that they possess the skills and qualities required by a technology firm like Microsoft but must also show a willingness to work in a team. For them to be of utmost value to the company, HR managers are then tasked to create "good jobs" in the organization. A job becomes a good one if it promotes the employee's well being, increases organizational pride, reduces the incidence of absenteeism and the chances of employees quitting, and increases productivity and profitability (Dyer & Reeves, 1995). This would enable the firm to attract and keep the ideal type of employees. The stock grant as replacement for stock option would help because it preserves the same spirit but does less harm to the bottom line. Project #2 Performance-Based Ranking And Stock-Option Pay Systems: HRM Practices in Big Companies That Get Some in Trouble but Might Just Work for Others _________________________ Name of Student ____________________ Date of Submission Additional References 1. Dyer, L. & Reeves, T. (1995). "Human Resource Strategies: What do we Know and Where do we Need to Go" International Journal of Human Resource Development 6 (3). 2. Guest, D. (1999). "Human Resource Management: The Workers' Verdict." Human Resource Management Journal 9 (3). 3. Herriot, P. & Pemberton, C. (1997). "Facilitating New Deals." Human Resource Management Journal 7 (1). 4. Korczynski, M. (2002). "Human Resource Management in Service Work." Basingstroke: Palgrave. 5. NC-DHHS (2000). "The Impact of Strategic HRM on Organizational Success: The Public Sector and Multiple Goals." North Carolina Department of Health and Human Services. 6. Storey, J. (2002). "Developments in the Management of Human Resources." Oxford: Blackwell Business. Read More