For All Solve Worker

11-1. Employment Legislation

Human resource management (HRM), or the process of finding, developing, and keeping the right people to form a qualified workforce, is one of the most difficult and important of all management tasks. This chapter is organized around the three parts of the human resource management process shown in Exhibit 11.1: attracting, developing, and keeping a qualified workforce.

This chapter will walk you through the steps of the HRM process. We explore how companies use recruiting and selection techniques to attract and hire qualified employees to fulfill human resource needs. The next part of the chapter discusses how training and performance appraisal can develop the knowledge, skills, and abilities of the workforce. The chapter concludes with a review of compensation and employee separation, that is, how companies can keep their best workers through effective compensation practices and how they can manage the separation process when employees leave the organization.

Before we explore how human resource systems work, you need to understand the complex legal environment in which they exist. So we’ll begin the chapter by reviewing the federal laws that govern human resource management decisions.

“What was your last salary?” used to be the final question asked in the hiring process right before a job offer. Today, employers ask about salary much earlier. Josh Rock, a recruiter at Fairview Health Services which employs 20,000 people, said, “Why not figure out what’s going on sooner in the process [rather] than doing a dance?” *  Unfortunately, says Susan Vitale, chief marketing officer at iCIMS, which makes recruiting software, some companies, “use salary as a prescreening question.” *  For example, she says, “So if the role tops out at $55,000 and they say they want $60,000, it might knock the candidate out of consideration.” *  Out of concern that asking about salary perpetuates smaller salaries for women (who have lower salaries on average) and age discrimination (as older workers with higher salaries are screened out of the hiring process), some cities, like Philadelphia, are passing laws preventing employers from asking job applicants about salary histories. Vice president Christina Wong of Philadelphia-based ESM Productions says not asking about prior salaries will make it difficult for ESM, which hires crews and designers who run conferences and concerts worldwide, to determine appropriate market rates. *  So, what are employers to do? They don’t want to pay overpay employees, exceeding budgets and creating internal equity issues. But they also don’t want to violate the law or be accused of gender or age bias.

As the “last salary” example illustrates, the human resource planning process occurs in a very complicated legal environment.

Let’s explore employment legislation by reviewing 11-1a the major federal employment laws that affect human resource practice, 11-1b how the concept of adverse impact is related to employment discrimination, and 11-1c the laws regarding sexual harassment in the workplace.

11-1a. Federal Employment Laws

Exhibit 11.2 lists the major federal employment laws and their websites, where you can find more detailed information. The Fair Labor Standards Act (FLSA), administered by the Department of Labor (DOL), establishes minimum wage, overtime pay, record keeping, and youth employment standards for the private sector, as well as for federal, state, and local governments. (As such, the FLSA pertains to compensation issues discussed in Section 11-6a.) Except for the Family and Medical Leave Act and the Uniformed Services Employment and Reemployment Rights Act, which are both administrated by the DOL, All of these laws are administered by the EEOC ( www.eeoc.gov ). The general effect of this body of law, which is still evolving through court decisions, is that employers may not discriminate in employment decisions on the basis of sex, age, religion, color, national origin, race, disability, or genetic history. *  The intent is to make these factors irrelevant in employment decisions. Stated another way, employment decisions should be based on factors that are “job related,” “reasonably necessary,” or a “business necessity” for successful job performance.

The only time that sex, age, religion, and the like can be used to make employment decisions is when they are considered a bona fide occupational qualification. Title VII of the 1964 Civil Rights Act says that it is legal to hire and employ someone on the basis of sex, religion, or national origin when there is a bona fide occupational qualification (BFOQ) that is “reasonably necessary to the normal operation of that particular business.” A Baptist church hiring a new minister can reasonably specify that being a Baptist rather than a Catholic or Presbyterian is a BFOQ for the position. However, it’s unlikely that the church could specify race or national origin as a BFOQ. In general, the courts and the EEOC take a hard look when a business claims that sex, age, religion, color, national origin, race, or disability is a BFOQ. For example, citing BFOQs, the producers of the Broadway musical Hamilton, advertised auditions for “nonwhite performers,” claiming, “It is essential to the storytelling…that the principal roles, which were written for nonwhite characters (excepting King George), be performed by nonwhite actors.” The EEOC’s Compliance Manual clearly states, however, that, “race and color can never be BFOQs.” *  At the urging of the Actor’s Equity Association, auditions were opened to actors of all races and colors. *

It is important to understand, however, that these laws apply to the entire HRM process and not just to selection decisions (for example, hiring or promotion). These laws also cover all training and development activities, performance appraisals, terminations, and compensation decisions. Employers who use sex, age, race, or religion to make employment-related decisions when those factors are unrelated to an applicant’s or employee’s ability to perform a job may face charges of discrimination from employee lawsuits or the EEOC.

In addition to the laws presented in Exhibit 11.2, there are two other important sets of federal laws: labor laws and the laws and regulations governing safety standards. Labor laws regulate the interaction between management and labor unions that represent groups of employees. These laws guarantee employees the right to form and join unions of their own choosing. For more information about labor laws, see the National Labor Relations Board at  www.nlrb.gov .

The Occupational Safety and Health Act (OSHA) requires that employers provide employees with a workplace that is “free from recognized hazards that are causing or are likely to cause death or serious physical harm.” This law is administered by the Occupational Safety and Health Administration (which, like the act, is referred to as OSHA). OSHA sets safety and health standards for employers and conducts inspections to determine whether those standards are being met. Employers who do not meet OSHA standards may be fined. *  Even though working with wild animals has inherent risks, OSHA found that Sea World did not have adequate procedures in place to protect employees and supervisors properly from killer whales while riding on or swimming with the animals. Building fast-rising pool floors and emergency air systems to protect its trainers did not prevent the death of a trainer at a park in Orlando, so OSHA fined the company $25,770. *

11-1b. Adverse Impact and Employment Discrimination

The EEOC has investigatory, enforcement, and informational responsibilities. Therefore, it investigates charges of discrimination, enforces the employment discrimination laws in federal court, and publishes guidelines that organizations can use to ensure they are in compliance with the law. One of the most important guidelines, jointly issued by the EEOC, the U.S. Department of Labor, the U.S. Department of Justice, and the federal Office of Personnel Management, is the Uniform Guidelines on Employee Selection Procedures, which can be read in their entirety at  www.uniformguidelines.com/uniformguidelines.html . These guidelines define two important criteria, disparate treatment and adverse impact, which are used in determining whether companies have engaged in discriminatory hiring and promotion practices.

Disparate treatment, which is intentional discrimination, occurs when people, despite being qualified, are intentionally not given the same hiring, promotion, or membership opportunities as other employees because of their race, color, age, sex, ethnic group, national origin, or religious beliefs. * Bobby Nickel, a former facilities manager at Staples, the office supply retailer, was awarded $26 million by a jury that found Staples guilty of harassing him by calling him an “old coot” and an “old goat” and firing him because he was an older employee with a salary. * Legally, a key element of discrimination lawsuits is establishing motive, meaning that the employer intended to discriminate. If no motive can be established, then a claim of disparate treatment may actually be a case of adverse impact. Adverse impact, which is unintentional discrimination, occurs when members of a particular race, sex, age, or ethnic group are unintentionally harmed or disadvantaged because they are hired, promoted, or trained (or any other employment decision) at substantially lower rates than others.

At Texas Roadhouse restaurants, front-of-house employees (servers, bartenders, and hosts) are required to line dance during shifts, wear jeans, and work nights and weekends. The company hires younger workers for these positions—even though it produces a statistically adverse impact on older workers—because it considers such activities to be BFOQs. *  The EEOC disagreed, filing a class action lawsuit against the restaurant chain for discrimination. The EEOC noted that only 1.9 percent of Texas Roadhouse’s front-of-house employees were over the age of 40, a figure “well below the protected age group’s representation in the general population of defendants’ locations, well below the protected age group’s representation in Bureau of Labor statistics data for such positions within the industry, and well below the protected age group’s representation in the pool of applicants for positions with defendants.” *  How do courts determine what constitutes “well below?”

The courts and federal agencies use the four-fifths (or 80%) rule to determine if adverse impact has occurred. Adverse impact is determined by calculating the impact ratio, which divides the decision rate for a protected group of people by the decision rate for a nonprotected group (usually white males). If the impact ratio is less than 80 percent, then adverse impact may have occurred. For example, if 20 out of 100 black applicants are hired (20/100=20%) , but 60 white applicants are hired (60/100=60%) , then adverse impact has occurred because the impact ratio is less than 80 percent (.20/.60=33%) .

Violation of the four-fifths rule is not an automatic indication of discrimination, however. If an employer can demonstrate that a selection procedure or test is valid, meaning that the test accurately predicts job performance or that the test is job related because it assesses applicants on specific tasks actually used in the job, then the organization may continue to use the test. If validity cannot be established, however, then a violation of the four-fifths rule may likely result in a lawsuit brought by employees, job applicants, or the EEOC itself.

11-1c. Sexual Harassment

According to the EEOC, sexual harassment is a form of discrimination in which unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature occurs. From a legal perspective, there are two kinds of sexual harassment, quid pro quo and hostile work environment. *

Quid pro quo sexual harassment occurs when employment outcomes, such as hiring, promotion, or simply keeping one’s job, depend on whether an individual submits to being sexually harassed. For example, in a quid pro quo sexual harassment lawsuit against Stones River Medical Group, a woman hired as the assistant office manager was pressured for sex by a doctor beginning her first month on the job. The doctor provided her medications, threatened her with violence if she ended the sexual relationship, placing her on leave when she did so, and only hired her back after she resumed their sexual relationship. This made it a quid pro quo case by linking sexual acts to economic outcomes. She again ended their sexual relationship and was fired five days later. A jury awarded her a $2.3 million settlement. *

A hostile work environment occurs when unwelcome and demeaning sexually related behavior creates an intimidating, hostile, and offensive work environment. In contrast to quid pro quo cases, a hostile work environment may not result in economic injury. However, it can lead to psychological injury when the work environment becomes stressful. Zillow, a real estate website that estimates the value or sales prices of for-sale homes, settled a federal lawsuit alleging a hostile work environment and a “frat house” culture. A sales manager referred to a female worker as “Rachel 2.0,” because she was like, “Rachel but with bigger breasts and less miles on her.” *  This sales manager, who was fired by Zillow one day after a hostile work environment lawsuit was filed in federal court, allegedly sent the female worker sexually explicit messages, with one including a picture of a penis. An IT technician, asked to help a female employee reset a password, responded, “Only trade password for boob pix. Haha.” *

Finally, what should companies do to make sure that sexual harassment laws are followed and not violated? *  First, respond immediately when sexual harassment is reported. A quick response encourages victims of sexual harassment to report problems to management rather than to lawyers or the EEOC. Furthermore, a quick and fair investigation may serve as a deterrent to future harassment. A lawyer for the EEOC says, “Worse than having no sexual harassment policy is a policy that is not followed. It’s merely window dressing. You wind up with destroyed morale when people who come forward are ignored, ridiculed, retaliated against, or nothing happens to the harasser.” *

Then take the time to write a clear, understandable sexual harassment policy that is strongly worded, gives specific examples of what constitutes sexual harassment, spells outs sanctions and punishments, and is widely publicized within the company. This lets potential harassers and victims know what will not be tolerated and how the firm will deal with harassment should it occur.

Next, establish clear reporting procedures that indicate how, where, and to whom incidents of sexual harassment can be reported. The best procedures ensure that a complaint will receive a quick response, that impartial parties will handle the complaint, and that the privacy of the accused and accuser will be protected. At DuPont, Avon, and Texas Industries, employees can call a confidential hotline 24 hours a day, 365 days a year. *

Finally, managers should also be aware that most states and many cities or local governments have their own employment-related laws and enforcement agencies. So compliance with federal law is often not enough. In fact, organizations can be in full compliance with federal law and at the same time be in violation of state or local sexual harassment laws.

11-2. Recruiting

Frustrated by the high numbers of local candidates declining job offers, executives at Salesforce.com’s San Francisco headquarters developed an algorithm to collect the LinkedIn profiles of everyone in Northern California with the technical skills their jobs needed. Finding fewer candidates than anticipated, and realizing that it had already been in contact with 23 percent of them,  Salesforce.com  decided to look at other cities with larger talent pools. After reviewing the results,  Salesforce.com  recruiting head Ana Recio said, “Suddenly we were in real-estate discussions.” *

Recruiting is the process of developing a pool of qualified job applicants.

Let’s examine 11-2a what job analysis is and how it is used in recruiting, 11-2b how companies use internal recruiting, and 11-2c external recruiting to find qualified job applicants.

11-2a. Defining the Job

Job analysis is a “purposeful, systematic process for collecting information on the important work-related aspects of a job.” *  A job analysis typically collects four kinds of information:

· Work activities, such as what workers do and how, when, and why they do it

· The tools and equipment used to do the job

· The context in which the job is performed, such as the actual working conditions or schedule

· The personnel requirements for performing the job, meaning the knowledge, skills, and abilities (KSAs) needed to do a job well *

Job analysis information can be collected by having job incumbents and/or supervisors complete questionnaires about their jobs, by direct observation, by interviews, or by filming employees as they perform their jobs.

Job descriptions and job specifications are two of the most important results of a job analysis. A job description is a written description of the basic tasks, duties, and responsibilities required of an employee holding a particular job. Job specifications, which are often included as a separate section of a job description, are a summary of the qualifications needed to successfully perform the job. Exhibit 11.3 shows a job description for a firefighter for the city of Portland, Oregon.

Exhibit11.3.Job Description for a Firefighter for the City of Portland, Oregon

Yes, as a firefighter you will fight fire and provide emergency medical services to your community. But it doesn’t end there: your firefighting career offers you the opportunity to expand your skills to include hazardous materials response, specialty response teams (dive, rope rescue, confined space), paramedic care, public education and information, fire investigation, and fire code enforcement.

Teamwork

Professional firefighters work as a team at emergency scenes. The workday also includes training, fire station and equipment maintenance, fire prevention activities, and public education. As a firefighter, you must be in excellent physical condition to meet the demands of the job; this means you must work quickly, handling heavy equipment for long periods of time while wearing special protective gear in hot and hazardous environments. If you can meet the challenge of strenuous work and like the idea of helping people, consider applying for the position of firefighter.

Work Schedule

Portland Fire & Rescue firefighters work a 24-on/48-off shift. This means that Firefighters report to work at 8:00 a.m. the day of their shift and continue working until 8:00 a.m. the following morning. Our firefighters then have the following two days (48 hours) off. Firefighters are required to work shifts on holidays and weekends. Portland Fire & Rescue also has 40-hour-a-week firefighters who work in training, inspections/investigations, public education, logistics, and emergency management. These positions are usually filled after a firefighter has met the minimum requirements for these positions.

Source: Portland Fire and Rescue, accessed July 8, 2016.  http://www.portlandoregon.gov/fire/25923 .

Because a job analysis specifies what a job entails as well as the knowledge, skills, and abilities that are needed to do the job well, companies must complete a job analysis before beginning to recruit job applicants. Job analyses, job descriptions, and job specifications are the foundation on which all critical human resource activities are built. They are used during recruiting and selection to match applicant qualifications with the requirements of the job. Software company SAP uses machine learning to teach “a computer how to spot patterns and make connections by showing it a massive volume of data.” *  SAP Resume Matching, a machine learning program, reads thousands of job descriptions and specifications on the Internet to identify the KSAs for a variety of jobs. It validated what it learned by using those KSAs to evaluate anonymous resumes (with no names or identifying demographics) of actual job applicants who were rejected, made the first cut of promising candidates, interviewed, or were eventually hired by managers in a variety of companies. SAP’s chief innovation officer said, “Recruiters spend 60 percent of their time reading CVs. Why should a person read 300 resumes if a machine can propose the top 10?” *

Job descriptions are also used throughout the staffing process to ensure that selection devices and the decisions based on these devices are job related. For example, the questions asked in an interview should be based on the most important work activities identified by a job analysis. Likewise, during performance appraisals, employees should be evaluated in areas that a job analysis has identified as the most important in a job.

Job analyses, job descriptions, and job specifications also help companies meet the legal requirement that their human resource decisions be job related. To be judged job related, recruitment, selection, training, performance appraisals, and employee separations must be valid and be directly related to the important aspects of the job, as identified by a careful job analysis. In fact, in Griggs v. Duke Power Co. and Albemarle Paper Co. v. Moody, the U.S. Supreme Court stated that companies should use job analyses to help establish the job relatedness of their human resource procedures. *  The EEOC’s Uniform Guidelines on Employee Selection Procedures also recommend that companies base their human resource procedures on job analysis.

11-2b. Internal Recruiting

Internal recruiting is the process of developing a pool of qualified job applicants from people who already work in the company. Internal recruiting, sometimes called “promotion from within,” improves employee commitment, morale, and motivation. Recruiting current employees also reduces recruitment start-up time and costs, and because employees are already familiar with the company’s culture and procedures, they are more likely to succeed in new jobs. Crédit Suisse was posting less than half of its open jobs internally until it discovered that those taking a new job within the company were more likely to stay long term. So, it now posts 80 percent of its openings internally—even cold-calling employees to let them know when jobs have opened. Doing so has resulted in promotions for 300 of its people. William Wolf, the bank’s global head of talent acquisition and development, says, “We believe we’ve saved a number of them from taking jobs at other banks.” *  Job posting and career paths are two methods of internal recruiting.

Job posting is a procedure for advertising job openings within the company to existing employees. A job description and requirements are typically posted on a bulletin board, in a company newsletter, or in an internal computerized job bank that is accessible only to employees. Job posting helps organizations discover hidden talent, allows employees to take responsibility for career planning, and makes it easier for companies to retain talented workers who are dissatisfied in their current jobs and would otherwise leave the company. *  In fact, a LinkedIn survey of workers who changed jobs found that 42 percent would have stayed with their former employers if a relevant position had been available. *  LinkedIn vice president Parker Barrile says it’s often the case that, “People quit their job, not the company.” *  Ally Financial posts jobs via career roundtables in which managers fill openings with internal candidates. Ally Financial’s Tony Jefferson got promoted to middle management after discussing his finance skills and managerial aspirations with 12 executives. The roundtable, he says, was, “a good opportunity to get your name and face in front of the senior leadership team.” *

A study of 70 large global companies found that organizations that formalize internal recruiting and job posting have a lower average rate of turnover (11%) compared to companies that don’t (15%). *  Likewise, a University of Pennsylvania study found external hires generally are more costly, less reliable hires. Specifically, external hires get paid 18 to 20 percent more than internal hires, are 61 percent more likely to be fired, and are 21 percent more likely to quit their jobs. *

Job Spotter: The Pokemon Go of Job Postings

Indeed.com  is the world’s largest job site visited by 200 million people per month seeking employment in 60 countries. Indeed is free for job applicants and employers, but it makes money several ways. When you click on a job near you, you’ll find several other “promoted” jobs listed as well. Those promoted jobs are like paid Google Ads, but in this case, companies paid Indeed to “promote” their jobs to make sure they get seen by applicants. The more applicants Indeed brings to its site, the more attractive Indeed becomes to employers. As that happens, standing out in the crowd of employers becomes more difficult, so employers pay for “promoted” jobs.

All of which explains why Indeed is willing to lose money on Job Spotter, it’s latest way to get more job openings listed on its website. Job Spotter is an app, like Pokemon Go, in which users score points by finding job openings that aren’t listed on Indeed. When you see a “help wanted” sign, take a picture. Submit it with the app. Chris Hyams, Indeed’s president, explains that GPS data are used, “to match the photo to a database of businesses to get the name and address, and we use [data from the photo] to automatically extract phone number, email, and other information from the image.” Every new job earns 50 points (but only if it’s not on Indeed). One hundred points is worth $1 in store credit at  Amazon.com . In the six months since launching, users have been paid $250,000 for uploading 500,000 new jobs that Indeed would otherwise have listed.

So next time you’re out for a walk or a bike ride, earn some extra spending money by submitting job openings with Job Spotter. You’ll earn some pizza money and help someone find their next job!

A career path is a planned sequence of jobs through which employees may advance within an organization. According to Brian Hoyt of RetailMeNot, an online coupon company in Austin, Texas, “Workers were saying, ‘It isn’t enough for me to work at a fun Internet company,’…they wanted to know where their career was going.” *  So the company revamped its internal recruiting system, adding to each job posting a detailed list of responsibilities, required competencies, and skills needed to get each job. Garrett Bircher, an associate product manager, said that when he when was hired, the company lacked a coherent approach. “Now, I feel more secure,” he says. “I know four jobs ahead of me now where I want to go and what it takes to get there.” *

Career paths help employees focus on long-term goals and development while also helping companies increase employee retention. As you can see in Garrett Bircher’s case, career paths can also help employees gain a broad range of experience, which is especially useful at higher levels of management.

11-2c. External Recruiting

External recruiting is the process of developing a pool of qualified job applicants from outside the company. Headquartered in Canton, Ohio, Dieboldis the largest manufacturer of ATMs and voting machines in the United States. Diebold needs to expand its software and service offerings to grow, but experts in those areas don’t want to move to Canton. To solve this problem, CEO Andy Mattes waived the requirement that executives relocate, saying, “We were fishing in a small pond…[so] we expanded the talent pool substantially. As long as they live near an airport, where they work isn’t nearly as important as what they can contribute.” Now, Diebold’s chief strategist lives in San Jose California, the chief marketing officer in Boston, and the head of software in Dallas. Overall, nearly 40 of Diebold’s top 100 executives live outside of Canton. *

External recruitment methods include advertising (newspapers, magazines, direct mail, radio, or television), employee referrals (asking current employees to recommend possible job applicants), walk-ins (people who apply on their own), outside organizations (universities, technical/trade schools, professional societies), employment services (state or private employment agencies, temporary help agencies, and professional search firms), special events (career conferences or job fairs), Internet job sites ( CareerBuilder.com ,  Glassdoor.com ,  Indeed.com , and  Monster.com ), and social media (LinkedIn and Facebook), as well as career portals on company websites. Which external recruiting method should you use? Historically, studies show that employee referrals, walk-ins, advertisements, and state employment agencies tend to be used most frequently for office/clerical and production/service employees. By contrast, advertisements and college/university recruiting are used most frequently for professional/technical employees. When recruiting managers, organizations tend to rely most heavily on advertisements, employee referrals, and search firms. *

Recently, social media sites and industry-specific job boards have been gaining momentum at the expense of generalist job boards and newspapers. Facebook’s job search platform is used effectively to recruit lower-skilled workers, and sites such as LinkedIn and  theLadders.com  tend to attract more highly skilled or senior-level job seekers. *  Even though 67 percent of people seeking jobs through social media use Facebook, LinkedIn continues to be where recruiters look for promising candidates. A recent survey found that a whopping 92 percent of recruiters use social media for outreach—87 percent of whom use LinkedIn. *

One of the biggest trends in recruiting is identifying passive candidates, people who are not actively seeking a job but who might be receptive to a change. Why pursue passive candidates? About half of all workers would be willing to change jobs if recruited by another company. *  Apps such as Entelo search 50 sources across the web for information about passive candidates, such as job title, experience, or professional achievements. Recruiters then improve search accuracy after each wave of data matching by indicating whether the identified candidates fit. Becky McCullough, who runs recruiting at digital marketer HubSpot, says, “It has set new benchmarks for response rate,” meaning the percentage of passive candidates who respond with interest when contacted by HubSpot, “and we can a/b test various outreach tactics” to see what recruiting methods work best. *

Some companies are even hosting virtual job fairs, where job applicants click on recruiting booths to learn about the company, see the kinds of available jobs, and speak with company representatives via video chat or instant message. Because they don’t need to send HR representatives on long trips and can interact with potential hires from all over the world, Boeing, Progressive, Citibank, and Amazon have found virtual job fairs to be an efficient, cost-effective way to find qualified candidates. Still an important part of external recruiting, job fairs are being repositioned as branding events. With nearly half of its U.S. workforce expected to retire by 2025, the insurance and risk management industry is aggressively recruiting younger workers. Allstate bolsters its campus recruiting and job fairs with trivia nights, free food, and hackathons to attract computer science majors. And instead of wearing business suits, its campus recruiters wear T-shirts emblazoned with “Jobhunting is Mayhem,” a reference to the star character in its popular ad campaign. *

11-3. Selection

After the recruitment process has produced a pool of qualified applicants, the selection process is used to determine which applicants have the best chance of performing well on the job. From the initial review of applicants to phone screening (seven days) to group interviews (six days) to personality and skills testing, it takes an average of 23 to 29 days to screen potential applicants and hire a new employee. *  Software company AppDynamics, however, accomplishes the full selection process in less than a week. A few days after applying, strong candidates have two phone interviews, during which recruiters set expectations about compensation. Applicants then visit the office for seven hours of in-person interviews with roughly six employees. This day ends with a 15-minute interview with a hiring manager who may (or may not) extend an offer. Candidates who receive offers have two days to accept or decline. Luan Lam, AppDynamics’ vice president of global talent, says, “Time kills deals,” and notes that before implementing this speed-hiring method, AppDynamics needed 30 days to fill every open engineering position. *

As this example illustrates, selection is the process of gathering information about job applicants to decide who should be offered a job. To make sure that selection decisions are accurate and legally defendable, the EEOC’s Uniform Guidelines on Employee Selection Procedures recommend that all selection procedures be validated. Validation is the process of determining how well a selection test or procedure predicts future job performance. The better or more accurate the prediction of future job performance, the more valid a test is said to be.

Let’s examine common selection procedures such as 11-3a application forms and résumés, 11-3b references and background checks, 11-3c selection tests, and 11-3d interviews.

11-3a. Application Forms and Résumés

The first selection devices that most job applicants encounter when they seek a job are application forms and résumés. Both contain similar information about an applicant, such as name, address, job and educational history, and so forth. Though an organization’s application form often asks for information already provided by the applicant’s résumé, most organizations prefer to collect this information in their own format for entry into a human resource information system (HRIS).

Employment laws apply to application forms just as they do to all selection devices. Application forms may ask applicants only for valid, job-related information. Nonetheless, application forms commonly ask applicants for non-job-related information such as marital status, maiden name, age, or date of high school graduation. One study found that 73 percent of organizations had application forms that violated at least one federal or state law. * Likewise, interviewers may not ask about medical histories or genetics, religious beliefs, or citizenship. Exhibit 11.4 provides a more detailed explanation and list of the kinds of information that companies may not request in application forms, during job interviews, or in any other part of the selection process.

Courts will assume that you use all of the information you request of applicants even if you actually don’t. Be sure to ask only those questions that relate directly to the candidate’s ability and motivation to perform the job. Furthermore, using social media such as Facebook and LinkedIn at the initial stage of the hiring process can give employers access to information they’re not allowed to obtain directly from applicants. Attorney James McDonald says, “I advise employers that it’s not a good idea to use social media as a screening tool. You need to control the information you receive so you’re only getting information that is legal for you to take into accounting.” *

Résumés also pose problems for companies, but in a different way. A CareerBuilder survey of hiring managers found that 58 percent had found a lie on a résumé, with the most common being embellished skills, employment dates, job titles, academic degrees, and the companies for which one has supposedly worked. Applicants in financial services (73%), leisure and hospitality (71%), and IT and health care (both 63%) were the most likely to have lies caught on resumes. *  Therefore, managers should verify the information collected via résumés and application forms by comparing it with additional information collected during interviews and other stages of the selection process, such as references and background checks, which are discussed next.

11-3b. References and Background Checks

In the United States, drivers for the Uber and Lyft ride-sharing services undergo an independent screening by Checkr, a company that runs each applicant’s name through seven years of federal and county background checks, sex offender registries, and motor vehicle records. Checkr, which runs 300,000 checks a month, completes background checks in just two days. *  Commercial truck drivers get an even more thorough background check called “Drive-a-Check,” or “DAC.” DAC reports, which are completed by HireRight, examine work histories, driving accidents, and reliability in terms of completing scheduled deliveries. One negative incident is usually enough to prevent a hire. Independent trucker Jeff Bailey said, “If a company uses DAC and you have a bad DAC, you’re not hired.” *  Nearly all companies ask an applicant to provide employment references, such as the names of previous employers or coworkers, whom they can contact to learn more about the candidate. Background checks are used to verify the truthfulness and accuracy of information that applicants provide about themselves and to uncover negative, job-related background information not provided by applicants. Background checks are conducted by contacting “educational institutions, prior employers, court records, police and governmental agencies, and other informational sources, either by telephone, mail, remote computer access, or through in-person investigations.” *

Unfortunately, previous employers are increasingly reluctant to provide references or background check information for fear of being sued by previous employees for defamation. *  If former employers provide potential employers with unsubstantiated information that damages applicants’ chances of being hired, applicants can (and do) sue for defamation. As a result, 54 percent of employers will not provide information about previous employees. * Many provide only dates of employment, positions held, and date of separation.

When previous employers decline to provide meaningful references or background information, they put other employers at risk of negligent hiringlawsuits, in which an employer is held liable for the actions of an employee who would not have been hired if the employer had conducted a thorough reference search and background check. *  Heyl Logistics hired Washington Transportation, a trucking firm, to deliver bottled water, but its driver took drugs, fell asleep, hit a truck, and killed another driver. The killed driver’s family sued Heyl Logistics for negligent hiring, alleging it should have known that Washington Transportation operated without a license, did not test its drivers for drug use, and carried no insurance. Heyl was found guilty, Washington Transportation’s driver was sent to prison for negligent homicide and driving under the influence, and the family was awarded $5.2 million in punitive damages. *

With previous employers generally unwilling to give full, candid references and with negligent hiring lawsuits awaiting companies that don’t get such references and background information, what can companies do? They can conduct criminal record checks, especially if the job for which the person is applying involves money, drugs, control over valuable goods, or access to the elderly, people with disabilities, or people’s homes. *  According to CareerBuilder, 59 percent of organizations conduct criminal record checks, and 21 percent conduct credit checks. *  Now that companies provide criminal record checks for $10 an applicant, pulling data from 3,100 court systems nationwide, there’s no excuse to not check. Requiring criminal record checks may prompt some applicants to withdraw from the hiring process. Jeff Russow owns Avalanche Roofing & Exteriors in Colorado Springs. He says that for many of the people he recruits to apply for jobs with his company, “As soon as I say ‘criminal background check,’ ‘drug test,’ they’re out the door.” *  While companies are legally entitled to use criminal background checks at some point in the hiring process, they should follow state laws and EEOC guidelines that may restrict asking applicants about criminal records on initial application forms. *

The previous edition of this textbook indicated that recruiters were using public networking sites such as LinkedIn to identify and contact applicants’ work colleagues for reference and background checks. LinkedIn, however, has discontinued “Reference Search.” *  Furthermore, fewer companies are using social media (SM) for screening candidates and background checks. Three out of four organizations believe that using SM during recruiting exposes them to legal risk, particularly in regard to information they are not legally entitled to know (See Exhibit 11.4 on topics to avoid in interviews). At this time, companies are advised to not use SM until late in the hiring process, to have HR review SM rather than hiring managers, to look at SM for everyone or no one (be consistent!) and to only review publicly available information. *

After doing a background check, dig deeper for more information. Ask references to provide additional references. Next, ask applicants to sign a waiver that permits you to check references, run a background check, or contact anyone else with knowledge of their work performance or history. Likewise, ask applicants if there is anything they would like the company to know or if they expect you to hear anything unusual when contacting references. * This in itself is often enough to get applicants to share information they typically withhold. When you’ve finished checking, keep the findings confidential to minimize the chances of a defamation charge. Always document all reference and background checks, noting who was called and what information was obtained. Document everything, not just information you received. To reduce the likelihood that negligent hiring lawsuits will succeed, it’s particularly important to document even which companies and people refused to share reference checks and background information.

Finally, consider hiring private investigators to conduct background checks, which can often uncover information missed by traditional background checks. For example, while traditional background checks should be able to verify applicants’ academic credentials, a private investigator hired by the Wall Street Journal found that 7 out of 358 senior executives at publicly traded firms had falsified claims regarding the college degrees they had earned.” *  Likewise, private investigators can potentially identify when applicants hire companies that provide fake references from fake bosses (to avoid negative references from previous employers). Indeed, one such business claims, “We can replace a supervisor with a fictitious one, alter your work history, provide you with a positive employment reputation, and give you the glowing reference you need.” *

11-3c. Selection Tests

Selection tests give organizational decision makers a chance to know who will likely do well in a job and who won’t. Prehiring assessments are growing in popularity, with 57 percent of large U.S. employers using some sort of prehiring test to ensure a better fit. “The incentives to screen before hiring have increased over time, while costs have declined,” says economist Steve Davis. “Both those things are encouraging employers to move away [from] what was essentially a trial employment situation to just screening out people in advance. *  The basic idea behind selection testing is to have applicants take a test that measures something directly or indirectly related to doing well on the job. The selection tests discussed here are specific ability tests, cognitive ability tests, biographical data, personality tests, work sample tests, and assessment centers.

Specific ability tests measure the extent to which an applicant possesses the particular kind of ability needed to do a job well. Specific ability tests are also called aptitude tests because they measure aptitude for doing a particular task well. For example, if you took the SAT to get into college, then you’ve taken the aptly named Scholastic Aptitude Test, which is one of the best predictors of how well students will do in college (that is, scholastic performances). *  Specific ability tests also exist for mechanical, clerical, sales, and physical work. For example, clerical workers have to be good at accurately reading and scanning numbers as they type or enter data. Exhibit 11.5 shows items similar to the Minnesota Clerical Test, in which applicants have only a short time to determine if the two columns of numbers and letters are identical. Applicants who are good at this are likely to do well as clerical or data entry workers.

Cognitive ability tests measure the extent to which applicants have abilities in perceptual speed, verbal comprehension, numerical aptitude, general reasoning, and spatial aptitude. In other words, these tests indicate how quickly and how well people understand words, numbers, logic, and spatial dimensions. Although specific ability tests predict job performance in only particular types of jobs, cognitive ability tests accurately predict job performance in almost all kinds of jobs. *  Why is this so? The reason is that people with strong cognitive or mental abilities are usually good at learning new things, processing complex information, solving problems, and making decisions, and these abilities are important in almost all jobs. *  In fact, cognitive ability tests are almost always the best predictors of job performance. Consequently, if you were allowed to use just one selection test, a cognitive ability test would be the one to use. *  (In practice, though, companies use a battery of different tests because doing so leads to much more accurate selection decisions.)

Biographical data, or biodata, are extensive surveys that ask applicants questions about their personal backgrounds and life experiences. The basic idea behind biodata is that past behavior (personal background and life experience) is the best predictor of future behavior. For example, during World War II, the U.S. Air Force had to test tens of thousands of men without flying experience to determine who was likely to be a good pilot. Because flight training took several months and was very expensive, quickly selecting the right people for training was important. After examining extensive biodata, the Air Force found that one of the best predictors of success in flight school was whether students had ever built model airplanes that actually flew. This one biodata item was almost as good a predictor as the entire set of selection tests that the air force was using at the time. *

Most biodata questionnaires have more than 100 items that gather information about habits and attitudes, health, interpersonal relations, money, what it was like growing up in your family (parents, siblings, childhood years, teen years), personal habits, current home (spouse, children), hobbies, education and training, values, preferences, and work. *  In general, biodata are very good predictors of future job performance, especially in entry-level jobs.

You may have noticed that some of the information requested in biodata surveys is related to those topics employers should avoid in applications, interviews, or other parts of the selection process. This information can be requested in biodata questionnaires provided that the company can demonstrate that the information is job related (that is, valid) and does not result in adverse impact against protected groups of job applicants. Biodata surveys should be validated and tested for adverse impact before they are used to make selection decisions. *

An individual’s personality is made up of a relatively stable set of behaviors, attitudes, and emotions displayed over time. In short, it is personality that makes people different from each other. A personality test measures the extent to which an applicant possesses different kinds of job-related personality dimensions. In Chapter 12, you will learn that there are five major personality dimensions related to work behavior: extraversion, emotional stability, agreeableness, conscientiousness, and openness to experience. *  Of these, only conscientiousness—the degree to which someone is organized, hardworking, responsible, persevering, thorough, and achievement oriented—predicts job performance across a wide variety of jobs. * Conscientiousness tests work especially well in combination with cognitive ability tests, allowing companies to select applicants who are hardworking, organized, responsible, and smart! “Personality tests allow employers to gauge a candidate’s personality traits, cultural fit, and even compatibility with a team. Furstperson, a prehire test development company, uses a series of statements with agree-disagree scales. Statements which don’t have obvious answers, such as “I dislike yelling, but sometimes a little yelling is necessary,” make it harder to game the test. Twenty companies using Furstperson assessments saw their rate of 90-day attrition (the percentage of employees who quit or are fired before 90 days) drop from over 40 percent, before using personality tests to 12 percent after using them for two years. *  Although increasingly prevalent, personality tests are not infallible. Charles Handler, a hiring consultant, admits assessments can’t catch everything, saying, “There will be false positives, people who get through who shouldn’t, and false negatives, someone who should’ve got through that didn’t.” *

Work sample tests, also called performance tests, require applicants to perform tasks that are actually done on the job. So, unlike specific ability tests, cognitive ability tests, biographical data surveys, and personality tests, which are indirect predictors of job performance, work sample tests directly measure job applicants’ capability to do the job. For example, a candidate applying to be a pharmacist might be asked to consult medical databases and accurately fill prescriptions. An applicant for a sales position might have to role-play a sales pitch. The Levenson Group, an advertising firm, had applicants for a junior copywriter job develop an Instagram ad campaign for a vodka company. Fifty designed campaigns. Levensen hired recent college grad Kendall Madden whose ad, which took 16 hours to create, showed hands stretching toward drinks made with the vodka. Chief product officer Paul McEnany said that without the work sample test, “I’m not certain we would have interviewed her in the first place,” because she hadn’t studied marketing. *  Work sample tests are generally very good at predicting future job performance; however, they can be expensive to administer and can be used for only one kind of job. For example, an auto dealership could not use a work sample test for mechanics as a selection test for sales representatives.

Assessment centers use a series of job-specific simulations that are graded by multiple trained observers to determine applicants’ ability to perform managerial work. Unlike the previously described selection tests that are commonly used for specific jobs or entry-level jobs, assessment centers are most often used to select applicants who have high potential to be good managers. Assessment centers often last two to five days and require participants to complete a number of tests and exercises that simulate managerial work.

Some of the more common assessment center exercises are in-basket exercises, role-plays, small-group presentations, and leaderless group discussions. An in-basket exercise is a paper-and-pencil test in which an applicant is given a manager’s in-basket containing memos, phone messages, organizational policies, and other communications normally received by and available to managers. Applicants have a limited time to read through the in-basket, prioritize the items, and decide how to deal with each item. Experienced managers then score the applicants’ decisions and recommendations. Exhibit 11.6 shows an item that could be used in an assessment center for evaluating applicants for a job as a store manager.

In a leaderless group discussion, another common assessment center exercise, a group of six applicants is given approximately two hours to solve a problem, but no one is put in charge (hence the name leaderless group discussion). Trained observers watch and score each participant on the extent to which he or she facilitates discussion, listens, leads, persuades, and works well with others.

Are tests perfect predictors of job performance? No, they aren’t. Some people who do well on selection tests will do poorly in their jobs. Likewise, some people who do poorly on selection tests (and therefore weren’t hired) would have been very good performers. Nonetheless, valid tests will minimize selection errors (hiring people who should not have been hired and not hiring people who should have been hired) while maximizing correct selection decisions (hiring people who should have been hired and not hiring people who should not have been hired). Charles Handler, president of Rocket-Hire, a consulting firm on selection tests, says, “Predicting what humans will do is really…hard. Tests are a predictor and better than a coin toss, but you have to be realistic about them.” *  In short, tests increase the chances that you’ll hire the right person for the job, that is, someone who turns out to be a good performer. So, although tests aren’t perfect, almost nothing predicts future job performance as well as the selection tests discussed here.

11-3d. Interviews

In interviews, company representatives ask job applicants job-related questions to determine whether they are qualified for the job. Interviews are probably the most frequently used and relied on selection device. There are several basic kinds of interviews: unstructured, structured, and semistructured.

In unstructured interviews, interviewers are free to ask applicants anything they want, and studies show that they do. Because interviewers often disagree about which questions should be asked during interviews, different interviewers tend to ask applicants very different questions. *  Furthermore, individual interviewers even seem to have a tough time asking the same questions from one interview to the next. This high level of variety can make things difficult. As a result, while unstructured interviews do predict job performance with some success, they are about half as accurate as structured interviews at predicting which job applicants should be hired. *

By contrast, with structured interviews, standardized interview questions are prepared ahead of time so that all applicants are asked the same job-related questions. *  Structuring interviews also ensures that interviewers ask only for important, job-related information. Not only are the accuracy, usefulness, and validity of the interview improved, but the chances that interviewers will ask questions about topics that violate employment laws (see Exhibit 11.4) are reduced.

Laszlo Bock, Google’s head of human resources, explains why structured interviews are so effective: “…think about the last five people you interviewed for a similar job. Did you give them similar questions or did each person get different questions? Did you cover everything you needed to with each of them, or did you run out of time? Did you hold them to exactly the same standard, or were you tougher on one because you were tired, cranky, and having a bad day? Did you write up detailed notes so that other interviewers could benefit from your insights? A concise hiring rubric [via structured interviews containing the same questions] addresses all these issues because it distills messy, vague, and complicated work situations down to measurable, comparable results.” *  Four kinds of questions are typically asked in structured interviews. Situational questions ask applicants how they would respond in a hypothetical situation (“What would you do if…?”). These questions are more appropriate for hiring new graduates, who are unlikely to have encountered real-work situations because of their limited work experience. Behavioral questions ask applicants what they did in previous jobs that were similar to the job for which they are applying (“In your previous jobs, tell me about…”). These questions are more appropriate for hiring experienced individuals. Background questions ask applicants about their work experience, education, and other qualifications (“Tell me about the training you received at…”). Job-knowledge questions ask applicants to demonstrate their job knowledge (for example, nurses might be asked, “Give me an example of a time when one of your patients had a severe reaction to a medication. How did you handle it?”). *

Semistructured interviews lie between structured and unstructured interviews. A major part of the semistructured interview (perhaps as much as 80%) is based on structured questions, but some time is set aside for unstructured interviewing to allow the interviewer to probe into ambiguous or missing information uncovered during the structured portion of the interview.

How well do interviews predict future job performance? Contrary to what you’ve probably heard, recent evidence indicates that even unstructured interviews do a fairly good job. *  When conducted properly, however, structured interviews can lead to much more accurate hiring decisions than unstructured interviews. In some cases, the validity of structured interviews can rival that of cognitive ability tests.

But even more important, because interviews are especially good at assessing applicants’ interpersonal skills, they work particularly well with cognitive ability tests. Combining the two—using structured interviews together with cognitive ability tests to identify smart people who work well with others—leads to even better selection decisions than using either alone. *  Exhibit 11.7 provides a set of guidelines for conducting effective structured employment interviews.

11-4. Training

According to the American Society for Training and Development, a typical investment in training increases productivity by an average of 17 percent, reduces employee turnover, and makes companies more profitable. *  Giving employees the knowledge and skills they need to improve their performance is just the first step in developing employees, however. The second step—and not enough companies do this—is giving employees formal feedback about job performance (which we will discuss in section 11-5).

Training means providing opportunities for employees to develop the job-specific skills, experience, and knowledge they need to do their jobs or improve their performance. American companies spend an estimated $189 billion a year on training. *

To make sure those training dollars are well spent, companies need to 11-4a determine specific training needs, 11-4b select appropriate training methods, and 11-4c evaluate training.

11-4a. Determining Training Needs

Needs assessment is the process of identifying and prioritizing the learning needs of employees. Needs assessments can be conducted by identifying performance deficiencies, listening to customer complaints, surveying employees and managers, or formally testing employees’ skills and knowledge.

Note that training should never be conducted without first performing a needs assessment. Sometimes, training isn’t needed at all or isn’t needed for all employees. Unfortunately, however, many organizations simply require all employees to attend training whether they need to or not. As a result, employees who are not interested or don’t need the training may react negatively during or after training. Likewise, employees who should be sent for training but aren’t may also react negatively. Consequently, a needs assessment is an important tool for deciding who should or should not attend training. In fact, employment law restricts employers from discriminating on the basis of age, sex, race, color, religion, national origin, or disability when selecting training participants. Just like hiring decisions, the selection of training participants should be based on job-related information.

11-4b. Training Methods

Assume that you’re a training director for a hospital system and that you’re in charge of making sure all employees in the biocontaminant unit can safely treat patients with Ebola. *  Exhibit 11.8 lists a number of training methods you could use: films and videos, lectures, planned readings, case studies, coaching and mentoring, group discussions, on-the-job training, role-playing, simulations and games, vestibule training, and computer-based learning. Which method would be best?

To choose the best method, you should consider a number of factors, such as the number of people to be trained, the cost of training, and the objectives of the training. For instance, if the training objective is to impart information or knowledge to trainees, then you should use films and videos, lectures, and planned readings. In our example, trainees might read a manual or attend a lecture about how to put on and remove personal protective gear.

If developing analytical and problem-solving skills is the objective, then use case studies, coaching and mentoring, and group discussions. In our example, trainees might view a video documenting how a team handled exposure to the disease, talk with first responders who have worked in West Africa, and discuss what they would do in a similar situation.

If practicing, learning, or changing job behaviors is the objective, then use on-the-job training, role-playing, simulations and games, and vestibule training. Employees at the biocontainment unit of the University of Texas Southwestern Medical Center (UTSMC) role-play putting on and taking off their protective gear. Because of the number of steps involved, this is done in teams to ensure compliance so as to prevent the spread of the deadly disease. UTSMC sprays the fake Ebola patients used during the training with spicy, peppery Tabasco sauce. Dr. Bruce Myer says that if doctors and nurses get Tabasco on their skin, “it gives immediate feedback,” to let them know a potentially deadly mistake has just been made. *

If training is supposed to meet more than one of these objectives, then your best choice may be to combine one of the previous methods with computer-based training. Walmart’s Pathways training program uses computer games and videos to teach frontline employees how to read stock labels, the eight-steps used for collecting carts from the parking lot, plus basic information about the retail industry. Pathways supports six months of supervised on-the-job training during which managers help employees prepare to pass “gateway” assessments that can lead to a raise, a promotion to a specialty department, or acceptance into a management training program. Likewise, supervisors are being trained to support their employees and must attend a five-week managerial skills workshop. Jamie Dworackzyk, an apparel manager at the Joplin, Missouri, store for 18 years, appreciates Walmart’s new emphasis on training, saying, “In the past we didn’t take the time to teach. We just expected them to know. Now I can actually manage my people.” *

These days, many companies are adopting Internet training, or “computer-based learning.” E-learning can offer several advantages. Because employees don’t need to leave their jobs, travel costs are greatly reduced. Also, because employees can take training modules when it is convenient (that is, they don’t have to fall behind at their jobs to attend week-long training courses), workplace productivity should increase, and employee stress should decrease. And, if a company’s technology infrastructure can support it, e-learning can be much faster than traditional training methods. This is especially true of micro-learning apps. With micro-learning, training is accomplished via short, focused lessons that can generally be completed in fewer than five minutes and are often followed by a quiz to check learning. For example, Uber drivers in Brazil, Colombia, and Mexico can practice their English skills using Duolingo, a foreign language app that delivers micro-instruction through audio, video, text, and pictures. After demonstrating proficiency by advancing to a certain level in the app, a driver’s vehicle is listed as an option for English-speaking passengers looking for a driver who speaks their language. *

There are, however, several disadvantages to e-learning. First, despite its increasing popularity, it’s not always the appropriate training method. E-learning can be a good way to impart information, but it isn’t always as effective for changing job behaviors or developing problem-solving and analytical skills. Second, e-learning requires a significant investment in computers and high-speed Internet and network connections for all employees. Finally, though e-learning can be faster, many employees find it so boring and unengaging that they may choose to do their jobs rather than complete e-learning courses when sitting alone at their desks. E-learning may become more interesting, however, as more companies incorporate game-like features such as avatars and competition into their e-learning courses.

11-4c. Evaluating Training

After selecting a training method and conducting the training, the last step is to evaluate the training. Training can be evaluated in four ways: on reactions(how satisfied trainees were with the program), on learning (how much employees improved their knowledge or skills), on behavior (how much employees actually changed their on-the-job behavior because of training), or on results (how much training improved job performance, such as increased sales or quality, or decreased costs). *  In general, training provides meaningful benefits for most companies if it is done well. For example, a study by the American Society for Training and Development shows that a training budget as small as $680 per employee can increase a company’s total return on investment by 6 percent. *  Chuck Runyon, CEO of Anytime Fitness, which has 2,500 locations, says, “The only thing worse than training people and having them leave is not training people and having them stay.” * 11-5. Performance Appraisal

Performance appraisal is the process of assessing how well employees are doing their jobs. Most employees and managers intensely dislike the performance appraisal process. In fact, 65 percent of employees are dissatisfied with their performance appraisal process. Likewise, according to the Society for Human Resource Management, 95 percent of human resource managers are dissatisfied with their companies’ performance appraisal systems. Sixteen percent of companies, including Accenture, Microsoft Adobe and General Electric (GE), have abolished their performance appraisal systems altogether. *  GE head of human resources Susan Peters explains the reason for the change this way: “It existed in more or less the same form since I started at the company in 1979, but we think over many years it had become more a ritual than moving the company upwards and forwards.” *

On the other hand, Paul Rubenstein, a partner at global human resources consulting firm Aon Hewitt, says, “If you get rid of the performance ratings, how are you going to get rid of a fair and equitable and measurable system to blame the distribution of pay on? Because why did performance ratings come into existence? So there’s some mechanism to force pay decisions. People wonder, which came first the rating or the pay decision.” *  Consulting firm CEB surveyed 9,000 managers and employees in 18 countries and found that employees were 14 percent less satisfied when companies dropped performance appraisals. The experience, according to CEB’s Brian Kropp, “is pretty negative.” Managers devote less time to performance issues and, without clarity regarding performance levels, employees often said, “my manager’s just going to give more money to the person he likes.” *

Indeed, performance appraisals are used for four broad purposes: making administrative decisions (for example, pay increase, promotion, retention), providing feedback for employee development (for example, performance, developing career plans), evaluating human resource programs (for example, validating selection systems), and for documentation purposes (for example, documenting performance ratings and decisions based on those ratings). *

Let’s explore how companies can avoid some of these problems with performance appraisals by 11-5a accurately measuring job performance and 11-5b effectively sharing performance feedback with employees.

11-5a. Accurately Measuring Job Performance

Workers often have strong doubts about the accuracy of their performance appraisals—and they may be right. For example, it’s widely known that assessors are prone to errors when rating worker performance. Three of the most common rating errors are central tendency, halo, and leniency. Central tendency error occurs when assessors rate all workers as average or in the middle of the scale. Halo error occurs when assessors rate all workers as performing at the same level (good, bad, or average) in all parts of their jobs. Leniency error occurs when assessors rate all workers as performing particularly well. One of the reasons managers make these errors is that they often don’t spend enough time gathering or reviewing performance data. Facebook reduces appraisal errors by having managers work together to finalize appraisal ratings. “Managers sit together and discuss their reports face-to-face, defending and championing, debating and deliberating, and incorporating peer feedback. Here, the goal is to minimize the ‘idiosyncratic rater effect’—also known as personal opinion. [This way] people aren’t unduly punished when individual managers are hard graders or unfairly rewarded when they’re easy graders.” *  What can be done to minimize rating errors and improve the accuracy with which job performance is measured? In general, two approaches have been used: improving performance appraisal measures themselves and training performance raters to be more accurate.

One of the ways companies try to improve performance appraisal measures is to use as many objective performance measures as possible. Objective performance measures are measures of performance that are easily and directly counted or quantified. Common objective performance measures include output, scrap, waste, sales, customer complaints, and rejection rates.

But when objective performance measures aren’t available (and frequently they aren’t), subjective performance measures have to be used instead. Subjective performance measures require that someone judge or assess a worker’s performance. The most common kind of subjective performance measure is the graphic rating scale (GRS), as shown in Exhibit 11.9. Graphic rating scales are most widely used because they are easy to construct, but they are very susceptible to rating errors.

A popular alternative to graphic rating scales is the behavior observation scale (BOS). BOSs requires raters to rate the frequency with which workers perform specific behaviors representative of the job dimensions that are critical to successful job performance. Exhibit 11.9 shows a BOS for two important job dimensions for a retail salesperson: customer service and money handling. Notice that each dimension lists several specific behaviors characteristic of a worker who excels in that dimension of job performance. (Normally, the scale would list 7 to 12 items per dimension, not 3, as in the exhibit.) Notice also that the behaviors are good behaviors, meaning they indicate good performance, and the rater is asked to judge how frequently an employee engaged in those good behaviors. The logic behind the BOS is that better performers engage in good behaviors more often.

Not only do BOSs work well for rating critical dimensions of performance, but studies also show that managers strongly prefer BOSs for giving performance feedback; accurately differentiating between poor, average, and good workers; identifying training needs; and accurately measuring performance. And in response to the statement, “If I were defending a company, this rating format would be an asset to my case,” attorneys strongly preferred BOSs over other kinds of subjective performance appraisal scales. *

The second approach to improving the measurement of workers’ job performance is rater training. The most effective is frame-of-reference training, in which a group of trainees learn how to do performance appraisals by watching a video of an employee at work. Next, they evaluate the performance of the person in the video. A trainer (an expert in the subject matter) then shares his or her evaluations, and trainees’ evaluations are compared with the expert’s. The expert then explains the rationales behind his or her evaluations. This process is repeated until the differences in evaluations given by trainees and evaluations by the expert are minimized. The underlying logic behind the frame-of-reference training is that by adopting the frame of reference used by an expert, trainees will be able to accurately observe, judge, and use relevant appraisal scales to evaluate the performance of others. *

11-5b. Sharing Performance Feedback

After gathering accurate performance data, the next step is to share performance feedback with employees. Unfortunately, even when performance appraisal ratings are accurate, the appraisal process often breaks down at the feedback stage. Employees become defensive and dislike hearing any negative assessments of their work, no matter how small. Managers become defensive, too, and dislike giving appraisal feedback as much as employees dislike receiving it. In response, many companies are asking managers to ease up on harsh feedback and instead accentuate the positive by focusing on employee strengths. In the past, Michelle Russell of Boston Consulting Group says, “We would bring them in and beat them down a bit.” *  Some employees would suffer a crisis of confidence and performance and then quit. At Intel, telling employees they “need improvement” deflates morale, says HR manager Devra Johnson, “We call them the walking wounded.” *

What can be done to overcome the inherent difficulties in performance appraisal feedback? First, be mindful of being overly critical and making employees so defensive that they quit listening. The top half of Exhibit 11.10 offers some suggestion for being less negative and more positive in feedback sessions. Also, because performance appraisal ratings have traditionally been the judgments of just one person, the boss, another possibility is to use 360-degree feedback. In this approach, feedback comes from four sources: the boss, subordinates, peers and coworkers, and the employees themselves. The data, which are obtained anonymously (except for the boss’s), are compiled into a feedback report comparing the employee’s self-ratings with those of the boss, subordinates, and peers and coworkers. Usually, a consultant or human resource specialist discusses the results with the employee. The advantage of 360-degree programs is that negative feedback (“You don’t listen”) is often more credible when it comes from several people.

Herbert Meyer, who has been studying performance appraisal feedback for more than 30 years, recommends a list of topics to discuss in performance appraisal feedback sessions (see the bottom half of Exhibit 11.10). *  Furthermore, managers can do three different things to make performance reviews more comfortable and productive. First, they should separate developmental feedback, which is designed to improve future performance, from administrative feedback, which is used as a reward for past performance, such as for raises. When managers give developmental feedback, they’re acting as coaches, but when they give administrative feedback, they’re acting as judges. These roles, coaches and judges, are clearly incompatible. As coaches, managers encourage, pointing out opportunities for growth and improvement, and employees are typically open and receptive to feedback. But as judges, managers are evaluative, and employees are typically defensive and closed to feedback.

Second, Meyer suggests that performance appraisal feedback sessions be based on self-appraisals, in which employees carefully assess their own strengths, weaknesses, successes, and failures in writing. Because employees play an active role in the review of their performance, managers can be coaches rather than judges. Also, because the focus is on future goals and development, both employees and managers are likely to be more satisfied with the process and more committed to future plans and changes. Because the focus is on development and not administrative assessment, studies show that self-appraisals lead to more candid self-assessments than traditional supervisory reviews. *

Job search website  Monster.com  has put self-appraisals at the center of its performance feedback system by asking managers to conduct quarterly checkins with their direct reports. Prior to the meetings, employees must complete a short template that includes one to three professional goals for the upcoming period, what kind of results they hope to achieve in that time frame, and how they plan to achieve them.  Monster.com  chief human resources officer Kim Mullaney says that “by communicating professional aspirations with their superiors, staffers will be more engaged. Knowing that you’re in direct control of your goals is extremely important—as is knowing that your boss is a stakeholder in the plan.” *

Finally, what people do with the performance feedback they receive really matters. A study of 1,361 senior managers found that managers who reviewed their 360-degree feedback with an executive coach (hired by the company) were more likely to set specific goals for improvement, ask their bosses for ways to improve, and subsequently improve their performance. *

A five-year study of 252 managers found that their performance improved dramatically if they met with their subordinates to discuss their 360-degree feedback (“You don’t listen”) and how they were going to address it (“I’ll restate what others have said before stating my opinion”). Performance was dramatically lower for managers who never discussed their 360-degree feedback with subordinates and for managers who did not routinely do so. Why is discussing 360-degree feedback with subordinates so effective? These discussions help managers understand their weaknesses better, force them to develop a plan to improve, and demonstrate to the subordinates the managers’ public commitment to improving. *  In short, it helps to have people discuss their performance feedback with others, but it particularly helps to have them discuss their feedback with the people who provided it.

11-6. Compensation and Employee Separation

Regional airlines, which operate 44 percent of all U.S. flights, transport passengers from smaller airports to large hub airports where travelers connect to longer flights on major airlines. Thanks to a wave of baby boomer pilots forced to retire at 65 (a federal requirement), and regulations that raised the minimum number of flight hours for regional pilots from 250 to 1,500 hours, airlines will need 14,500 more pilots over the next decade. Captain Tin Canoll, president of the Air Line Pilots Association union, says, “The marketplace for pilots is pretty tight right now. What we’re seeing is the operation of supply and demand economics.” *  Shortages are so severe that some regional airlines increased starting pay for new pilots from $20,000 a year to $50,000 plus travel and training stipends and retention bonuses. *

Compensation includes both the financial and the nonfinancial rewards that organizations give employees in exchange for their work. Employee separation is a broad term covering the loss of an employee for any reason. Involuntary separation occurs when employers terminate or lay off employees. Voluntary separation occurs when employees quit or retire. Because employee separations affect recruiting, selection, training, and compensation, organizations should forecast the number of employees they expect to lose through terminations, layoffs, turnover, or retirements when doing human resource planning.

Let’s learn more about compensation by examining the 11-6a compensation decisions that managers must make as well as 11-6b termination, 11-6c downsizing, 11-6d retirement, and 11-6e turnover.

11-6a. Compensation Decisions

There are three basic kinds of compensation decisions: pay level, pay variability, and pay structure. *  Pay-level decisions concern whether to pay workers at a level that is below, above, or at current market wages. Companies use job evaluation to set their pay structures. Job evaluationdetermines the worth of each job by determining the market value of the knowledge, skills, and requirements needed to perform it. After conducting a job evaluation, most companies try to pay the going rate, meaning the current market wage. There are always companies, however, whose financial situation causes them to pay considerably less than current market wages.

Some companies choose to pay above-average wages to attract and keep employees. Above-market wages can attract a larger, more qualified pool of job applicants, increase the rate of job acceptance, decrease the time it takes to fill positions, and increase the time that employees stay. *  While a senior pilot at U.S.-based Delta Airlines makes $209,000 a year, Qindao and Sichuan Airlines, both regional Chinese airlines, are paying $318,000 and $302,000 a year — including the pilots’ Chinese income tax! What accounts for the 50 percent premium? Exponential growth in Chinese air travel, where the number of passenger jets has tripled in the last 10 years and the number of airlines has doubled in the last five. Projected growth is so strong that that the only way for Chinese airlines to meet customer demand is to hire 100 new pilots a week for the next 20 years. Dave Ross, president of U.S.-based Wasinc International, is recruiting pilots for over a dozen Chinese airlines. Ross says, “When we ask an airline, ‘How many pilots do you need?,’ they say, ‘Oh, we can take as many as you bring.’ It’s almost unlimited.” *

Pay-variability decisions concern the extent to which employees’ pay varies with individual and organizational performance. Linking pay to performance is intended to increase employee motivation, effort, and job performance. Piecework, sales commissions, profit sharing, employee stock ownership plans, and stock options are common pay-variability options. For instance, under piecework pay plans, employees are paid a set rate for each item produced up to some standard (for example, $3 per item produced for output up to 100 units per day). After productivity exceeds the standard, employees are paid a set amount for each unit of output over the standard (for example, $4.50 for each unit above 100 units). Under a sales commission plan, salespeople are paid a percentage of the purchase price of items they sell. The more they sell, the more they earn. At inventory software company Fishbowl, every employee’s pay is determined in part by how much he or she contributes to company sales. Employees receive a base salary discounted from the market rate, as well as a monthly commission based on how much they were able to directly influence sales. Since a company needs more than just salespeople, the significance of the commission is relative to the function within the company. Programmers receive 80 percent of their pay as base salary and 20 percent as commission, whereas salespeople receive 10 percent of their pay as base salary and 90 percent as commission. Even administrative employees earn commission. In lean months, no commissions are paid, but in good months, employees can double their base salaries through commission payouts. Overall, commissions increase Fishbowl employees’ compensation by 19 percent per year. *

Because pay plans such as piecework and commissions are based on individual performance, they can reduce the incentive that people have to work together. Therefore, companies also use group rewards (discussed in Chapter 10) and organizational incentives, such as profit sharing, employee stock ownership plans, and stock options, to encourage teamwork and cooperation.

With profit sharing, employees receive a portion of the organization’s profits over and above their regular compensation. Delta Airlines posted a profit of $5.9 billion in 2015. Thanks to the company’s generous profit sharing plan, $1.5 billion of that was distributed to employees—the largest payout in the history of U.S. corporate profit sharing. *

Employee stock ownership plans (ESOPs) compensate employees by awarding them shares of the company stock in addition to their regular compensation. Central States Manufacturing, a steel-cutting firm in Lowell, Arkansas, is 100 percent owned by its 517 employees. Six and a half percent of each employee’s annual pay goes into a tax-deferred ESOP account. Aaron King, a 60-year-old truck driver with the company for 23 years, has accumulated $1.25 million in his ESOP account. Because of the ESOP, he says, “We hold one another accountable. Somebody leaving a bundle of metal where it could be run over—a $3,000 bundle—we go and get that guy and talk to him. [Because] It’s going to come out of all of our paychecks.” * Not all ESOPs are 100 percent employee owned, however. Employees at yogurt company Chobani receive stock grants from founder and majority owner Hamdi Ulukaya enabling them to own up to 10 percent of the $3 billion company. *

Stock options give employees the right to purchase shares of stock at a set price. Options work like this. Let’s say you are awarded the right (or option) to buy 100 shares of stock from the company for $5 a share. If the company’s stock price rises to $15 a share, you can exercise your options, sell the stock for $15 a share, come out with $1,000. When you exercise your options, you pay the company $500 (100 shares at $5 a share), but because the stock is selling for $15 in the stock market, you can sell your 100 shares for $1,500 and make $1,000. Of course, as the company’s profits and share values increase, stock options become even more valuable to employees. Stock options have no value, however, if the company’s stock falls below the option “grant price,” the price at which the options have been issued to you. The options you have on 100 shares of stock with a grant price of $5 aren’t going to do you a lot of good if the company’s stock is worth $2.50. Proponents of stock options argue that this gives employees and managers a strong incentive to work hard to make the company successful. If they do, the company’s profits and stock price increase, and their stock options increase in value. If they don’t, profits stagnate or turn into losses, and their stock options decrease in value or become worthless. To learn more about ESOPs and stock options, see the National Center for Employee Ownership ( www.nceo.org ).

The incentive has to be more than just a piece of paper, however. It has to motivate employees with the real opportunity to grow the value of the company and their wealth. Adworkshop, a digital marketing agency that does website design and development, search marketing, media buying, and creative work, became an employee-owned company in 2007. Account supervisor Kelly Frady says the ESOP has energized employee commitment. She says, “Everyone knows that you do well, and your stock will rise. It’s a driving factor in making the company succeed in the long term.” *  In the United States, 7,000 employee-owned businesses, worth $1.30 trillion, are owned by 14 million employees. *

Pay-structure decisions are concerned with internal pay distributions, meaning the extent to which people in the company receive very different levels of pay. *  With hierarchical pay structures, there are big differences from one pay level to another. The highest pay levels are for people near the top of the pay distribution. The basic idea behind hierarchical pay structures is that large differences in pay between jobs or organizational levels should motivate people to work harder to obtain those higher-paying jobs. Many publicly owned companies have hierarchical pay structures, paying huge salaries to their top managers and CEOs. For example, CEOs of the 350 largest U.S. firms, now make an average of $15.6 million per year, which is 271 times salary of the average employee. *

By contrast, compressed pay structures typically have fewer pay levels and smaller differences in pay between levels. Pay is less dispersed and more similar across jobs in the company. The basic idea behind compressed pay structures is that similar pay levels should lead to higher levels of cooperation, feelings of fairness and a common purpose, and better group and team performance.

So should companies choose hierarchical or compressed pay structures? The evidence isn’t straight-forward, but studies seem to indicate that there are significant problems with the hierarchical approach. The most damaging finding is that there appears to be little link between organizational performance and the pay of top managers. *  Furthermore, studies of professional athletes indicate that hierarchical pay structures (for example, paying superstars 40 to 50 times as much as the lowest-paid athlete on the team) hurt the performance of teams and individual players. *  Likewise, managers are twice as likely to quit their jobs when their companies have very strong hierarchical pay structures (that is, when they’re paid dramatically less than the people above them). *  For now, it seems that hierarchical pay structures work best for independent work, where it’s easy to determine the contributions of individual performers, and little coordination with others is needed to get the job done. In other words, hierarchical pay structures work best when clear links can be drawn between individual performance and individual rewards. By contrast, compressed pay structures, in which everyone receives similar pay, seem to work best for interdependent work, which requires employees to work together. Some companies are pursuing a middle ground: combining hierarchical and compressed pay structures by giving ordinary workers the chance to earn more through ESOPs, stock options, and profit sharing.

11-6b. Terminating Employees

The words “You’re fired!” may have never been directed at you, but lots of people hear them, as more than 400,000 people a year get fired from their jobs. Getting fired is a terrible thing, but many managers make it even worse by bungling the firing process, needlessly provoking the person who was fired and unintentionally inviting lawsuits. Manager Craig Silverman had to fire the head of a company whom his organization had just acquired. He was specifically instructed to invite her to a meeting, which would require her to travel halfway across the country, and then fire her immediately on arrival. He said, “I literally had to tell the car service to wait. I don’t think it ever entered [her] mind that [she] would be terminated.” *  When Zynga terminated almost all of the employees from OMGPOP, a startup company it had acquired a year before, one of the employees tweeted, “I learned via Facebook I was laid off today and @omgpop office is closed. Thanks @zynga for again reminding me how not to operate a business.” *  A computer systems engineer was fired on “Take Your Daughter to Work Day,” with his eight-year-old daughter sitting next to him in the human resource manager’s office. He and his daughter were both escorted from the building. *  How would you feel if you had been fired in one of these ways? Though firing is never pleasant (and managers hate firings nearly as much as employees do), managers can do several things to minimize the problems inherent in firing employees.

To start, in most situations, firing should not be the first option. Instead, employees should be given a chance to change their behavior. When problems arise, employees should have ample warning and must be specifically informed as to the nature and seriousness of the trouble they’re in. After being notified, they should be given sufficient time to change their behavior. Ron Cohen is CEO and founder of Acorda Therapeutics, a company that develops therapies to restore neurological function for people with multiple sclerosis and spinal cord injuries. Cohen first fired an employee when he was 31 years old. He says it was painful, and, “I wound up hugging the employee, and she was crying on my shoulder.” Since then, however, when he fires someone, they’ve had plenty of opportunities to address performance issues. Says Cohen, “I’ve learned over the years that if the employee doesn’t expect it and know it’s coming, you’re not doing your job as a manager.”

If problems continue, the employees should again be counseled about their job performance, what could be done to improve it, and the possible consequences if things don’t change (such as a written reprimand, suspension without pay, or firing). Sometimes this is enough to solve the problem. If the problem isn’t corrected after several rounds of warnings and discussions, however, the employee may be terminated. *

Second, employees should be fired only for a good reason. Employers used to hire and fire employees under the legal principle of employment at will, which allowed them to fire employees for a good reason, a bad reason, or no reason at all. (Employees could also quit for a good reason, a bad reason, or no reason whenever they desired.) As employees began contesting their firings in court, however, the principle of wrongful discharge emerged. Wrongful discharge is a legal doctrine that requires employers to have a job-related reason to terminate employees. In other words, like other major human resource decisions, termination decisions should be made on the basis of job-related factors such as violating company rules or consistently poor performance. And with former employees winning 68 percent of wrongful discharge cases and the average wrongful termination award at $532,000 and climbing, managers should record the job-related reasons for the termination, document specific instances of rule violations or continued poor performance, and keep notes and documents from the counseling sessions held with employees. *

11-6c. Downsizing

Downsizing is the planned elimination of jobs in a company (see box “Dos and Don’ts of Conducting Layoffs in the Digital Age”). Two-thirds of companies that downsize will downsize a second time within a year. After struggling to successfully integrate its purchase of cell phone maker Nokia, Microsoftannounced in January 2015 that it had completed a layoff of roughly 12,500 employees in Nokia’s manufacturing division. *  Six months later, Microsoft CEO Satya Nadella announced that the company would lay off an additional 7,800 employees in the phone division and focus on running “a more effective and focused phone portfolio while retaining capability for long-term reinvention in mobility.” *

Does downsizing work? In theory, downsizing is supposed to lead to higher productivity and profits, better stock performance, and increased organizational flexibility. However, numerous studies demonstrate that it doesn’t. For instance, a 15-year study of downsizing found that downsizing 10 percent of a company’s workforce produced only a 1.5 percent decrease in costs; that downsizing firms increased their stock price by only 4.7 percent over three years, compared with 34.3 percent for firms that didn’t; and that profitability and productivity were generally not improved by downsizing. Downsizing can also result in the loss of skilled workers who would be expensive to replace when the company grows again. These results make it clear that the best strategy is to conduct effective human resource planning and avoid downsizing altogether. Downsizing should always be a last resort. *

If companies do find themselves in financial or strategic situations where downsizing is required for survival, however, they should train managers how to break the news to downsized employees, have senior managers explain in detail why downsizing is necessary, and time the announcement so that employees hear it from the company and not from other sources, such as TV or online reports. *  Finally, companies should do everything they can to help downsized employees find other jobs. One of the best ways to do this is to use outplacement services that provide employment counseling for employees faced with downsizing. Outplacement services often include advice and training in preparing résumés, getting ready for job interviews, and even identifying job opportunities in other companies. Sixty-nine percent of companies provide outplacement services for laid-off employees, 61 percent provide extended health coverage, and most offer up to 26 weeks of severance payments. *  Offering this kind of assistance can soften the blow from being laid off, preserve goodwill, and lower the risk of future lawsuits. *

Companies also need to pay attention to the survivors, the employees remaining after layoffs have occurred. According to author Sylvia Ann Hewlett, the impact of layoffs on remaining employees’ morale is severe: 64 percent of employees who survived a layoff felt demotivated, 73 percent felt demoralized, and 74 percent said they simply shut down. “In other words,” she says, “just when a company needs its top performers to charge the hill, they retreat to the bunkers.” *  The key to working with layoff survivors, according to Barry Nickerson, president of Dallas-based Marlow Industries, which downsized from 800 to 200 employees, is “Communicate. Communicate. Communicate.” Nickerson says, “Every time we had a change we had a meeting to explain exactly what we were doing. We were very open with our employees about where we were financially. We would explain exactly the current status and where we were.”

11-6d. Retirement

Early retirement incentive programs (ERIPs) offer financial benefits to employees to encourage them to retire early. Companies use ERIPs to reduce the number of employees in the organization, to lower costs by eliminating positions after employees retire, to lower costs by replacing high-paid retirees with lower-paid, less-experienced employees, or to create openings and job opportunities for people inside the company. Fidelity Investments offered early retirement to 3,000 employees 55 or older who had at least 10 years with the company. Depending on tenure and job level, incentives range from 6 to 24 months of salary, and a bonus. Everyone receives 18 months of health-care benefits, with the option to pay for continued coverage beyond that time. *

Although ERIPs can save companies money, they can pose a big problem for managers if they fail to accurately predict which employees will retire—the good performers or the poor performers—and how many will retire early. When Progress Energy, in Raleigh, North Carolina, identified 450 jobs it wanted to eliminate with an ERIP, it carefully shared the list of jobs with employees, indicated that layoffs would follow if not enough people took early retirement, and then held 80 meetings with employees to answer questions. Despite this care, an extra 1,000 employees, for a total of 1,450, took the ERIP offer and applied for early retirement! *

Because of the problems associated with ERIPs, 14 percent companies are now offering phased retirement, in which employees transition to retirement by working reduced hours over a period of time before completely retiring. The advantage for employees is that they have more free time but continue to earn salaries and benefits without changing companies or careers. The advantage for companies is that it allows them to reduce salaries and hiring and training costs and retain experienced, valuable workers. *  Paul Irving, chairman of the Milken Institute Center for the Future of Aging, said, “There’s a need for more companies to do this if they want to preserve their best practices, innovations, and customer relations. And there’s receptivity among older workers, a majority of whom want to stay engaged and keep working, but in new ways.” *

11-6e. Employee Turnover

In 2016, 74 percent of workers with a job were either actively seeking or open to a new job. *  Employee turnover is the loss of employees who voluntarily choose to leave the company. In general, most companies try to keep the rate of employee turnover low to reduce recruiting, hiring, training, and replacement costs. Not all kinds of employee turnover are bad for organizations, however. In fact, some turnover can actually be good. Functional turnover is the loss of poor-performing employees who choose to leave the organization. *  Functional turnover gives the organization a chance to replace poor performers with better workers. In fact, one study found that simply replacing poor-performing workers with average workers would increase the revenues produced by retail salespeople in an upscale department store by $112,000 per person per year. *  By contrast, dysfunctional turnover, the loss of high performers who choose to leave, is a costly loss to the organization. To minimize dysfunctional turnover, VoloMetrix, Inc. uses algorithms to identify so-called flight risks—employees who are gearing up to quit. Software examines anonymized data from employee emails and calendars to identify patterns of communication that indicate the employee is spending less time interacting with colleagues and attending only required meetings. The analysis helps the company predict a departure up to a year in advance, which is important, as the median cost of turnover for most jobs is 21 percent of the employee’s annual salary. *

Employee turnover should be carefully analyzed to determine whether good or poor performers are choosing to leave the organization. If the company is losing too many high performers, managers should determine the reasons and find ways to reduce the loss of valuable employees. The company might have to raise salary levels, offer enhanced benefits, or improve working conditions to retain skilled workers. One of the best ways to influence functional and dysfunctional turnover is to link pay directly to performance. A study of four salesforces found that when pay was strongly linked to performance via sales commissions and bonuses, poor performers were much more likely to leave (that is, functional turnover). By contrast, poor performers were much more likely to stay when paid large, guaranteed monthly salaries and small sales commissions and bonuses.