Step 1: Establish Human Capital Priorities | The Headcount Solution : How to Cut Compensation Costs and Keep Your Best People

In the CWE/WorldatWork survey discussed in Chapter 2, the vast majority of respondents reported that preserving human capital was a major concern in conducting layoffs. Yet many times mass layoffs are conducted either through an across-the-board policy or one that attempts to lay off staff in reverse order of seniority. Both policies can be defended on the grounds of fairness or equity from an employee-relations perspective. However, they both come up woefully short when held up to a standard of business rationality.

A smarter approach is to first to consider the needs of the company when faced with the pressure to lay off staff. Specifically, managers should ask, “What’s in the best interest of the business?” when considering options. In terms of human capital, the question boils down to, “Which employees have the mission-critical skills and where are they?”

The decision maker must determine quickly who is needed to fulfill the primary tasks of maintaining the organization and running the business. This does not mean creating wish lists or putting together generalities. Rather, it means that department managers should make some timely choices of who goes and who stays based on tough business priorities. Following is an example that’s a compilation of how cuts are handled based on the experience of a number of businesses.

The department is an information technology (IT) unit that services a property and casualty insurance company. A mission has been undertaken to turn the company’s poor financial performance around. The CEO has asked all unit managers (including IT) to come up with a plan for cutting salaries by 30 percent within the month. The department consists of 16 full-time employees and provides two kinds of services to the insurance company’s line of business (LOB) organization: (1) providing new software installation, upgrading, and maintenance, and (2) supporting customer service primarily through troubleshooting problems as they develop.

The manager has already identified across-the-board costs to cut (discussed in Chapter 4). He knows how to cut roughly 5 percent of the 30 percent of the costs that must be removed. But he also knows that 25 percent more will have to come out later. Eliminating those costs will involve decisions about people. So he has reached the stage where he must choose those who will stay (either as full-time employees or part-time employees in some other work arrangement) and those whom he will have to fire.

The manager needs to take a few minutes to compile a list of strategic and process competencies for the IT department (as shown in Table 6-1). Strategic competencies define how a business will achieve and sustain a competitive advantage in its market. In this case, the insurance company has pursued two strategies: (1) a reputation for highly customized insurance products and (2) rapid, flawless customer service. These two strategic competencies are the basis for building competitive advantage. He needs to ask, “What strategic and process competencies does the IT department need to accomplish this strategy?” The answer is listed in Table 6-1.

Note, for example, that if the insurance company achieves and maintains a reputation for customized financial products and customer service, it will need state-of-the-art information technology from the IT department. It will also need an immediate response from IT when troubles crop up or systems go down.

Two major processes contribute to support the company’s strategy. The first is state-of-the-art technology. IT must assure that all information systems (hardware and software) are current. That requires continuous research and upgrading of systems.

Table 6-1: Strategic and Process Competencies
Level		Competency
Company strategy	Key to competitive advantage	Reputation for customized financial products Customer service
IT department	Key to supporting competitive	State-of-the-art technology
process	advantage IT department competencies:What people do	Internal customer service Software languages Operating systems Hardware systems Databases Applications Network administration Project management

The second process is customer service. The insurance company will require that IT deliver flawless customer service. It will need to deliver uninterrupted high-quality service to keep systems up and running and to troubleshoot and bring systems back quickly to top working order.

The manager must define process competencies first and then define the critical activities required to accomplish the department’s objectives. Taking matters a step further, managers should ask, “What will it take on behalf of our people to assure state-of-the-art technology and rapid customer service to the LOB internal clients (e.g., insurance operations and policy service)?” To answer this question, managers need to determine what competencies are demanded in terms of the skills people actually need and find out who has them. The answer is in the lower right side of Table 6-1:

Software languages: Proficiency in basic languages to develop software.
Operating systems: Proficiency in customer operating systems.
Hardware systems: Proficiency in customer platforms.
Databases: Proficiency in databases to support applications.
Applications: Proficiency on customer-driven applications.
Network administration: Proficiency in developing and maintaining systems on the network.
Project management: Proficiency to manage project teams.

Staff will have to be proficient in software systems and operating languages. They will need hardware and database skills. They will have to know how to manage networks flawlessly. And they will need to be capable project managers, which means that they will have to know how to bring in tasks on budget, with quality results achieved on time.

Once process competencies have been identified, managers must use them to assess employees in the department in order to find people who most closely meet them. These are the people most critical to the mission and who will be considered foremost for retention when cost-cutting decisions are made.

By examining the department’s processes closely, the manager forces herself to address what goes on in the IT department and what people actually do. This discipline helps to establish the priorities, which become the business-related basis for making choices about who goes and stays.

The next task is to determine who in the department has these process competencies and how they can best be employed, given the costs that have to be removed. The analysis in this step will prepare managers to decide who will stay as full-time employees, who will be allocated to an alternative work arrangement, and who will be laid off.

Note how different this procedure is compared to traditional layoffs. In contrast to the traditional practice, this approach places business needs as the primary consideration and employee considerations as a support driver. Be careful. The primary question is not, “Who has been most faithful?” or “Who is the best individual performer?” but “Who is most critical to the core business?” followed by, “Who are the best performers with respect to the core business?”

Here’s the rub, however. Some will ask, “Doesn’t loyalty count for something or anything any longer?” Yes, but managers will have a conflict if they keep people based on their time with the organization. Managers face important choices. They can keep people who are loyal, long-term employees, but these are not necessarily the ones most capable of turning around the business. Or they can choose the players who have the greatest chance to turn the company around irrespective of past service.

Here’s another key question, “Doesn’t merit count anymore?” Yes, but it is not sufficient. Again, it will not help the company to retain its best performers if those with a previous history of good performance do not happen to have the skills needed to survive and thrive in the future.

In reality this is not a clean or easy decision. In fact, the best managers must balance all the considerations of who is most skilled, who puts forth the extra effort, and who are the most committed, long-term contributors. Achieving the right balance among these criteria requires a prioritization that goes something like this:

First, who has the skills needed to maintain the mission and core operations?
Second, within this group, who are the best performers?
In the same group, who are the long-term contributors?

The answer to these questions will yield the people who should be kept first and foremost.

Making the decision of whom to keep, cut, and assign to alternative work arrangements requires weighing many different criteria and applying judgment and wisdom. The judgment and wisdom surface most importantly when dealing with loyal, long-term employees who do not have the skills to lead the company into the future.

In a period of low unemployment and numerous job opportunities, an ample severance package will support a laid-off employee for a reasonable time during a job search. Even in good economic times, however, the stress that comes with having to terminate an employee coupled with the onus of knowing the shame and loss of self-esteem often disturbs managers so much that they will try to avoid a serious human capital assessment. Instead, they adopt rules of thumb to sidestep such judgments. For example, the “last-in, first-out” approach basically gets managers off the hook from making tough decisions about skills and performance levels.

In addition fair employment practice rules and regulations must be factored into these decisions. Companies need to consider the risk of costly violations of fair employment practice laws (e.g., Title VII of the Civil Rights Act, Age Discrimination in Employment Act, WARN, etc., which will be covered in Chapter 9).

The following six guidelines for human capital decision making will greatly increase opportunities for success:

Employ decision-making criteria that are defensible and based on business relatedness. Skills and competencies that are related to executing strategies are clearly business related and defensible on their face. The same is true for decisions based on job or task performance. However, the whole area of personal characteristics and traits such as energy, drive, and attitude is troublesome and subjective. Judging differences between people on these types of criteria is hard to document, defend, and explain. It makes more sense to stick to the most objective criteria possible, which involve issues directly related to business success. For example, specify skills in terms of on-the-job work performed or successful completion of job-related tests of skills. Or use performance ratings that are based on job-related work.
Communicate the plan for the human capital analysis to all employees. This period of time is incredibly stressful. Managers are reluctant to talk about the process because they probably do not know how it will end up—who will stay and who will go. Consequently, everyone is tight lipped. It is possible to communicate the process without dealing with the results that are to come on an individual level, and that is exactly what should be done. This should include steps and timetables. This approach will actually be a boon to managers because it will take some of the pressure off them and provide a frame of reference for questions posed.
Educate managers on the tasks ahead and the pitfalls to avoid. Along with communication to all employees, special background information should be provided to managers. Subjects should include:
- The process the company is going through and how to manage it.
- Tips for coaching and counseling.
- How to get assistance in dealing with distraught employees (if necessary).
- How to conduct the headcount analysis.
This background material can be communicated either in written form or in up-front training or coaching.
Ensure that personal biases do not enter into human capital decisions. A company manager may be unconsciously biased toward one employee or another. This may be due to personal likes (or dislikes) that are the result of previous social encounters. Bias can also be the result of stereotypes people have based on personal beliefs and lack of knowledge. That’s why it’s important to stick to judgments based solely on criteria relevant to the job and the company and not on personal biases. Managers must essentially erase such potential biases from the task at hand when making human capital decisions to ensure future company success.
Develop a complete profile on each employee and use the same criteria for assessing all employees. To be totally consistent, each employee should be reviewed in exactly the same way using the same criteria. Additionally, complete documentation should be collected for every employee. The best defense for any claims of unfair treatment is demonstration of a thorough and completely documented analysis based on business-related criteria.
Take a “snapshot” of the employee base before and after you make human capital decisions . Compare the work force differences as a check on your decisions. When the manager is done with the analysis, he or she should take a before-and-after look at the decisions that have been made. Is there a pattern of bias against any particular EEO protected group? Is there an implication of favoritism? Would an outsider question these decisions on a common sense basis ? If the answer is “yes,” then the manager should make sure that the treatment of employees can be defended on business-related criteria.