Considering Human Resource Planning from Different Perspectives Two Olympic Gold Medalist in skiing married in 2014, Jason and LeAnn Benson opened Adventurers and Explorers (A&E) outdoor sporting store that sales gear and clothing. The couple’s concept is

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Home >Business & Finance homework help >Considering Human Resource Planning from Different Perspectives Two Olympic Gold Medalist in skiing married in 2014, Jason and LeAnn Benson opened Adventurers and Explorers (A&E) outdoor sporting store that sales gear and clothing. The couple’s concept is

C H

A P

T E

Human Resource

IN Organizations

Decision Human ResourceHuman Resource

MAKING

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If you’re looking for the best Parmesan cheese for your chicken parmigiana recipe, you might try Wegmans, especially if you hap- pen to live in the vicinity of Pittsford, New York. Cheese depart- ment manager Carol Kent will be happy to recommend the best brand because her job calls for knowing cheese as well as managing some twenty subordinates. Kent is a knowledgeable employee, and knowledgeable employees, says Wegmans’ CEO Danny Wegman, are “something our competitors don’t have and our customers couldn’t get anywhere else.”

Wegmans Food Markets, a family-owned East Coast chain with 83 outlets in 6 states, prides itself on its commitment to custom- ers, and it shows: It ranks at the top of the latest Consumer Reports survey of the best national and regional grocery stores. But com- mitment to customers is only half of Wegmans’ overall strategy, which calls for reaching its customers through its employees. “How do we differentiate ourselves?” asks Wegman, who then

proceeds to answer his own question: “If we can sell products that require knowledge in terms of how you use them, that’s our strategy. Anything that requires knowledge and service gives us a reason to be.” That’s the logic behind one of Carol Kent’s recent assignments, one which she understandably regards as a perk: Wegmans sent her to Italy to conduct a personal study of Italian cheese. “We sat with the families” that make the cheeses, she recalls, “broke bread with them. It helped me understand that we’re not just selling a piece of cheese. We’re selling a tradition, a quality.”

Kent and the employees in her department also enjoy the best benefits package in the industry, including fully paid health insurance. And that includes part-timers, who make up about two-thirds of the com- pany’s workforce of more than 44,000. In part, the strategy of

LEARNING OBJECTIVES

After studying this chapter you should be able to:

6-1 Discuss the role of ethics in human resource decision making

6-2 Describe the concept of rightsizing and identify organizational strategies for rightsizing

6-3 Describe how to manage termination and retention

6-4 Describe the elements of voluntary turnover

6-5 Discuss the key human resource issues during mergers and acquisitions

“ If we can sell products that require knowledge in terms

of how you use them, that’s our strategy.

”—Danny Wegman, CEO of Wegmans Food Markets

IT’S MORE THAN JUST A PLACE TO WORK

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extending benefits to this large segment of the labor force is intended to make sure that stores have enough good workers for crucial peak periods, but there’s no denying that the costs of employee-friendly policies can mount up. At 15 to 17 percent of sales, for example, Wegmans’ labor costs are well above the 12 percent figure for most supermarkets. But according to one company HR executive, holding down labor costs isn’t neces- sarily a strategic priority: “We would have stopped offering free health insurance [to part-timers] a long time ago,” she admits, “if we tried to justify the costs.”

Besides, employee turnover at Wegmans is about 7 percent— a mere fraction of an industry average that hovers around 19 per- cent (and can approach 100 percent for part-timers). And this is an industry in which total turnover costs have been known to outstrip total annual profits by 40 percent. Wegmans employees tend to be knowledgeable because about 20 percent of them have been with the company for at least 10 years, and many have logged at least a quarter century. Says one 19-year-old college student who works at an upstate-New York Wegmans while pur- suing a career as a high school history teacher: “I love this place. If teaching doesn’t work out, I would so totally work at Wegmans.” Edward McLaughlin, who directs the Food Industry Management Program at Cornell University, understands this sort of attitude: “When you’re a 16-year-old kid, the last thing you want to do is wear a geeky shirt and work for a supermarket,” but at Wegmans, he explains, “it’s a badge of honor. You’re not a geeky cashier. You’re part of the social fabric.”

Wegmans placed third in Fortune magazine’s 2013 annual list of “100 Best Companies to Work For”—good for 15 consecutive years on the list and seven straight top-ten finishes. “It says that we’re doing something right,” says a company spokesperson, “and that there’s no better way to take care of our customers than to be a great place for our employees to work.” In addition

to its health-care package, Wegmans has been cited for such perks as fitness center discounts, compressed work weeks, telecommuting, and domestic-partner benefits (which extend to same-sex partners).

Finally, under the company’s Employee Scholarship Program, full-time workers can receive up to $2,200 a year for 4 years, and part-timers up to $1,500. Since its inception in 1984, the pro- gram has handed out $90 million in scholarships to more than 28,400 employees. Like most Wegman policies, this one combines employee outreach with long-term corporate strategy: “This pro- gram has made a real difference in the lives of many young peo- ple,” says president Colleen Wegman, who adds that it’s also “one of the reasons we’ve been able to attract the best and the brightest to work at Wegmans.”

Granted, Wegmans, which has remained in family hands since its founding in 1915, has an advantage in being as gener- ous with its resources as its family of top executives wants to be: It doesn’t have to do everything with quarterly profits in mind, and the firm likes to point out that taking care of its employees is a longstanding priority. Profit sharing and fully funded medi- cal coverage were introduced in 1950 by Robert Wegman, son and nephew of brothers Walter and John, who opened the firm’s original flagship store in Rochester, New York, in 1930. Why did Robert Wegman make such generous gestures to his employees way back then? “Because,” he says simply, “I was no different from them.”1

THINK IT OVER

1. Why don’t more firms use Wegmans’ approach to dealing with employees?

2. What factors might theoretically cause Wegmans to change its

approach in the future?

Ethics refers to an individual’s beliefs about

what is right and wrong and what is good and bad. Ethics

are formed by the societal context in which people and

organizations function.

In Chapter , we discussed some of the sources of infor- mation for making human resource management (HRM) decisions. In this chapter and the next, we will discuss the details of some of those decisions that are made on a regular basis. Chapter  will describe the details of how organizations recruit and select employees for organiza- tions. This chapter looks at decisions about the size of an organization; that is, our focus here is the decisions about how many employees should be on the payroll at any time. This is often referred to as the headcount. We will discuss both temporary and more permanent decisions that can be made about headcounts, and we will also discuss some

special problems about the size of an organization’s workforce after a merger or acquisition. Before dealing with any of these decisions, we begin by discussing the importance of ethics in decision making.

6-1 ETHICS AND HUMAN

RESOURCE MANAGEMENT

In Chapter , we discussed how the legal framework pro- vided a set of parameters for human resource manage- ment decisions, and, as noted above, we discussed various sources of information for these decisions in the previous chapter. But ethics is another important aspect of decision making for all managers, not just human resource (HR) managers. Ethics is a separate concept from the law but is closely intertwined. Ethics refers to an individual’s beliefs about what is right and wrong and what is good and bad. Ethics are formed by the societal context in which people and organizations function. In recent years, ethical behavior and ethical conduct on the part of managers and organiza- tions have received considerable attention, usually fueled by scandals at firms such as Enron, WorldCom, Imclone, and Tyco International and unscrupulous managers such as Kenneth Lay, Jeffrey Skilling, and Bernard Madoff. The

Chapter 6: Human Resource Decision Making in Organizations 119

“The biggest risk is not taking any risk. . . . In a world that is

changing really quickly, the only

strategy that is guaranteed to fail is not

taking risks.”

—M Z, co-founder of Facebook

basic premise is that laws are passed by governments to control and dictate appropri- ate behavior and conduct in a society. The concept of ethics serves much the same pur- pose because of its premise about what is right and what is wrong.

But ethics and law do not always coincide precisely. For example, it may be per- fectly legal for a manager to take a certain action, but some observers might find his or her action to be unethical. For example, an organization undergoing a major cutback might be legally able to termi- nate a specific employee who is nearing retirement age, but if that employee has a long history of dedicated service to the organization, then many people could consider termination to be ethically questionable. Managers from every part of the organization must take steps to ensure that their behavior is both ethical and legal. Some organiza- tions develop codes of conduct or ethical statements in an attempt to communicate publicly their stance on ethics and ethical conduct.

The various scandals of the s raised many pub- lic questions about the ethical training and orientation of managers. A survey published in USA Today created even more questions. In that survey of  master’s of business administration (MBA) students, more than  percent responded that they would buy stock based on insider information, more than  percent said they would allow a gift to influence a company purchasing decision, and more than  percent said they make a payoff to help close a deal. Even more serious questions of business ethics emerged in the aftermath of the financial meltdown of , and the financial crises of –.

Following the near collapse of several major banks and financial institutions, the U.S. government insti- tuted its Troubled Asset Relief Program (TARP) to provide billions of dollars in loans to institutions such as Bank of America and JPMorgan Chase. By the end of , every one of these firms had repaid

the loans, and were, for the most part, reasonably healthy financially. It does seem clear, however, that many of these institutions would never have survived without the federal funds. The problems really arose, however, over the year-end bonuses the companies were paying to their executives. We will discuss executive compensation more fully in Chapter , but suffice it to say that Wall Street firms paid multimillion dol- lar bonuses to top execu- tives in early . There was no question that these bonuses were perfectly legal, but questions were raised about the ethics of paying

out huge bonuses to executives while many Americans were unemployed or struggling financially—especially when the firms were in a position to pay those bonuses only because of government bailout dollars. In fact, in early , Andrew Cuomo, New York’s attorney general, sent a letter to eight of the nation’s largest banks demand- ing to know how they structured those bonus payouts.

One interesting ethical challenge facing an organi- zation became apparent when Internet search provider Google announced that it was going to close its operations in China. The huge company had formally entered China in  (although it had provided a Chinese-language version of Google since ). As the company saw its market share shrink, however, Google’s executives real- ized they must formally enter the Chinese market. The problem was that Google considered itself a company that was socially responsible; to enter the Chinese market, the company had to agree to a certain level of censorship required by the government. Not only was information that was critical of government policies censored but also there was evidence that the Chinese government used Internet access to track down and prosecute dissidents within China.

To access the hundreds of millions of Chinese Inter- net users, Google agreed to this censorship, even though it was clearly at odds with Google’s corporate philosophy and what most Americans would consider ethical behav- ior. As a result, in January  Google announced that it had uncovered a Chinese government plot to use e-mail attachments to get access to sensitive information and to identify political dissidents, and this was seen as going too far. The source of the attacks has been speculated to be students at Chinese universities. In March , Google transplanted its Chinese operations to Hong Kong. This

Managers must take steps to ensure that

their behavior is both ethical and legal.

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Rightsizing is the process of monitoring and adjusting

the composition of the organization’s workforce to

its optimal size.

case illustrates how some companies must balance ethics with profits, and how complicated it is to maintain a real balance.

This case also helps illustrate how the scope of business ethics can be even more complicated when one thinks about the global environment of modern business. Different countries and different cultures have different values and norms, and this translates into different ideas about what kinds of behaviors are ethical and what kinds are unethical. Specifically, nations and cultures differ in what they see as acceptable behaviors relative to corrup- tion, exploitation of labor, and environmental impact. Transparency International, a global coalition fighting corruption, publishes a list of the countries perceived to be the least and the most corrupt in the world. In their latest survey, they found Denmark, Finland, New Zealand, Sweden, and Singapore to be perceived as the least corrupt countries in the world. Somalia, North Korea, Afghanistan, Sudan, and Myanmar were per- ceived to be the most corrupt. The United States was ranked as being perceived to be the nineteenth least cor- rupt country. Thus, it is important to recognize that one’s sense of ethics is always part of any decision made, but that individuals as well as countries can differ in terms of their sense of what constitutes ethical behav- ior. We will refer back to questions of ethics throughout these next two chapters.

6-2 RIGHTSIZING THE ORGANIZATIONS

One of the more basic decisions an organization must make concerning human resources is the size of the work- force. Whether a company is forecasting revenue growth or decline, the number of its employees must be adjusted to fit the changing needs of the business. In all cases, therefore,

adjusting the organization’s workforce to its optimal size and composition.

Managing the size of the workforce may, in turn, involve layoffs or early-retirement programs to reduce the size of the workforce, retention programs to main- tain the size of the workforce, and using temporary workers as a bridge between the current state of affairs and either growth or reduction. In any case, the orga- nization must ensure that it has the “right” people. Reduction, retention, or any other strategy affecting the size and composition of the workforce must target the specific types of employees the organization would like to eliminate or keep. For the most part, organizations choose to retain highly committed, highly motivated, and productive employees and would prefer to lose less committed and less productive employees. How an orga- nization achieves this goal while staying within the limits of the law is one major focus of this chapter.

Over the past three decades, people in the United States have witnessed firsthand the cyclical nature of eco- nomic forces. In the s, numerous layoffs and workforce reductions occurred at U.S. firms, primarily as the firms adjusted to increased global competition. Both academic researchers and the popular press discussed at length the best ways to manage layoffs and the challenges of dealing with their survivors. Then the economy began to grow at an unprecedented rate in the s, and expert opinion began to focus more on recommendations for recruiting and retaining valuable employees. Then came September , , and its aftermath: The economy slowed, and work- force reductions began again. By the middle of , the Dow Jones Industrial Average had its sharpest decline since the Great Depression, and layoffs and reductions were again the order of the day. This time, however, most organizations took a more strategic approach than they had in the s; as a result, many were in a good position to capitalize when markets rebounded again in . In late

If not for the intervention of the U.S. government, many large banks and financial institutions

would have failed during the recent recession.

 and early , however, things took a turn for the worse. Problems with bad mortgages led to foreclosures, banks that had invested in mortgage-backed securities began to have serious problems, and there were massive layoffs. In fact, as noted earlier in the chapter, if it had not been for the intervention of the U.S. gov- ernment, many large banks and

it is essential that the organization, through the HRM function, manage the size of its workforce effectively. This process is called rightsizing, and it is the process of monitoring and

Chapter 6: Human Resource Decision Making in Organizations 121

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m financial institutions would have failed during . The economy began showing signs of recovery by , but unemployment problems lingered and did not drop below  percent until . By June , the unemployment rate was hovering around . percent. The Dow Jones Industrial Average set a new record high in July , and by then the housing market had demonstrated several months of steady improvement. Throughout the first half of , the stock market continued to get stronger, there was continued job growth, and unemployment claims went down to their low- est levels since . Nonetheless, the United States was still plagued by economic uncertainty in the middle of , and many believed that this uncertainty was preventing companies from expanding hiring even further.

How, then, do organizations manage the size of their workforces to deal with their current needs and potential future economic realities? One important, short-term solu- tion is the use of temporary or contingent workers, who pro- vide a buffer for the organiza- tion. When facing declining needs for employees, the organization can simply decide not to renew the con- tracts of temporary workers or end their relationship with contingent workers in other ways. When facing increas- ing demand for employees, the organization can increase overtime or hire contingent workers until it determines if it will need more perma- nent workers. Once the need for permanent employees is established, companies must deal with the recruitment and selection issues discussed in the next chapter. This chap- ter is more concerned with temporary fixes for increased demand and the special issues that face an organization with declining demands for employees: These are the true focus of any discussion of rightsizing. We begin with an examina- tion of the increased demands for employees.

6-2a Dealing with Increased Demand for Employees When an organization anticipates an increased need for employees, the traditional approach has been to recruit and hire new permanent employees. In recent years, that model has changed. Specifically, if the demand for new employees is not expected to last, or if it would take a long time to find the needed permanent employees, then a firm may try a more temporary solution—at least for awhile. This is the case, for example, when the increased need for employees is part of a normal and well-understood cycle such as the practice of retailers hiring temporary help dur- ing November and December.

The easiest way to deal with a temporary increase in the demand for employees is to offer overtime opportuni- ties, which simply means asking current workers to put in longer hours for extra pay. As noted, this alternative is especially beneficial when the increased need for human resources is short term. For example, a manufacturing plant facing a production crunch might ask some of its production workers to work an extra half-day, perhaps on Saturday, for  or  weeks to get the work done. An advantage to this approach is that it gives employees the opportunity to earn extra income. Some employees wel- come this opportunity and are thankful to the organi- zation for making it available. In addition, it keeps the organization from having to hire and train new employ- ees because the existing employees already know how to do their work.

On the other hand, labor costs per hour are likely to increase. The Fair Labor Standards Act (described

earlier in Chapter  and dis- cussed further in Chapter ) s t i p u l a t e s t h a t e m p l o y - ees who work more than  hours a week must be compensated at a rate of one and a half times their normal hourly rate. Furthermore, if the organization doesn’t really need all the members of a work group for overtime, then it may face a compli- cated situation in deciding who gets to work the over- time. Unionized organiza- tions often have contracts

that specify the decision rules that must be followed when offering overtime. Finally, there is the problem of potential increased fatigue and anxiety on the part of employees, particularly if the overtime is not particularly welcome and if they have to work the overtime for an extended period of time.

Another increasingly popular alternative to hiring permanent employees is a growing reliance on temporary employees. The idea behind temporary employment is that an organization can hire someone for only a specific period of time, and a major advantage to the organiza- tion is that such workers can usually be paid a lower rate, although they are now more likely to be entitled to the same benefits as full-time workers. Considerable flex- ibility comes from the fact that employees themselves realize their jobs are not permanent, so the organization can terminate their rela- tionship as work demands mandate. On the other hand, temporary employ- ees tend not to understand the organization’s culture

121

Overtime refers to hours worked above the normal 40-hour workweek, for which there is usually a pay premium.

122 Part 2: Decision Making in Human Resource Management122

Employee leasing involves an organization paying a fee

to a leasing company that provides a pool of employees

who are available on a temporary basis. This pool of

employees usually constitutes a group or crew intended

to handle all or most of the organization’s work needs

in a particular area.

Part-time workers refers to individuals who are regularly

expected to work less than 40 hours a week. They

typically do not receive bene!ts and a"ord the

organization a great deal of #exibility in sta$ng.

as well as permanent employees. In addition, they are not as likely to be as productive as permanent full-time employees of the organization.

Employee leasing is yet another alternative. An organization can pay a fee to a leasing company that provides a pool of employees to the client firm. This pool of employees usually constitutes a group or crew intended to handle all or most of the organization’s work needs in a particular area. For example, an organization might lease a crew of custodial and other maintenance workers from an outside firm specializing in such services. These workers appear in the organization every day at a predetermined time and perform all maintenance and custodial work. To the general public, they may even appear to be employees of the firm occupying the building. In reality, however, they work for a leasing company.

smaller staff on hand during downtimes. Part-time work- ers are common in organizations such as restaurants. Wait staff, bus persons, kitchen help, and other employ- ees might be college students who want to work only  or  hours a week to earn spending money. Their part- time interest provides considerable scheduling flexibility to the organization that hires them.

Each group of employees described in the preceding can be considered part of the contingent workforce, which includes () all temporary employees, () all part-time employees, and () all part-time employees who are employed by orga- nizations to fill in for permanent employees during peak demand. Thus, these contingent workers are considered alternatives to recruiting, but usually as alternatives that are less desirable. Some recent views of staffing take a more strategic perspective, however, and suggest that there may

The Fair Labor Standards Act stipulates that hourly workers

must be compensated at a rate of one and a half times

their normal hourly rate for work in excess hours of

40 hours per week.

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The basic advantage to the organization is that it essentially outsources to the leasing firm the HR elements of recruiting, hiring, training, compensating, and evaluating those employees. On the other hand, because the individu- als are not employees of the firm, they are likely to have less commitment and attachment to it. In addition, the cost of the leasing arrangement might be a bit higher than if the employees have been hired directly by the firm itself.

Our final alternative to hiring permanent workers is to rely on part-time workers, or individuals who routinely

expect to work fewer than  hours a week. Among the major advantages of part-time employment is the fact that these employ- ees are usually not covered by benefits, thus lowering labor costs, and the organi- zation can achieve consid- erable flexibility. The part- time workers are routinely called on to work different schedules from week to week, thereby allowing the organization to cluster its labor force around peak demand times and have a

be situations when it would be preferable to hire temporary or contingent workers instead of permanent employees.

In this view, whenever a firm requires additional human resources unrelated to its core competencies or required to have skills or knowledge that is generally available in the marketplace, then it may be to the firm’s competitive advantage to add resources through some other arrange- ment besides permanent hires. Eventually, though, it may become clear that the firm needs to hire more permanent employees, and that is the focus of the next chapter. For now, we turn instead to the situation in which rightsizing requires the firm to reduce the number of employees.

6-2b Dealing with a Declining Need for Employees There are also cases in which an organization needs fewer employees. If the organization employs a large contingent workforce, then the easiest solution is to cut those workers and simply retain its core of permanent employees. This approach works best in cyclical indus- tries in which demand increases and decreases with the time of year, such as farming and its use of migrant farm- workers. But dealing with more permanent decreases in the demand for employees is more problematic, although there are some approaches we can discuss for this pos- sibility as well.

Chapter 6: Human Resource Decision Making in Organizations 123

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Distributive justice refers to perceptions that the outcomes a person faces are fair when compared to the outcomes faced by others.

6-2c Strategies for Layoffs

In many cases, there is not enough warning to rely on early retirements, or the early retirement strategy simply does not result in enough decrease in employee numbers. In these cases, it is usually necessary to reduce the workforce through layoffs. Layoffs

are not popular for obvi- ous reasons. When notified of

a layoff, some employees decide to sue the organization for wrongful termination. In

these cases, the former employee alleges that the organization violated a contract or a law in deciding who to terminate. Even if an employee does not pursue legal remedies, many employees who have lost their jobs develop negative feelings toward their former employer. These feelings usually manifest themselves through neg- ative comments made to other people or refusing to con- duct personal business with their former employer. In some extreme cases, they may even result in aggressive

or violent responses directed at those perceived to be responsible. Hundreds of such attacks occur each year, and several dozen result in the loss of life. For these rea- sons, it is critical that layoffs be carried out humanely and carefully.

A critical determinant of an employee’s reaction to being laid off is his or her perceptions of the justice involved in the layoff process. Three types of justice—distributive, procedural, and interactional—seem to be related to reac- tions to layoffs.

. Distributive justice refers to perceptions that the out- comes a person faces are fair when compared to the outcomes faced by others. This type of justice is often important in determining an employee’s reac- tions to pay decisions, for example. Most experts believe that these perceptions are based on both the actual outcomes faced (e.g., how much I am paid, whether or not I lose my job) and the per- ceptions of what oth- ers have contributed. For example, a person may be paid less than

Early retirements and natural attrition can be used when it is possible to plan systematically for a gradual decrease in the workforce. In some cases, organizations can even conduct planning exer- cises that may suggest the need to reduce the workforce over the next few years. This reduction may result from antici- pated changes in tech- nology or customer bases or even to anticipated changes in corporate or business strategies. The organization can attempt to manage the reduction by simply not replacing workers who leave voluntarily, or by providing incentives for other employees to retire early, or both.

Clearly, a certain number of employees will retire every year in any mature organization, which can reduce the size of the workforce by simply not replacing those retired employees. But what if normal retirement rates are not expected to be enough to produce the necessary reductions? In those cases, the organization can offer certain types of incentives to convince some employees to retire earlier than they had planned.

For example, in an organization that has a defined benefit retirement plan (see Chapter ), the pension that an employee earns at retirement is a function of (among other things) the number of years that person has worked and her or his salary. An organization could simply announce that those who are thinking about retiring will automatically have, say,  years added to their years of service if they make a decision to retire by a certain date. As a result, employees could feel comfortable about retiring  years earlier than they had planned. An orga- nization could also increase the rate at which it matches employee contributions to (k) plans (also discussed in Chapter ) or in some other way make it financially more attractive for employees to retire early. Some firms actu- ally provide employees with opportunities to learn more about wealth management so they are better able to take advantage of early retirement opportunities. But, in all cases, these plans must truly be voluntary or the organiza- tion may encounter legal problems. By definition, early- retirement plans target older workers, so any attempt— real or perceived—to coerce them into leaving can be con- strued as age discrimination. As noted in Chapter , age discrimination toward older workers is illegal.

Perceptions of distributive, procedural, and interpersonal justice affect reactions to layoffs.

124 Part 2: Decision Making in Human Resource Management

Voice: The perception that the person had some control over the outcome or some voice in the decision.

Consistency: The perception that the rules were applied the same way to everyone involved.

Free from bias: The perception that the person applying the rules had no vested interest in the outcome of the decision.

Information accuracy: The perception that the information used to make the decision was accurate and complete.

Possibility of correction: The perception that some mechanism exists to correct "awed or inaccurate decisions.

Ethicality: The perception that the decision rules conform to personal or prevailing standards of ethics and morality.

Representativeness: The perception that the opinions of the various groups a#ected by the decision have been considered in the decision.

Source: Adapted from Jason Colquitt, Donald Conlon, Michael Wesson, Christopher Porter, and K. Yee Ng, “Justice at the Millennium: A Meta-Analytic Review of 25 Years of Organizational Justice Research,”

Journal of Applied Psychology (2001), 86: 425–445.

TABLE 6.1 Critical Dimensions of Procedural Justice

his co-worker, but if he can see that she contributes more to the company than he does and that the dif- ference in the pay is proportional to the difference in contributions each makes, then he can still view the outcome as fair. Others argue, however, that unequal outcomes alone lead to perceptions of low distributive justice and when someone loses his or her job but someone else does not, then it is difficult to see how this difference in outcome can be linked to differences in contribution.

. Nonetheless, those who lose their jobs may still react reasonably as long as they feel that the organization has not also violated another type of justice— procedural justice—or perceptions that the process used to deter- mine the outcomes was fair. Thus, an employee who loses his or her job may be less angry if everyone in a department also lost their jobs or if layoffs were based on objective and accepted criteria. Several models of procedural justice have been proposed, and these models have yielded the dimensions of procedural jus- tice presented in Table ..

It is also clear, however, that an employee (or any other observer) will judge a process to be fair when it leads to an outcome that is favorable. This perspec- tive explains why most students generally consider fair tests to be the ones they perform best on. It is also why employees who do not lose their jobs are more likely to view the basis for layoff decisions as being more just (see, however, the discussion on the survivor syndrome).

. Finally, a third dimension of justice, interactional justice, refers to the quality of the interper- sonal treatment people receive when a deci- sion is implemented. Thus, employees losing their jobs will feel that

the decision was more just if it is communicated to them in a considerate, respectful, and polite manner. In fact, scholars have proposed more recently that there are two separate dimensions to interactional justice. The first dimension deals with the extent to which the person was treated with respect and dignity when he or she was told about the decision, while the second dimension refers to the extent to which the decision maker provides information about the deci- sion rules used and how they were applied. These two dimensions have been called interpersonal justice and informational justice, respectively.

The human resource manager who has to deal with layoffs should consider these justice issues. Basically, they suggest that necessary layoffs should be implemented using a well-formulated strategy that can be communi- cated to and understood by the employees and follows the rules implied by the dimensions of procedural justice in Table .. Finally, the decisions should be communicated in a way that conveys respect and caring for the people involved.

Of course, the actual strategy used for determining who will be laid off must also be reasonable. As noted above, a layoff strategy that targets older workers is probably illegal and would rarely be considered as fair. Sometimes, layoff decisions are made on the basis of performance; that is, the organization decides to lay off its poorest performers. But how does an organization decide who these employees are? Typically, this decision is based on past performance appraisals, but, as we shall see in Chapter , performance appraisals are far from perfect and prone to various biases. When layoff deci- sions are based on performance ratings, those ratings take on the role of employment tests. In other words, because the organization is making a decision based on the performance ratings, the courts consider the perfor- mance ratings to be employment tests. Thus, if there is evidence of disparate impact in the layoffs, the organi- zation will need to demonstrate that the performance

124

Procedural justice refers to perceptions that the

process used to determine the outcomes were fair.

Interactional justice refers to the quality of the

interpersonal treatment people receive when a

decision is implemented.

Chapter 6: Human Resource Decision Making in Organizations 125

Managers today use more

information to make

decisions than ever before. Perhaps the most obvious example

comes from the retailing sector. Point-of-sale technology helps

managers know exactly how many units of every product in

a store are sold every day. They can correlate this information

with sales of other products, track it on daily, weekly, monthly,

seasonal, and annual bases, and monitor the effects of price

fluctuations on customer demand. Similarly, hotel managers

can track occupancy rates in real time, Web site administrators

know how many people view their sites every day, and airline

managers know how many reservations are made, how many

people are on each flight, and how much luggage is on every

airplane.

It should come as no surprise, then, that human resource

managers are also getting into the act. HR managers essentially

use two kinds of data. One type they gather themselves:

For instance, they can collect, store, and access objective

data related to employee education, skills, experience,

demographics, and so forth. In addition, they can conduct

employee surveys to assess attitudes, job satisfaction,

engagement, and the like. In most cases they can also access

organizational data related to finance, operations, marketing,

and so forth.

HR managers also often rely on the second type of

information, from external sources. For instance, salary surveys,

cost-of-living data, projected population shifts (migration), and

labor force profiles can all be useful. This and related information

can be obtained from government sources, consulting firms, and

so forth.

FedEx is a great example of a firm that relies heavily on

HR information in making decisions. For instance, if FedEx is

considering acquiring a company, it first analyzes data from

the target company related to employee engagement surveys,

turnover rates, experience, education, and diversity to compare

with its own workforce information. This helps FedEx understand

what additional investments (if any) it will need to make in

human capital if it completes the acquisition. The firm is also

looking into ways to compare data its employees provide on

engagement surveys with the information they share on various

social media platforms.18

THINK IT OVER

1. Can a manager ever have too much information? Why or why

not?

2. What issues arise when a firm looks at its employees’ posts on

social media sites to gain information about them?

“Our analysis provides management with another data point before they make their decision.”

—Bob Bennett, chief learning office and vice

president of HR for FedEx17

Making Good Decisions

ratings are job related or valid. This process is not always simple, as we shall see in the next chapter. In addition, the layoff strategy must also include some plan for call- backs if the demand for labor increases again. For exam- ple, a strategy that states the first to be laid off will also be the first to be called back will often be perceived as a fair strategy.

Finally, as noted in Chapter , when an organiza- tion is about to undertake a large-scale layoff or site clo- sure, it is necessary to announce this step far enough in advance to allow employees (and others) to take some action to adjust to the coming changes. The Worker Adjustment and Retraining Notification (WARN) Act requires at least  days’ notice for a facility clo- sure or a mass layoff. Failure to provide this notification can result in serious financial penalties, especially for a firm facing pressure to reduce costs. From the orga- nization’s perspective, however, some potential costs come with announcing planned layoffs. Once this plan is made known, many employees will seek alternative

employment to avoid being out of work (which is the intention of the law). The employees most likely to find alternative employment are the best employees, how- ever, and the firm is most likely to want to retain these employees. It is difficult to balance the requirements of the law (and of the individual employees) with the needs of the organization that desires to retain its top talent. This chapter’s closing case presents additional informa- tion about exporting jobs.

6-2d Is Downsizing Effective? Given the prevalence of downsizing as a way to reduce labor costs and make a firm more efficient, it would seem that the effectiveness of downsizing as a strategy would get a lot of support. Why else would so many firms turn to this strat- egy as a means of becoming more competitive? The data on the effectiveness of downsizing is rather mixed, however, and most of the data suggests that downsizing is not an effective strategy.

126 Part 2: Decision Making in Human Resource Management

A major study of the effects of downsizing was con- ducted in the s. The authors compared several groups of companies that were tracked from  through , but we will focus on only three for the current discussion. “Stable employers” were defined as those firms where changes in employment throughout these years fell between plus and minus  percent (this was the largest group in the study). “Employment downsizers” were firms where the decline in employment was more than  percent during this time and the decline in plant and equipment was less than  percent during the same period. “Asset downsizers” were defined as firms where the decline in employment was less than  per- cent during this time, but the decline in plant and assets was at least  percent greater than the decline in employ- ment. The authors examined the impact of these strategies over time on two indexes of performance: return on assets (a financial index of profitability) and common stock prices.

The results clearly showed that employment downsiz- ers had the lowest levels of return on assets over time and also did quite poorly on stock price. In both cases, the asset downsizers produced the greatest performance over the

The Worker Adjustment and Retraining Noti!cation (WARN)

Act requires at least 60 days’ notice for a facility closure

or a mass layoff.

Most of the pressure on management to downsize the

workforce comes from stockholders.

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Earlier in this chapter, we emphasized issues that can occur in conjunction with those employees who lose their jobs in a layoff, but issues related to those who avoid losing their jobs in the layoff also crop up. A phenomenon known as survivor syndrome can counteract many of the presumed cost savings that led to the layoffs in the first place. This syndrome describes employees who feel guilty over keep- ing their jobs (that is, they survived) when others lost their jobs. Their morale and commitment to the organization drop dramatically. One study from the s found that HR managers reporting layoffs reported steep declines in morale and increased levels of voluntary turnover. A more recent study found that  percent of respondents had gone through layoffs or restructuring since , and these firms reported that top performers were less likely to see a link between their own goals and company goals, while almost half the employees reported that these changes resulted in declines in quality and customer service. This data may underestimate the total costs of increased layoffs. Evidence suggests that the increasing rates of layoffs and the result- ing joblessness are causing serious emotional problems for

period. Most of the pressure on management to downsize the workforce comes from stockholders, who believe that this method is a good way to cut costs and increase profit- ability. But the results of this study suggest that firms

facing increased competition or some other need to down- size should consider reducing plants and assets rather than their workforce.

Other studies have also reported negative effects on stock prices and other financial indexes as a result of downsizing. Given these findings, why do firms continue to downsize as a reaction to the need to cut costs? Some evidence suggests that, in the short run, the stock market reacts positively to these cuts, and so managers are reinforced for their deci- sions. But other potential costs, not only potential direct financial costs, are also associated with downsizing.

employees—both those actually affected by layoffs and those who think they might be affected by layoffs.

Given this data, we must close with a discussion of alter- natives to layoffs as ways of reducing costs. Downsizing the number of employees is a tangible way of demonstrating that a firm is serious about cutting costs, but it may not be the most effective. Reducing assets is an alternative. This could include reducing investments in new machinery, stretching out maintenance schedules for equipment, or actually get- ting out of some lines of business. Although closing plants will also result in job loss, a firm might be able to sell some of its less productive assets. Thus, some alternatives to layoffs may also result in job loss, but that outcome isn’t a foregone conclusion. Some firms find even more productive ways to reduce costs. Some years ago, one of the authors of this text- book learned about a DuPont plant that was facing layoffs or closure because of high labor costs. The plant manager (subsequently promoted several times) asked the employees to get involved in the decision about reducing costs. The employees suggested a combination of job sharing, salary reductions (the plant was nonunion), early-retirement plans, and part-time work, which resulted in almost no employ- ees losing their jobs. At the same time, the plant became extremely profitable and the employees developed a loyalty to the company that was the envy of the manufacturing sector.

Chapter 6: Human Resource Decision Making in Organizations 127127

Involuntary turnover is terminating employees whose services are no longer desired.

Punishment simply refers to following unacceptable behavior with some type of negative consequences.

6-3 MANAGING TERMINATIONS AND RETENTION

Not all decisions regarding who remains with a firm result from changes in the demand for human resources. There are times when an organization wants to sever the employ- ment relationship, not with a large number of employees but with specific employees. There are also times when an organization is concerned over the loss of critical employees (or group of employees) and must instead focus on ways to retain them. We begin this discussion by turning our attention now to the various issues involved in termi- nating employees whose services are no longer desired—also known as involuntary turnover.

6-3a Managing Involuntary Turnover Effective human resource practices are supposed to ensure that employees perform their job satisfactorily. But even the most sophisticated recruitment and staffing practices can still result in hiring an employee who is simply not capa- ble of or is not willing to perform up to acceptable standards or who presents enough of a disciplinary problem that he or she must be terminated. We should note, first, however, that any time an employee is terminated, it represents a failure of some part of the HR system. It can also be costly because the firm must then seek to recruit, hire, and train a replacement. Therefore, in all the situations we describe in this section, ter- mination should be seen as the last resort. Before terminat- ing an employee, managers should always start with an effort to rectify the problem. These attempts begin with trying to ascertain the reasons for poor performance.

For example, in some cases, the poorly performing employee might have the potential to perform effectively but he or she was never properly trained or is not properly supervised. In such cases, the employee’s performance may be brought up to standard by retraining or reassignment to a supervisor who is better at developing employees. In other cases, the employee may be suffering from various physical or psychological problems such as excessive stress or prob- lems associated with alcohol or drug abuse. Most organiza- tions have some type of employee assistance program (EAP) designed to either help such employees directly or refer

them to competent profession- als who can provide that help. Originally, many EAPs focused on alcoholism, but more recently they have expanded to deal with

drugs and more general problems of mental health. Considerable

evidence suggests that effective EAPs can help employees and reduce the costs associated with lost workdays and poor productivity. These plans can also save costs by

serving as gatekeepers for employee health plans because they deter-

mine what types of services are best suited for each employee.

But, more important, these pro- grams make it possible for potentially valu-

able employees to be brought back to productive levels, thus ensuring their continued employment and yield- ing savings for the organization.

In many cases, the reason for an employee failing to perform up to standard is that he or she simply does not know how or cannot perform at that level. It may be a lack of ability or a lack of fit between the person’s abilities and the job requirements. In these cases, it is in everyone’s best interests for the employee to leave the company or be reas- signed to another job, and this is what most termination decisions deal with. But, in other cases, poor performance is a motivational problem, not a personal or ability problem. For whatever reason, the employee chooses not to perform at expected levels, even though he or she is capable of doing so. This may the result of poorly designed incentives for per- formance, which we will discuss in Chapters  and , but sometimes it is possible to convince the employee to exert greater effort by taking some type of disciplinary action.

6-3b Progressive Discipline Disciplinary programs in organizations are designed to try to improve perfor- mance through the use of punishment.

. P u n i s h m e n t s i m p l y re fers to following un accep table behavior with some type of nega- tive consequences.

Before terminating an employee for poor performance, managers should start with an

effort to rectify the problem—trying to ascertain the reasons for the poor performance.

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128 Part 2: Decision Making in Human Resource Management

Problems with

performance

■ Failure to complete work on time ■ Errors in work products ■ Work products that do not meet

established tolerances

Problems with

attendance

■ Repeated unexcused absences ■ Tardiness ■ Leaving work early

Problems with ethics

or honesty

■ Taking credit for the work of others ■ Falsifying records ■ Soliciting or accepting bribes or

kickbacks

Other behavior

problems

■ Gambling ■ Vandalism ■ Use of drugs or alcohol on the job ■ Sexual harassment

Problems that could

lead to immediate

termination

■ Major theft ■ Sleeping on the job ■ Selling narcotics on the job

TABLE 6.2 Typical Disciplinary Problems

128

Discipline refers to the system of rules and

procedures for how and when punishment is administered

and how severe the punishment should be.

Progressive disciplinary plans are organizational

disciplinary programs where the severity of the punishment

increases over time or across the problem.

Verbal warnings—the !rst step in most progressive disciplinary programs—are cautions conveyed orally to

the employee.

Written warnings—the second step in most

progressive disciplinary programs—are more formal

warnings. They are given to the employee in writing

and become part of the employee’s permanent record.

As part of a progressive disciplinary program, a

suspension is a temporary layo", usually with pay,

when there is an ongoing investigation.

As part of a progressive disciplinary program,

termination is an act by the organization to end the

employment relationship.

Employment at will states that an employer can

terminate any employee, at any time, for any reason

(good or bad), or for no reason at all.

. Discipline refers to the system of rules and procedures for how and when punishment is administered and how severe it should be.

In all cases, the goal of the disciplinary program is to convince the employee to stop the ineffective or undesired behavior and engage in more accepted or desired behav- ior. The goal is not to terminate the employee unless that becomes the only viable alternative.

We refer to these programs as progressive disciplinary plans because, almost invariably, the severity of the pun- ishment increases over time or across the seriousness of the problem. A list of typical steps in the progressive dis- ciplinary program is provided in Table .. Each infrac- tion, as well as the schedule of penalties, should be spelled out clearly to employees, both in the form of an employee handbook and orally at employee orientation. Whatever the infractions, the steps in the disciplinary process are

almost always the same. It is also true, however, that some types of problems might incur more severe penalties from the outset. For example, if a bank teller fails to balance at the end of the day, and this pattern continues for several days, the bank may simply send the teller for further train- ing. If the pattern contin- ues, the bank may suspend the teller, and eventually, dismiss the teller, but this will take some time. On the other hand, if the teller is found to be stealing money, the penalty is immediate dismissal for the first infraction.

. Typically, the first step in a progressive disciplin- ary program is a verbal warning, or a caution con- veyed to the employee orally rather than in writ- ing. The supervisor or manager should keep a written record of the fact that a verbal warning was given to document the fact that all required steps were taken in deal- ing with an employee.

. Written warnings are more formal and are the second step in the process. Here

the supervisor gives the warning to the employee in writing and provides a copy to the HR department. As a result, a written warning becomes part of the employee’s permanent record.

. Suspension, or a temporary layoff, is the next step in the process. The suspension could last a day or a few

weeks; it may be with or without pay. At each step, the supervisor should discuss the performance problems with the employee and seek ways for the employee to improve.

. If all else fails, the final step in the process is termination. At this point, the organization faces potential legal problems as well as potentially violent reactions by the employee. This final step should be taken only after serious consideration and the decision that the employee cannot be salvaged.

6-3c Employment at Will It is not always easy to terminate an employee, no matter how problematic he or she may be. Considerable public- ity has surrounded the issue of employees suing organiza- tions for wrongful termination, so we might suspect that the formal law dealing with this issue is quite complicated. It might be surprising, therefore, to learn that the only real legal perspective on employee termination is a nineteenth- century common-law rule known as employment at will. Basically, this view asserts that, because an employee can terminate an employment relationship at any time (i.e., quit a job), the employer should have similar rights. Therefore, employment at will states that an employer can terminate any employee at any time for any reason (good or bad)—or for no reason at all. This view differs dramatically from the situation in many European countries, where employees can be terminated for criminal behavior only.

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Chapter 6: Human Resource Decision Making in Organizations 129

1. The termination would violate a speci!c law. Various laws forbid termination for a speci$c reason. Some of the most common reasons are

termination based on gender or race (violates the Civil Rights Act) or termination because of union activity (violates the Taft-Hartley Act).

2. The employee has a contractual right to his or her job. The contract might be a formal contract or an implied contract guaranteeing or

implying a guarantee of employment.

3. The employee’s rights of due process have been violated. For example, if an employee is accused of theft, the employee has the right to

know of the charges and to refute those charges—in a court of law if necessary.

4. Public–policy exception. This exception has been less common but involves cases in which an employee is discharged for refusing to commit

a crime or for reporting a crime or unethical or unsafe behavior on the part of the organization. Thus, whistle-blowers are protected under

this exception.

5. Breach-of-good-faith exception. This is the most di%cult exception to establish because it involves a breach of promise. In one of the best-

known cases, an employee claimed that he was terminated after 25 years of employment so that the company could avoid paying him his

sales commission.

Note: These exceptions have been cited in various court cases, but there is no guarantee that any speci"c state will recognize any one of these exceptions in its jurisdiction.

Source: Fortune v. National Cash Register, 364 Massachusetts 91, 36 N.E. 2d 1251 (1977).

TABLE 6.3 Exceptions to the Doctrine of Employment at Will

In the United States, companies are relatively free to terminate employees anytime they wish, so in most cases an employee has no legal recourse if he or she is terminated. Several important exceptions to the employment-at-will doc- trine exist. These exceptions define situations in which an employee who is discharged can sue for wrongful termina- tion and thus get his or her job back. These exceptions are important to keep in mind and are presented in Table ..

Even with these exceptions, employers can still usually terminate employees for cause; that is, if the employee vio- lates a written company rule or policy or is an objectively documented poor performer, then he or she can be termi- nated in virtually every case. The key to successful termina- tion of an employee is documentation. An organization can terminate any employee at any time, but if the employee claims that the termination was wrong, the employer may have to prove otherwise. If an employee is dismissed for poor performance, then it may be necessary to document that most (if not all) of the employee’s recent performance appraisals were poor or below standard. If the employee has received generally acceptable evaluations, then it will be extremely difficult to terminate the employee for poor performance. In any case, if a company has a progressive disciplinary program, it must show that each step was fol- lowed before the employee was terminated.

If an employer does not follow the proper steps and document each one, the employee may well get his or her job back. This situation may be annoying to the employer, but it is actually far more serious than annoyance. Progressive discipline can work only if the employee truly believes that he or she will be fired without improved performance. If the threat of termination is not credible because proce- dures were not followed correctly or because of some other reason (perhaps the employee is a civil-service employee), it is extremely difficult to correct a problem employee. The credible threat of termination is actually an important part

of the process by which an organization can turn a poorly performing employee into a productive one.

Some organizations have begun to adopt an approach referred to as positive discipline, which has a somewhat dif- ferent orientation. This approach integrates discipline with performance management. (We will discuss this more fully in Chapter .) Positive discipline emphasizes positive changes rather than punishment. Typically, the process is still somewhat progressive in nature, with warnings lead- ing to eventual termination if the problem is not corrected. The major difference, however, is that a great deal of coun- seling and problem solving are integral to the process. The employee is given as much help as is reasonable to help him or her identify the behaviors desired by the organization and to eliminate undesirable behaviors.

6-3d Employee Retention Sometimes the focus of human resource decisions is on ways to retain valued employees instead of on ways to terminate undesired employees. In fact, the two work together: Organizations must seek ways to eliminate poorly performing employees while at the same time find ways to retain highly performing employees. Thus, termination is about ways to ensure the involuntary turnover of undesired employees, and retention is about ways of reducing the vol- untary turnover of desired employees.

One of the authors of this book works at a university in New Orleans where this problem was played out in dramatic fashion following Hurricane Katrina and the breaching of the New Orleans levee system in August . As a result, the university had to close for a semester, and it lost a great deal of money. When the university was ready to reopen, it became clear that it would be necessary to reduce the size of the staff (and the faculty) to survive. Deans and heads of programs were therefore asked to determine which staff positions were critical for the future of the university and

130 Part 2: Decision Making in Human Resource Management130

Job dissatisfaction is the feeling of being unhappy with one’s job. It is a major cause of

voluntary turnover.

to prioritize layoffs among the remainder of the staff. Lists of potential layoffs were thus generated across the univer- sity, and hundreds of staff members were scheduled to lose their jobs. But no one really understood the situation from the perspective of the staff employees. Many of them had been forced to evacuate New Orleans, and they had to enroll their children in schools in other cities. Many of them had lived in areas that had been flooded and could not be rebuilt in time to return to work in January . Still others had found jobs elsewhere or had spouses who had found jobs

elsewhere and were not planning to return to New Orleans. As a result, hundreds of staff employees voluntarily left their jobs. Unfortunately, these were often not the same people the university had planned to lay off. Instead, these were val- ued employees whose jobs were critical to the future of the organization. As a result, all the planned layoffs had to be canceled (with a few exceptions), and the university had to scramble to make sure that all critical positions were filled.

This experience illustrates quite graphically that there are two sides to every rightsizing exercise: the termination of employees who are no longer needed, and the reten- tion of those employees who are still needed and who may become even more critical in the light of planned layoffs. Therefore, we turn our attention now to the problems of retaining valued employees. These strategies are always important if the firm hopes to gain competitive advantage through its human resources, but they are especially critical as part of any rightsizing.

6-4 MANAGING VOLUNTARY TURNOVER

Managers cannot always control who leaves the organiza- tion or why they leave, but they should not assume that all turnover is negative even in the case of voluntary turnover. In fact, although the organization does not want to force some- one out, management may not be totally disappointed that the person left, and a certain amount of voluntary turnover is probably healthy for the organization. Yet it is important to manage this turnover as much as possible. High rates of turnover cost the organization a great deal in terms of the expense associated with employee replacement, and such turnover can hurt the organization’s reputation as a good place to work.

To manage turnover, it is important to under- stand why people leave. A major cause for turnover is job dissatisfaction, or being

unhappy with one’s job. We will discuss some causes for job dissatisfaction later in the chapter (as well as some additional consequences of dissatisfaction later in the chap- ter), but for now it is enough to say that the HR man- ager plays a major role in ensuring that employees remain reasonably satisfied with their jobs. It is also the role of human resources to help reduce turnover and retain valued employees. As we shall see, job dissatisfaction is often the key to turnover. Different views explain why dissatisfied workers decide to leave.

6-4a Models of the Turnover Process The basic reason people leave their jobs is because they are unhappy with them. Thus, the simplest view of the employee turnover process would suggest that if we increase job satisfaction, then we will decrease turnover. Although this basic view is essentially correct, the processes involved are somewhat more complex.

First, the economy and the labor market play a role. It has been noted that the prevailing unemployment rate is as big a factor in whether a person leaves a job at the level of dissatisfaction. Clearly, this explanation makes a great deal of sense. Even if an employee is extremely dissatisfied, he or she is not likely to quit without real prospects of find- ing another job.

Recognizing this fact, several turnover models empha- size the role of dissatisfaction in the decision to look for alternatives, and it is seen as a necessary (but not sufficient) first step in the decision to quit. At least two major streams of research have proposed models that incorporate these ideas, and the basic concepts of these models are present in Figure .. As you can see in the figure, the process begins with factors leading to job dissatisfaction (which will be discussed below). Job dissatisfaction causes the employee to begin thinking about quitting, which leads to a search for alternatives. Only if those alternatives look better does the employee decide that he or she will quit, a decision first manifested by an intention to quit.

Of course, the implication of this type of model is that managers should reduce the sources of job dissatisfaction. It is best to stop the turnover before the employee begins searching for alternatives because he or she might find a more attractive alternative. Even if an employee begins searching for alternatives, it may still be possible to retain the employee by convincing him or her that the current job really is better than the alternatives. In fact, the search for alternatives sometimes leads to increased satisfaction on the current job after the employee discovers that the alter- natives were not as positive as once believed.

Other models have proposed similar mechanisms but have also suggested that job dissatisfaction must reach a

A certain amount of voluntary turnover is probably healthy for the organization.

Chapter 6: Human Resource Decision Making in Organizations 131

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Job embeddedness refers to the fact that some people stay on their jobs, even when they decide they are unhappy and should leave. Other ties in the community or obligations keep the employee on the job.

FIG 6.1 A Model of the Turnover Process

Causes of job

dissatisfaction

Compare alternatives

Actual turnover

Job dissatisfaction

Thinking about leaving

Looking for alternatives

Intention to quit

critical level before anything happens and, at that point, it may be too late to do anything. In other words, this approach suggests that increasing job dissatisfac- tion does little to change the employee’s intentions to leave. Those levels of job dissatisfaction finally reach a critical level, however, and the intention to leave becomes so strong that the employee is almost guaran- teed to leave.

Another interesting model that deviates a bit from the basic model in Figure . focuses on “shocks” to the individual. First, this model proposes that several paths can lead to turnover, and they do not all require shocks. Nonetheless, the major focus is on a shock—an event that can be either positive or negative but is so profound that it causes the employee to think about the organization, the job, and how he or she fits with both. This model begins with shock and not with job dissatisfaction. In fact, the dissatis- faction occurs only because the employee started thinking about the job in response to the shock. The decision to leave is largely based on the perception that the employee does not really fit with the company—that is, the current job in the current company is not consistent with the image the employee has of him- or herself. In some cases, the employee will leave without even considering alternatives, but in all cases the decision to leave takes place over time.

The model includes other aspects of cognitive processing, but the shocks include events such as winning the lottery or losing a loved one, as well as job- related events such as missing a promotion or receiving an offer from another company. This model has interesting implica- tions for understanding how dif- ficult it is to manage the turn- over process, but recently the authors of the model have added one more wrinkle. Although the model was originally proposed as a way of understanding why people leave their jobs, it can also help understand why others stay.

The notion of job embeddedness has been proposed as an explanation for why some people stay on their jobs, even when they decide they are unhappy and should leave. Some employees are simply tied too strongly to their jobs to leave. Perhaps they are deeply involved in the neighborhood, or perhaps they cannot sell their houses. Whatever the reason, they feel that they can- not quit. These employees may be quite unhappy, which can cause other problems. This state is not always desirable. Nonetheless, the notion of job embeddedness adds a great deal to our potential under- standing of the turnover process.

6-4b The Causes of Job Dissatisfaction

A common thread in these models of the turnover process is job dissatisfaction. Wherever and however in the process job dissatisfaction occurs, reducing it is likely to reduce turnover. Therefore, it is important to understand the causes of job dis- satisfaction. Although most sources of job dissatisfaction that have been studied are related to the job, some of the more creative approaches have focused on factors that have little or nothing to do with the job. For example, one line of re search, using identical twins, has (cautiously) suggested that a cer- tain component of job satisfaction may be genetic. A related

line of research has suggested that some individuals are simply disposed toward being satisfied, while others are disposed toward being dissatis- fied, and that, although conditions on the job play a role, these tenden- cies are as important in determining levels of job dissatisfaction. More typical approaches to job dissatisfac- tion, however, tend to focus on the following job-related factors.

. Nature of the Work. One of the most important sources of dissat- isfaction on the job is the nature of the work that a person does. For example, a consistent relationship

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exists between job complexity (and job challenge) and job satisfaction such that employees with more complex and challenging jobs are more satisfied. We will discuss how jobs can be redesigned to make them more moti- vating and satisfying in Chapter .

In addition, job satisfaction tends to be higher when the job is less physically demanding. We don’t want to suggest that a boring job is preferred—quite the contrary—but a job that requires constant physi- cal exertion and strain tends to lower levels of job satisfaction. Also, jobs that help employees achieve something of value tend to result in higher levels of job satisfaction; that is, if an employee feels that he or she is accomplishing some good on the job, satisfaction tends to be higher. In addition, if an employee values status and a job provides him or her with more of it, then levels of satisfaction are also likely to be higher.

. Pay and Benefits. It may not be a surprise that an employee’s level of satisfaction on the job is affected by the extent to which he or she is satisfied with pay and benefits. In general, higher levels of pay and more attrac- tive benefits tend to result in greater satisfaction, and we will discuss issues of both compensation and benefits in Chapter . But another important factor in deter- mining satisfaction with pay is what other people make. Basically, we compare ourselves with similar others, and we gauge what we contribute to an organization versus what a comparison person contributes. We then com- pare how much we are paid and, if the ratio of rewards to contributions is better for the other person, we tend to be dissatisfied. Note that these calculations are all based on perceptions, which may be incorrect, and note also that this comparison person could be working in the same organization or in another organization.

. Supervisors and Co-Workers. Supervisors and co- workers represent two additional potential sources of job dissatisfaction. An employee may be satis- fied (or dissatisfied) with co-workers for several rea- sons. An important factor for job satisfaction is that the employee believes he or she shares certain values and attitudes with co-workers—that everyone has some shared vision of the world and can work together

as a team. Clearly, the impression that co-workers do not share values and atti- tudes can lead to dissatisfac- tion. In addition, co-work- ers can be seen as sources of social support, which can

also lead to increased job satisfaction. Employees can be satisfied with supervisors for many of the same rea- sons. In other words, shared values and social support can be important determinants of satisfaction with a supervisor as well as with a co-worker. In addition, an employee can be satisfied (or dissatisfied) with a super- visor’s leadership ability. How a supervisor leads (i.e., his or her leadership style) and the effectiveness of the work group are important determinants of satisfaction with the supervisor.

Each source of job dissatisfaction can be measured and thought of independently or as part of a whole; that is, studying and considering satisfaction with pay in its own right has some value, whereas others consider it simply as one source of overall satisfaction with the job. We will return to this issue later when we discuss methods of mea- suring satisfaction. Before turning to that topic, however,

we turn our attention to some of the outcomes of dissatis- faction on the job.

6-4c The Effects of Job Dissatisfaction

We began our discussion of job satisfaction by noting that it is a major determinant of voluntary turnover and thus our major reason for discussing job satisfaction, but job dissatisfaction can have other negative effects, and some of these effects are related to topics we discuss later in the text.

For now, our primary concern with job dissat- isfaction is that it leads to increased voluntary turnover. As noted earlier, job dissatisfaction is a major determi- nant of turnover, but it is also predictive of other types of withdrawal behavior. For example, a strong relationship exists between job dissatisfaction and absenteeism, partly because employees who are dissatisfied may not always be able to leave their jobs (because of a lack of alternatives); thus, they choose to withdraw partially by being absent. In addition, it is possible to withdraw even more gradually (or partially) by simply being late.

A more subtle form of withdrawal that does not involve being away from the job is a reduction of com- mitment to the organization. Organizational commitment is the degree to which an employee identifies with an organization and is willing to exert effort on behalf of the organization. Employees who lack organizational commitment are excellent candidates for turnover when a workable alternative presents itself. They are also unlikely to exert extra effort or even to encourage others to join the organization.

Happier workers are healthier workers. Dissatisfied employees are more likely

to be absent for health reasons.

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Organizational commitment is the degree to

which an employee identi!es with an organization and is willing to exert e"ort on

behalf of the organization.

Chapter 6: Human Resource Decision Making in Organizations 133

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Organizational citizenship behaviors (OCBs) include employee behaviors that are bene!cial to the organization but are not formally required as part of an employee’s job.

Dissatisfied employees are also more likely to join unions. Several studies support this relationship and, although the process of joining a union is fairly complex, job dissatisfaction has consistently been found to be a good predictor of who joins unions. We will discuss the impli- cations of this relationship in more detail in Chapter .

Finally, dissatisfied employees are less likely to engage in behaviors on the job known broadly as organizational citizenship behaviors, or sometimes as contextual performance. Organizational citizenship behaviors (OCBs) include those behaviors that are beneficial to the orga- nization but are not formally required as part of an employee’s job. These behaviors include activities such as volunteering to carry out extra tasks, helping and cooperating with others, following rules even when such behavior is inconvenient, and endorsing and supporting organizational goals. We discuss contextual performance further in the next chapter, but clearly the organization benefits when employees engage in these types of behavior, and dissatisfied employees are simply less likely to do so.

In addition, considerable evidence suggests that job dissatisfaction imposes a differ- ent type of cost on an organization. Job dissatisfaction has been found to be strongly linked to stress (discussed more fully in Chapter ), job burnout (the condition of physical, emotional, and men- tal exhaustion on the job), and (through the first two processes) employee health. Thus, happier workers are healthier workers. Dissatisfied employees are more likely to be absent for health reasons.

The most intriguing possibility, however, is the link between job satisfaction and productiv- ity. The notion that happy workers may be produc- tive workers has attracted scholars for almost  years. Although there are cases in which performance and satisfac- tion have common determinants, and even some in which the most productive employees are also the most satisfied, no consistent causal relationship between job satisfaction and performance has been found. Thus, higher levels of job satisfaction do not necessarily lead to higher levels of perfor- mance, and an organization should not target increases in job satisfaction in the hope of raising productivity.

6-4d Measuring and Monitoring Job Satisfaction As should be clear by now, job satisfaction is extremely important for managing workforce size and effectiveness. As a result, organizations spend a fair amount of time and effort monitoring the levels of their employees’ job satisfac- tion, primarily through the use of attitude surveys that are distributed to employees once or more a year. The responses

from these surveys are used to track changes in employees’ attitudes—such as job satisfaction—so that the organiza- tion can respond to them before they become problematic.

Although many organizations design their own atti- tude surveys (or hire consulting firms to design them), some widely used measures of job satisfaction often show up as part of these surveys. By using standard measures of job satisfaction, an organization not only tracks changes in its employees’ levels of satisfaction but also is able to compare satisfaction levels with other organizations that use the same measures.

The job descriptive index (JDI) is the most commonly used measure of job satisfaction. It assesses satisfaction with specific job aspects such as pay, the work itself, and supervision, but it does not have a single overall measure of job satisfaction (although it is easy to assess overall satisfac- tion using the JDI). For each aspect of the job, a series of descriptors might apply. For example, for the work itself, adjectives such as routine and satisfying are listed, among

others. Employees are asked to indicate if each adjective “describes your work,” “does not describe your work,” or

if the employee “can’t decide.” The employee indicates the level of agreement by placing

a Y, N, or ? next to each item, with the question mark (?) assumed to indicate a

moderate level of dissatisfaction. Other instruments do include direct

measures of job satisfaction, and some include questions about the levels desired

versus what is experienced. One instrument, the faces scale, presents a series of faces that are either happy or sad, and

the employee is instructed to check the face that best reflects his or

her feelings about the job.

Whatever the measure, most organizations are interested in

changes in the levels of job sat- isfaction over time. Before leaving this discussion, it is important to make a final

note. The primary reason to measure job satisfaction is because dissatisfied employees tend to quit their jobs; over time, those employees who are the most dissatis- fied will quit the soonest. The next time the organiza- tion surveys its employees, the survey will not include those employees who have already quit. As a result, it is quite likely that the overall levels of job satisfac- tion will go up, even if the organization does nothing to improve job satisfaction, because only the more sat- isfied employees are still on the job. The others have already left, indicating a

134 Part 2: Decision Making in Human Resource Management

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Realistic job previews (RJPs) are pre-employment

previews that provide accurate and realistic information

to the job applicant. They can also be used with new

employees as a means of socializing them in their new

job roles, and they are e�ective in reducing turnover.

Stock options are rights given to employees to

purchase a certain number of shares of stock at a given price.

serious problem that the organization could overlook if managers are not paying attention.

6-4e Retention Strategies The purpose of discussing job satisfaction is to provide insights into how to manage voluntary turnover. At the simplest level, one could say that the way to manage turnover is to increase the levels of satisfaction among employees. But the key is in understanding exactly how to do that. When an organization learns of a potential prob- lem, most likely through a survey, it is important that something be done. Employees are less likely to respond honestly to survey questions if they feel that no one will respond to their concerns. More specifically, two other types of interventions (both discussed previously in dif- ferent contexts) have been found to increase levels of job satisfaction.

Job enrichment, discussed in Chapter  as a strat- egy for enhancing performance, has been consistently linked with higher levels of job satisfaction. By making employees’ work more challenging and meaningful and by granting them more autonomy and more opportunity to use their skills, the work itself becomes both motivat- ing and satisfying (and more satisfied employees are also more productive). This in turn reduces turnover rates.

Realistic job previews

(RJPs) are pre-employment p r e v i e w s t h a t p r o v i d e a c c u r a t e a n d r e a l i s t i c information to the job applicant. They are often used with new employees as a means of socializing them in their new job roles (and they will be discussed further in this context in the next chapter), but they are also effective in reducing turnover. The link to turnover reduction is the result of several aspects of RJPs. First, because potential employees

who receive RJPs have more complete information about the job (including the nature of the work, supervision, and pay), those who are more likely to be dissatisfied with the job characteristics are less likely to accept the jobs. Therefore, RJPs help ensure that the people on the job are those most likely to be satisfied and thus remain. In addition, when new employees are

made aware of potential sources of dissatisfaction before encountering them, the employees can prepare themselves (psychologically or even physically) so that, when they encounter the problem, they are ready to deal with it. In fact, when employees learn that they can cope with various problems on the job by preparing for them beforehand, this knowledge alone can be a source of job satisfaction and promote retention.

Another retention strategy involves issuing stock options to new employees at all levels of the organization (these options have typically been given to executives only). Stock options are rights, given to employees, to purchase a certain number of shares of stock at a given price. That stock-option price is often just slightly lower than the sell- ing price of the stock when the option is issued. If the stock appreciates in value, then these options can become very valuable. The employee can exercise the option, buy the stock at an option price that is lower than the current sell- ing price, and then sell the stock for an immediate profit (some firms do not even require the employee to purchase the stock at that point but simply pay out the profit). By the end of the s, however, some firms added a new wrinkle aimed specifically at employee retention. Although

an employee was issued stock options early in the employment rela- tionship, the options were restricted so that the employee could not exercise the options for  or so years. If the stock was climbing, then the employee who left before he or she had completed  years of employment would forgo potentially large profits because he or she would not be able to exercise the stock

options. Thus, there was a real incentive for the employee to remain with the firm (at least long enough to exercise her or his stock options). Of course, if the stock price falls below the option price (and the option is said to be “underwater”), there is no reason to exercise the option, and the incentive to remain with the company is lost.

6-5 MANAGING HUMAN RESOURCES DURING MERGERS AND ACQUISITIONS

Managing human resources during mergers or acquisi- tions is the last issue we address concerning decisions regarding the size and nature of the workforce. Every

Chapter 6: Human Resource Decision Making in Organizations 135

few years, we seem to experience another wave of merg- ers and acquisitions. During the last decade, for exam- ple, the six largest U.S. airlines merged—Delta joined with Northwest Airlines, United with Continental, and American with U.S. Airways—to form three mega- airlines that control most of the long-haul air travel indus- try in this country. We have also seen many acquisitions in the casino industry so that now two companies, MGM and Harrah’s, control almost  percent of all the casino business in the United States. More recently, following the financial crisis of  and the so-called subprime crisis, several banks and financial firms acquired large but financially less viable firms. These included Wells Fargo acquiring Wachovia, Chase buying Washington Mutual, and Merrill Lynch taking over what was left of Bear Stearns.

Although a lot of attention is paid to big merg- ers and acquisitions, the public is less aware that many of these mergers and acquisitions actually fail. Failure (or success) can be assessed by looking at stock prices, accounting measures, or indicators such as research-and- development (R&D) expenditures. For each of these mea- sures, data usually has shown that mergers and acquisi- tions typically fail; that is, they result in lower stock prices, lower returns, and lower levels of R&D expenditures.

This pattern ended quite quickly, but there is some evi- dence that restructuring in the financial sector will con- tinue, as evidenced by Aabar Investments (representing the Abu Dhabi sovereign fund) increasing its share of Uni-Credit, a troubled Italian bank, in early .

There is considerable speculation and some limited research on why mergers and acquisitions fail, but much of the attention has been paid to a deal’s financial elements (e.g., the acquiring firm paid too much) or to strategic elements (e.g., the new business was too far from the firm’s areas of expertise). Although these issues are certainly important, it is also becoming increasingly clear that the successful manage- ment of human resources during the merger and acquisition process is also quite important for the overall success of the project. In fact, several HRM aspects may be critical for suc- cessful mergers and acquisitions.

When a merger or acquisition is announced, sev- eral interesting processes begin. The most obvious is that employees in the firms involved become concerned about their jobs, especially employees of the firm that is being acquired by another company. In many cases, for example, a merger or acquisition results in a certain amount of redun- dant human resources, so it is not unusual for layoffs to occur following the merger or acquisition. This awareness causes employees to become more stressed and to worry about their security, and it leads some employees to seek other employment before they become victims of a layoff. Unfortunately, in these cases, it is often the more valued employees who have the market value that makes such a job change easy.

Mergers and acquisition also threaten the way em ployees think about themselves. This core belief is known as a person’s self-identity, and a great deal of our self-identity is tied up with what we do and for whom we work. For example, there has been a lot of recent discussion about the merger between Internet giant AOL and media titan Time Warner. When it was announced in , it was valued at  billion, and it remains today the largest merger in U.S. business history. By the time that Time Warner spun off AOL in April , billions of dollars had been lost (Ted Turner personally lost a reported  billion), and everyone declared the merger a disaster. What went wrong? Clearly, the nature of the Internet business changed, and the bursting of the dot-com bubble was a factor. But most analysts see the real issue as having been that the cultures of the two companies never joined to form one new entity. Few people were involved in doing the deal, so almost no one felt they had a stake in making it work, and no one at the top of the new company really tried to persuade the people in charge of their brands that they needed to try to make this deal work. The fact that the two cultures were never blended was clearly a critical, if not the critical issue in explaining the failure of this giant merger.

The problems at AOL and Time Warner are not unique. Employees involved in mergers and acquisitions must abandon one self-identity and then develop a new one: an employee of the acquiring firm or an employee of the new, merged firm. This is not a trivial manner. When people perceive threats to their self-identity, they actu- ally work to reinforce that self-identity. In this case, an employee in a firm about to be acquired would feel his or her identity threatened and, as a reaction, would develop even stronger feelings of identity with the firm about to be acquired. Then, when employees of the acquiring firm were there, they would be seen as the “enemy”—as the people responsible for threatening the employee’s self- identity. Intergroup research shows that these feelings are associated with an “us versus them” mentality that results in competition between groups and even dislike for the other group members.

Of course, this is exactly what the organizations want to avoid. They must move to integrate the two firms into one and create a new self-identity for all employees: employees of the newly merged firm. In other words, for a merger or acquisition to be successful, all the employees should identify with the new firm and therefore work with one another and cooperate to help make the new firm the best it can be—especially because it is even more rewarding to be associated with a really successful firm.

The situation thus far does not sound promising. It would seem as if all mergers and acquisitions are doomed to fail because of identity issues, yet we know that many mergers and acquisitions are successful. Moreover, we

believe that in successful cases HR managers func- tioned in such a way as to increase the likelihood that the mergers or acquisitions were successful. One criti- cal role the HR manager can play during this process is to serve as the center of communications. As noted above, there is a great deal of uncertainty for everyone during a merger or acquisi- tion, and the HR manager can work to communicate openly, honestly, and fre- quently with the employees. Research has shown that realistic information during the merger or acquisition process can reduce stress, increase job satisfaction and commitment, and even reduce turnover, so this communication process can be extremely useful.

In addition, it is impor- tant to build employee identification with the new corporate identity. This can be accomplished with simple measures such as distributing shorts or caps with the new corpo- rate logo, or it might involve orientation sessions in which all of the reasons and details of the merger or acquisition are explained. It is easier to do this when the policies and procedures in the new firm are not based solely on the policies and procedures of one party

in the merger or acquisition. If some policies are based on

one firm’s policies, some on the other firm’s policies, and still other policies are blends of the two, then it is easier for employees from both firms to retain good feelings about their former employers and also feel good about the newly cre- ated firm.

T h r o u g h p r o g r a m s such as these, the HR man- ager can be an important player in the merger and acquisition process and thus can add value to the organi- zation in yet another way. Perhaps the human resource manager should never become the final arbiter of which mergers or acquisi- tions should be pursued, but input from that man- ager might be useful. For example, input from human resources might help decide how much should be paid for an acquisition or what terms should be agreed to for a merger—with an eye toward how easy it would be to implement the merger or acquisition from the per- spective of dealing with the problems identified in this

chapter. In any event, once a merger or acquisition begins, the close involvement of the HR manager is obviously criti- cal for the ultimate success of the endeavor.

Stanford University professors Jeffrey Pfeffer and Bob Sutton,

authors of Hard Facts, Dangerous Half-Truths, and Total Nonsense,

have put out a call for a renewed reliance on rationality in managerial

decision making—an approach that they call evidence-based man-

agement (EBM). “Management decisions,” they argue, “[should] be

based on the best evidence, managers [should] systematically learn

from experience, and organizational practices [should] reflect sound

principles of thought and analysis.” They define evidence-based

management as “a commitment to finding and using the best the-

ory and data available at the time to make decisions,” but their “Five

Principles of Evidence-Based Management” make it clear that EBM

means more than just sifting through data and crunching numbers.

Here’s what they recommend:

1. Face the hard facts and build a culture in which people are

encouraged to tell the truth, even if it’s unpleasant.

“There are people who are really

good managers, people who can manage a big organization,

and then there are people who

are very analytic or focused on

strategy. Those two types don’t usually tend to be in the same person. I would

put myself much more in the

latter camp.”

—M Z,

co-founder of Facebook

136 Part 2: Decision Making in Human Resource Management

HARD FACTS AND HALF-TRUTHS

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Chapter 6: Human Resource Decision Making in Organizations 137

2. Be committed to “fact-based” decision

making—which means being committed to

using the best evidence to guide actions.

3. Treat your organization as an unfinished

prototype—encourage experimentation and

learning by doing.

4. Look for the risks and drawbacks in what

people recommend (even the best medicine

has side effects).

5. Avoid basing decisions on untested but

strongly held beliefs, what you have done in

the past, or on uncritical “benchmarking” of

winners.

Pfeffer and Sutton are particularly persuasive

when they use EBM to question the outcomes of

decisions based on “untested but strongly held

beliefs” or on “uncritical ‘benchmarking’.” Take, for instance,

the popular policy of paying high performers significantly more

than low performers. Pfeffer and Sutton’s research shows that

pay-for-performance policies get good results when employees

work solo or independently. But it’s another matter altogether

when it comes to the kind of

collaborative teams that make

so many organizational deci-

sions today. Under these cir-

cumstances, the greater the

gap between highest- and

lowest-paid executives, the

weaker the firm’s finan-

c i a l p e r f o r m a n c e . W h y ?

According to Pfeffer and

Sutton, wide disparities

in pay often weaken both

trust among team mem-

bers and the social con-

nectivity that contributes

to strong, team-based

decision making.

Or consider another increasingly prevalent policy for evalu-

ating and rewarding talent. Pioneered at General Electric by the

legendary Jack Welch, the practice of “forced ranking” divides

employees into three groups based on performance—the top

20 percent, middle 70 percent, and bottom 10 percent—and termi-

nates those at the bottom. Pfeffer and Sutton found that, accord-

ing to many HR managers, forced ranking impaired morale and

collaboration and ultimately reduced productivity. They also con-

cluded that automatically firing the bottom 10 percent resulted

too often in the unnecessary disruption of otherwise effective

teamwork. That’s how they found out that 73 percent of the errors

committed by commercial airline pilots occur on the first day that

reconfigured crews work together.57

CASE QUESTIONS 1. Do you think evidence-based management seems like common

sense? If so, why wasn’t it advocated earlier?

2. Are there circumstances in which evidence-based management

might not be the best approach?

3. Could automated evidence-based management ever replace

human decision makers? Why or why not?

4. Would you want to work under Jack Welch’s system at General

Electric? Why or why not?

C H

A P

T E

■ Rip out the chapter review card located at the end of the book.

■ Review the valuable study tools located online at

www.cengagebrain.com

■ Review the Key Terms flashcards.

■ Download audio and visual summaries to review on the go.

■ Complete practice quizzes to prepare for the test.

■ Watch the chapter video for a real-life example of key concepts.

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