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The Human Equation: Building Profits by Putting People First by Jeffery Pfeffer

The Human Equation: Building Profits by Putting People First by Jeffrey Pfeffer (345 pages, Harvard Business School Press, 1998)

(originally published by Booz & Company)
If you had been given a dollar every time you heard chief executive officers or senior managers talk about their "people-centered strategy," you would probably be very rich. I would be. The downsizing, rightsizing and re-engineering of the 1990's brought a fierce public reaction and an unprecedented boardroom response — in annual reports, public speeches and briefings to journalists — that praised these companies' "most important assets."

You could make a second fortune by spotting examples of such rhetoric falling well short of reality. Many a board took short-term actions to please the investment community. Less noticeable were rebukes, such as one noted in Jeffrey Pfeffer's book, of a Harvard M.B.A. student's extraordinarily insensitive description of junior managers at a chain of bakery cafes as "gerbils running around in a wheel in a cage." In a discussion about a new bonus system the company was planning to introduce, this same student reputedly asked, "Why should we give them more pellets?"

Mr. Pfeffer, the Thomas D. Dee Professor of Organizational Behavior at the Stanford Graduate School of Business, may not see villains quite like this in every American corporate boardroom, but he is pretty scathing about prevailing management practices and the tendencies to outsource unthinkingly, to treat businesses like portfolios of assets and to shrink companies to profitability. His concern is not so much with the gap between actions and words, with hypocrisy and double standards, as it is with the unwillingness of corporate managers to confront what he contends is a large and growing body of evidence that "high-commitment work practices" benefit the bottom line and lead directly to organizational success. A large part of The Human Equation, which extends the ideas in Mr. Pfeffer's 1994 book Competitive Advantage through People, therefore, concentrates on piling up these research results with case studies to make his point.

Managers, Mr. Pfeffer says, frequently misunderstand the sources of corporate success. Contrary to conventional wisdom, he observes, there is nothing magical about being in the "right" industry, about being large, about being global or even having a barrier to competition in the form of some technological edge or brand equity. With the right attitude to people, his message runs, you can be successfully small, local and "low tech."

The book's centerpiece describes seven practices he says are found in most successful organizations (based on research in a wide range of industries in more than 20 countries):

1) Provide employment security. Employees surely can be fired if they do not perform, but they should not be put on the street quickly because of economic downturns or strategic errors by senior management over which they have no control. An example he frequently cites is Southwest Airlines, which sees job security as a vital tool for building employee partnership and argues that short-term layoffs would "put our best assets, our people, in the arms of the competition."

2) Use different criteria to select personnel. Companies should screen for cultural fit and attitude, among other things, rather than just for skills that new employees can easily acquire through training.

3) Use self-managed teams and decentralization as basic elements of organizational design. Mr. Pfeffer is particularly keen on the way teams can substitute peer-based control of work for hierarchical control, thereby allowing for the elimination of management layers.

4) Offer high compensation contingent on organizational performance. High pay can produce economic success, as illustrated by the story of Pathmark. This large grocery store chain in the Eastern United States had three months to turn the company around or go bust. The new boss increased the salaries of his store managers by 40 percent to 50 percent, enabling them to concentrate on improving performance rather than complaining about their pay.

5) Train extensively. The author notes that this activity "begs for some sort of return-on-investment calculations" but concludes that such analyses are difficult, if not impossible, to carry out. Successful companies that emphasize training do so almost as a matter of faith.

6) Reduce status distinctions and barriers. These include dress, language, office arrangements, parking and wage differentials.

7) Share financial and performance information. The chief executive of Whole Foods Market has said that a high-trust organization "can't have secrets." His company actually shares salary information with every employee who is interested.

Not one of these ideas is new, but Mr. Pfeffer's case for espousing them — in battalions and not singly — is passionately argued and deserves serious consideration from every responsible and thoughtful chief executive. The problem lies in the way he overplays his hand.

In the United States, for example, the author says that "the Dunlap style is increasingly in vogue," a reference to "Mean Al's" deep cuts at the Scott Paper Company and the Sunbeam Corporation and the legions of imitators supposedly queueing up on Wall Street and the smarter business schools. This makes for a more dramatic story, but it seems to be one of Mr. Pfeffer's wilder generalizations. His assertion, moreover, that current United States economic success and competitiveness are largely "in spite of" rather than "because of" current management practices would seem to imply that restructuring can be achieved without tough and sometimes painful choices.

Then there is the question of the book's subtitle: Building Profits by Putting People First. Of course people are important; without them strategies would not be implemented, customers would not be delighted and innovations would never happen. All non-human assets, moreover, are relatively easily tradeable in the marketplace and offer no more than short-lived competitive advantage.

I am uneasy, however, with the way Mr. Pfeffer approvingly quotes Richard Branson's statement that "the people come first, the customers second and the shareholders third." (Mr. Branson, the entrepreneurial founder of Virgin Records, Virgin Atlantic Airways, and other ventures, remember, once had the luxury few enjoy of dumping his shareholders.)

No one on either side of the Atlantic seems to have fully reconciled the stakeholding philosophy with the strong pull of shareholder value. The trick, it seems to me, is to try to convince all stakeholders that they are equally important (they are, at any rate, all indispensable in their own ways) and surely not to allow the claims of any one of them to predominate too strongly or for too long. When it comes to employees, there is a fine dividing line between complacency and security, a fine balance between the power of a stable and well-integrated team and the need to adapt quickly to shifting markets and developing technologies through outsourcing and, if necessary, lay-offs. In such an environment the "new employment contract" — developing employees through challenging assignments rather than providing a job for life — is surely unavoidable.

There is much in this book that is good and uplifting. Yes, companies are often gratuitously mean to their employees — and that is dumb. Yes, they do hide behind the smokescreen that training benefits are hard to measure. And yes, prevailing wisdom and culture in organizations is often wrong. I particularly liked Mr. Pfeffer's quotation at the end of the book from a Boise Cascade Corporation manager: "You have to do your job like you are independently wealthy; then you can do the right things all the time."

That said, like many management books, The Human Equation is better read for insights along the way than for a convincingly rounded message.

Tim Dickson, formerly the management page editor of the Financial Times, is publisher and director of the FT Mastering Management Review, a monthly journal published by the Financial Times Group. He is based in London.
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