Jeffrey Pfeffer, the Thomas D. Dee Professor of Organizational Behavior at the Graduate School of Business at Stanford University, has spent his career studying people and organizations around the world in an attempt to understand why some companies win in the marketplace while others do not fare as well.
Professor Pfeffer's conclusion at first may seem obvious. What differentiates high-performance organizations from others, he says, is the way they treat their people.
High-performance organizations have "people strategies" that reward teamwork, commitment, excellence, integrity and other winning behaviors.
In one high-performing organization that Professor Pfeffer studied, an individual who excelled at his job was eventually dismissed because he did so at the expense of his colleagues.
In other organizations that Professor Pfeffer has examined, the lack of an adequate people strategy caused a downward spiral in overall performance. Downward spirals and other manifestations of poor performance can be corrected, Professor Pfeffer says, by giving an organization's people strategy the right level of attention.
People matter, the professor argues in his latest book, "The Human Equation: Building Profits by Putting People First" (Harvard Business School Press, 1998), because they are the organization and embody its aims.
Treat them correctly, give them the tools, training and incentives they need to do their jobs, and they will excel. Pit them against each other and make them feel unwanted, and they will maximize their own chances of survival to the detriment of the organization's overall aims and the aims of their colleagues. And while the trends may be away from job security, loyalty and long-term employment, the companies that fare best in today's hyper-competitive environment tend to be those in which the workers feel most secure.
This is not idle chatter or New Age banter. Most of the companies in which superior shareholder value is consistently created are those that have an effective people strategy. Organizations that regularly outperform their rivals do so because they are better at capitalizing on the talents of their work force. The human equation is the most important equation to get right, Professor Pfeffer maintains.
But how do you create a high-performance organization? And what exactly are the essential elements of a people strategy?
What follows are excerpts from a recent conversation with Professor Pfeffer.
S&B: Your new book explains why shareholder value is dependent on a company's people, and not just on its systems, strategy and structure. Just how does the "human equation" relate to the creation of shareholder value?
JEFFREY PFEFFER: At the end of the day, shareholder value is determined by a company's profitability and its ability to generate exceptional economic returns over a sustained period of time. Its ability to generate those exceptional returns in a knowledge-based economy is dependent, in large measure, upon its ability to attract, retain and develop the right work force -- and whether it succeeds in unleashing their mental capacities.
Treating your people well produces lots of things, including a higher rate of retention, an easier time of attracting other people and more development of skill, as well as the ability to utilize that skill. And all of that produces a number of other outcomes, including higher levels of customer satisfaction and higher levels of performance.
S&B: You use the term "people-based strategy" to describe the approach that is needed to achieve those results. But most companies don't think in terms of people strategies. They think of people in terms of the functions they can perform -- they think function first, people second. How does your approach change that?
JEFFREY PFEFFER: A people-based strategy says that, to be successful in my business, I need to have a superior work force and capture all the knowledge and skills of these folks.
Let me give you an example. The SAS Institute was No. 3 on Fortune's list of the 100 best places to work in America. It's this weird and lovely organization in North Carolina that is the largest privately held software company in the world, with revenues last year of three-quarters of a billion dollars.
I asked Jim Goodnight, who runs SAS, how he rates his top people. "I evaluate my managers, fundamentally, on the attraction and retention of outstanding talent," he said. And I looked at him and kind of raised my eyebrows. "Look, we're in the knowledge business," he continued. "If we get and retain and motivate the best brains, the rest -- the product development, the numbers, everything else -- will take care of itself."
Let me give you another example, involving the Men's Wearhouse and its unusual commitment to training. I visited the company's training center, which it calls Suits University, in Fremont, Calif., with George Zimmer, the company's founder and chief executive, and Charlie Bresler, senior vice president for human development.
And Charlie Bresler stands up in front of everyone and asks, "What business are we in?" Everybody says, "We're in the men's clothing business." And he says no. And somebody says, "We're in the tailored men's clothing business." He says no. Somebody else says, "We're in the men's formal wear business." He says definitely no. Finally, there is silence. Then he says, "What's my title? Senior vice president for human development. And that's the answer. We are in the people development business."
In an industry, retailing, where there's extensive use of part-timers, enormous levels of turnover and almost no training -- even in companies such as Nordstrom -- "we have taken a different tack," he says. He describes a covenant: "Our deal is we are going to build you, we are going to develp your human potential and, along the way, we're going to teach you how to sell men's clothing. In return, you will provide great service and help develop the firm. The two things come together, and that's the key to our success."
S&B: It's all well and good to say that you should have a people-based strategy. But how does it work? Do you have to think about structure and organizational charts in a different way?
JEFFREY PFEFFER: Yes. Obviously, at some point you have to have an organizational design, though some of these organizations are relatively loose. You begin by asking, what do I have to do in order to attract, retain and develop people? And so you ask, what do I need to offer them in terms of a job and work environment, including the types of benefits and other kinds of accouterment? And what kind of a work system, or structure, will make them really want to stay?
Ask all the people who work at SAS Institute: Why, in an industry where the typical turnover rate is 20 percent, is the turnover at your company just 3 percent? One answer is that this is an organization that has very little structure. Jim Goodnight has 27 direct reports. There are only three layers in this organization of 5,000 people.
And people are able to move easily from being individual contributors to having manager roles and back. I talked to a guy who had been there 17 years, and over that period had gone from being basically a software developer to a manager of software developer teams to back to being a developer with no management responsibilities. People are able to start new projects and new products, in the video game operation today, perhaps, and educational software tomorrow.
The key to retaining employees is obviously going to differ, depending on the type of business. But in this case, it comes down to figuring out how to keep software people happy and engaged. At SAS, that means having a very fluid structure, enormous accessibility to management and a policy that says if John Smith, software developer, wants to work on a particular project, he can do it.
It's obviously a very fluid situation -- and the right answer for Men's Wearhouse, say, would be very different. But the focus would be the same, on people attraction, retention and development and the harnessing of their ideas and their energy. The structure and the systems that are needed are centered on, and organized around, that core set of objectives.
S&B: How do you measure performance when a people-centered strategy is applied?
JEFFREY PFEFFER: It depends again upon the business. Each company is going to have a slightly different set of metrics, depending upon its particular business and what it is trying to do. At the SAS Institute, for example, they take very seriously the measure of employee retention.
The Gallup Organization, which has done a lot of employee surveys at varying companies, uses a series of 13 questions that it says are enormously predictive of a number of organizational performance measures.The 13 questions measure individual attitudes and perceptions, not just job satisfaction. Do you know what the organization's goal is? Do you know what you're trying to achieve? Are you given feedback and coaching?
You could take every one of the seven practices that I think are key to a successful organization -- employment security, selective hiring, self-managed teams/decentralized decision-making, high compensation linked to organizational performance, training, reductions of status differences and sharing information -- and construct the questions that would measure the extent to which they are being achieved. Are you, in fact, working in teams? Are you given sufficient information and do you know what you're trying to do?
Whole Foods Market uses a survey of all of its people in all of its grocery stores. Are we living up to our values? Are we living up to what we're trying to do?
So there are a variety of metrics that could measure this stuff.
S&B: There's a lot of talk now that messy is better, so to speak, that clean lines reporting and very well defined distinctions between job descriptions are the signatures of an organization in decline. But messy, where you have creative people moving from one job to another, is also threatening to a lot of managers. How do people make that transition, and make certain that they will get results if they do?
JEFFREY PFEFFER: One of my favorite organizations is AES, the independent power producer. It actually practices participative decision-making the way it ought to be done, as opposed to the way it typically is. You know that way: "Joe, I want your advice," and then I go ahead and make the decision.
At AES, the people who are the leaders of the various projects, business development plans or whatever are given enormous flexibility in terms of how to do their jobs. They are encouraged to get advice, they're encouraged to talk to lots of people and they're encouraged to be creative and think outside the box. But they are also held accountable for their performance.
I do not believe it is inconsistent to say, "We're going to give you lots of decentralization and delegation, but also, at the end of the day, hold you accountable for results."
How do you do that? In every company, there are normally a set of key business drivers. At AES, if you are talking about operating an existing plant, there are some obvious key drivers. In the Men's Wearhouse, there is a very sophisticated measurement system to track how well they are doing. And you just hold folks accountable for doing well on those performance metrics.
We've gotten into a kind of confusion between controlling means and trying to hold people accountable for outcomes over a reasonable period of time in areas that are presumably subject to some influence by them. There's this tendency to say to people: "I want you to get good results. But I also want to review you along the way, I want you to tell me how you're getting those results and I want you to review all these processes and everything else."
And what that does is, it turns experts into novices. The reason is that most expert knowledge is tacit knowledge. In order for me to permit you to use that passive knowledge, I can't force you to make extremely explicit exactly what you're doing.
So I need to be clear about what we're trying to achieve and I need to share that with you; and then I need to let you go do it, and not impose all this monitoring on you along the way.
S&B: You also talk about a downward spiral that companies can get into, a cost-cutting spiral. How do you get out of that?
JEFFREY PFEFFER: The simple answer is that you get out of it by understanding the difference between cost and profits. You get into it just as simply, by not understanding that difference.
I saw this happen in the Stanford Shopping Center, where we used to have a Saks Fifth Avenue store and don't anymore, just because the store was not making its numbers and the staff got cut back.
To be sure, in the short term, the only controllable expense in most businesses, and certainly the only one in retail, is staffing.
Well, the store manager was told that she had to make her numbers. She couldn't cut her rent. And like most retailers, she couldn't affect her merchandise very much.
So all she could do was cut her people. And, of course, the more you cut your people, the fewer people there are to wait on customers. Eventually, they got to a point at Saks where you could go up to the second floor at noon and there was basically nobody there. Just about everyone was at lunch.
You see this also in the airlines and quite frequently in other service industries, where the response to a poor level of profit performance is to cut things that provide service. Then you lose your customers. And as your profits go down more, you continue this cutting.
You get out of this downward spiral by recognizing that costs are only one part of the profit equation. In addition to costs, there are also revenues. If you can add people, rather than subtract, and thereby draw more customers into the stores, you can become more profitable by growing revenues, rather than just by trying to cut costs.
S&B: So what you are saying is that if people are motivated and aligned, working together as teams toward growing revenue, then you can afford more people because their performance is higher and you can also afford to compensate them better.
JEFFREY PFEFFER: Yep. That's really the lesson of the Men's Wearhouse. What they do is what I told my students in the class I just finished teaching that you need to do, which is to reinvent businesses by changing how you think about your people. That's what Whole Foods did in the grocery business.
But let's stay with the Men's Wearhouse example. Everything that they do raises their costs. For openers, they send every new salesperson -- they call them wardrobe consultants -- to Suits University for four days. This is extraordinary training in an industry that basically gives none.
In the entire system, they have 12 percent part-time people -- you go into a typical retailer and everybody is working part time and nobody receives benefits. They also pay higher than average for the retail industry.
So here are three things: fewer part-timers, more training, higher wages. They also have a slightly higher staffing level than the typical retailer. All of this raises their costs, both in theory and in practice.
S&B: So everything is going against them?
JEFFREY PFEFFER: Everything in terms of cost is going against them. But George Zimmer says: "The question is not: What are these people costing me? The question is: What can they do?" And everything that they have done translates into their ability to generate more business and more revenue.
So, for instance, the four days of training at Suits University, and the enormous amount of followup training that they do, accomplishes several things.
You get motivated, interested people whose turnover rate is very low. They also don't steal from the store -- the theft rate is very, very low compared with the industry average. For that reason, the company doesn't use any electronic security. Some of the theft is stopped simply because there are more people. But it is also because employees who feel better about their stores don't steal -- my understanding is about 80 percent of store theft is done by workers, not by shoppers.
So No. 1, we've saved on turnover costs, we've saved on shoplifting, we've saved on security. So you're trading off -- one cost against another.
No. 2: when you walk into a Men's Wearhouse store, you are going to get waited on by somebody who is extraordinarily knowledgeable about men's clothing and selling techniques. The difference is between being served by a clerk and being served by a "wardrobe consultant." Most retailers use clerks. You come in and you say: "I want a blue blazer." The clerk puts you in a blue blazer, and maybe, with luck, you walk out with one. A Men's Wearhouse wardrobe consultant explains to you how the blue blazer could be a foundation of your wardrobe. And shows you pants that match. And gets you into a black blazer, and so on.
The Men's Wearhouse evaluates its people on sales per transaction. And they have people in the stores who are selling $7,000 to $8,000 per customer visit.
S&B: That must be off the charts compared with their rivals.
JEFFREY PFEFFER: Yes, it is. And now you see how they make money -- and how they keep making it. They encourage their wardrobe consultants to develop a relationship with you. Since there is less turnover, the next time you go into the same Men's Wearhouse store, you're likely to see the same human being whom you've seen before. And now this person understands your particular kind of body symptomology and taste and all this other stuff. Over time, these people are much better able to serve you and fulfill your clothing needs. And you are much less likely to go anywhere else.
I used to go to Nordstrom, which has fallen off tremendously. I had heard the ads for Men's Wearhouse and decided one day to try it out. Now I don't shop anywhere else.
I'm not the only one. They've got 400 to 500 stores, and they do about $1.5 million to $1.6 million per store; so annual sales are in the $600 million to $700 million range.
S&B: And this approach translates to other companies and industries?
JEFFREY PFEFFER: Absolutely. I can give you a similar story with AES with its electric power plants and I can give you a similar story with the SAS Institute. The specifics will be different, but the processes will be the same.
What you have done is invested in people in a variety of ways that have caused those people to be more productive. You've cut your turnover cost and you've cut a bunch of other costs. And your people just simply produce more because they are able to do more.
I once said to a client, "In order to get a return on your investment, it's first necessary to make the investment."
If you want a return on your investment in people, the first thing you've got to do is invest in them. You hire them and train them and develop them -- you do all the things that will cause them to have the skills and abilities and motivation to do an effective job. You can't sit there and say, "Gosh, I don't know why my people aren't doing a good job," when you haven't put anything into it. Nothing in, nothing out.
S&B: But how do you know how much to put in? Are there reliable benchmarks to measure how much input equals how much output? Is there a set of standards when it comes to people learning? Is there some ROI figure?
JEFFREY PFEFFER: In a word, no. Most of these companies do it based upon their detailed knowledge of the place. For instance, the senior management at the Men's Wearhouse, unlike the senior management at many wonderful retailers, actually believe that the key to their success is still operations. And so these guys are in the store all the time.
I have a friend who was waited on by George Zimmer, because part of their deal is that when a manager is in the store -- no matter how senior a manager -- and somebody needs to be waited on, you wait on that person. Because these folks are out in the stores -- and because they've got regional managers and the regional managers have district managers, who are also all supposed to visit the stores -- they are able to get a sense of how the salespeople are doing and how the culture is doing.
I've talked to Charlie Bresler about figuring out how much training to do. "Do you have a training budget?" I asked him. He said, "Sure, whatever George thinks we need to do, that's how much we do." And I said, "Well, how do you and George know how much to do?" "You feel it," he said. "For instance, if we were to hear from our regional and district managers and from our presence in the store that people were a little unmotivated or their spirits were flagging a little, we would know we needed to do a little bit more."
But there's no formula. I don't know anybody who is able to measure very well the return on training, including the people at Singapore Airlines, which spends 15 percent of its payroll on training, an outstandingly large number.
You do it almost as a matter of faith. You can say, "How do we know that we're not doing too much?" And you can adjust it. But it requires a sensitivity to the business.
S&B: So it's more an art than a science?
JEFFREY PFEFFER: Yes.
S&B: And what about the informal training that goes on in an organization? The experienced people have a lot of knowledge about the business and how to grow it and how to serve customers. How do you make sure that information is shared?
JEFFREY PFEFFER: This is why retention of people is so important. It takes time to learn how to run an electric power plant. It takes time to understand how to sell tailored men's clothing in a very competitive environment. It takes time to understand what it is that makes software programmers tick.
I gave a talk once in London and the theme was building organizational competence. And I said, "The oath of Hippocrates is very wise because it says, first do no harm." And so much of what organizations are doing is, in fact, very harmful.
The most harmful thing you can do is lose people. A lot of the organizational memory, culture and tacit knowledge is carried in people's heads and the more they've been in the organization, the more they understand.
Over the years, you become very skilled at what you do. But if I ask you to give somebody else a formula so that they can be as effective as you, you can't. They would have to be with you. They would have to apprentice with you. They would have to chat with you. And over a period of time, they would begin to become as skilled as you are. And that's exactly the process that we're describing in every business.
S&B: So there is the formal training aspect of transferring information, making people better and teaching skills, and there is also the informal, tacit level of training that comes just by rubbing shoulders on the job. But how do you make sure that the transfer of information is accentuated rather than inhibited? After all, in many organizations the people who can hoard information the best have the most power. In your
view, though, information has to be shared for an organization to succeed.
JEFFREY PFEFFER: What I have learned over and over and over again, and it's brought home to me forcefully whenever I visit organizations, is that individual rewards for performance are not enough. In many cases, you also need to have something, or a set of somethings, that gives people a sense that their success depends upon the success of the collective.
Some form of collective incentive system -- profit sharing, bonuses, stock ownership -- is needed so that my success does not depend solely on how well I do.
The organizations I have cited always have some collective element to their rewards. In many instances, they even do some things to de-emphasize individual performance. To go back to Men's Wearhouse, while I was doing interviews there for a case study the company fired its best salesperson, which was very traumatic for them.
This was a guy in one of their stores in the Northwest who was an exceptional salesperson. But the company's managers believe in the concept of team selling -- they believe in this idea of human development that you always succeed when your colleagues around you succeed, and that you ought to participate in all this training. And this guy said, "I'm not going to do any of this stuff."
The company's big measures are the number of transactions and the dollars of sales per transaction. This guy was way above on the number of transactions but not doing very well on dollars per transaction. What that meant was that people would come in the store and he would steal them. Finally, they said to this guy, "We want you to get with the program," and he wouldn't.
So they fired him -- and guess what? Sales in the store went up 30 percent. His replacement, of course, did not sell as much as he did. But everybody else in the store sold more. In other words, he was bringing everybody else down. And you see this in other organizations where there is one star.
At Men's Wearhouse, then, the information is transferred because the culture says that you are supposed to help other people with the sales process so that they'll help you.
I've seen this happen when I've been in these stores getting waited on. I will ask a guy a question, and if he doesn't know the answer, somebody working nearby will come over to help out. That not only helps close the sale -- it also has facilitated the learning process for the first person.
They really do have a wonderful team-selling system.
S&B: But what about functions other than sales?
JEFFREY PFEFFER: You need to make sure that there's some incentive for people to share their knowledge and wisdom. And that has to start at the top. It's one of the things I like about Whole Foods -- they've got teams from the top all the way down, and they have no secrecy from the top all the way down. So it's really very important if you're going to encourage this behavior to model the behavior.
S&B: But such a model would represent a radical departure from the status quo at many companies. It would also require putting a lot of trust in people. Don't a lot of organizations trust their existing systems of doing things a lot more than they trust their people?
JEFFREY PFEFFER: Well, a lot of organizations often don't look closely at what their systems are doing. Many companies have a performance appraisal system, for example, and a performance appraisal form. Where did the system come from? Who knows? It's been around a while. They never ask: What is it doing for us? It's like, "We do performance appraisals and this is it. And we're operating the compensation system pretty much on faith, too."
What I'm talking about is becoming more mindful, more conscious, more thoughtful about the systems and what their real effects are and how they relate to each other.
You need to ask yourself, to what extent is your performance appraisal and compensation system consistent with what you're trying to do in training? I can tell you story after story of companies that would send people off to do team building, Outward Bound and all of that good stuff. And they would come back to an organization that had only individually oriented incentives. Then management would scream at the training company, "Why didn't the training take?"
It's the interrelationship that counts. It's not about doing one thing -- the parts have to be consistent. When you walk down the street, you're not going to walk very well if one leg is going in one direction and the other leg is going in another direction.
And that's how many of these organization systems are. Often, it's because they have broken the functions up. You've got one person in HR worried about one thing and one person somewhere else worried about another thing and senior management not thinking very much about any of these things at all.
S&B: A lot of companies look at HR professionals as quite low in the organization and they are often left out of the loop, particularly when it comes to making strategy decisions. Is that one of the problems?
JEFFREY PFEFFER: It depends upon the skill of your HR people. There are some HR people for whom I think this is probably a good thing.
The real issue is senior management time and attention. One of the key roles of a C.E.O. is to visit the troops and teach the culture. That is what George Zimmer does, and what Herb Kelleher does at Southwest Airlines. It is very important to talk about the culture and embody the culture and enforce core values and norms.
That is a very different role from what the senior person is often portrayed as having. In a lot of the companies I've been talking about, however, the senior managers really are the senior people strategists and senior people officers, if you will, even if they have an HR staff. They spend their time and attention thinking about the development of people. As opposed to what one C.E.O. said to me: "I don't worry about this stuff -- I leave this for HR."
S&B: Let's say I am that C.E.O. and you have now convinced me of the error of my ways. What do I do to create a people-centered strategy?
JEFFREY PFEFFER: I would begin by asking one simple question. Given your particular business model and approach to the marketplace, what are the five or six key things that your folks have to be able to do in order for you to be successful? You'll first have to do some brainstorming with your people, of course, before you can winnow the list down to five or six things, but you'll get them.
If the company has a cost-based strategy, you're going to get one type of list. If it's a service strategy, you'll get another set of criteria. When I did this with Kaiser Permanente, the folks came up with a list of what was required to succeed in the increasingly competitive health care marketplace -- customer focus, a sense of social mission, caring and flexibility and a bunch of other stuff.
You should push people on why they think these things are related to what they need to do. Once you've got that settled, then you simply ask, "What are we going to do to produce this?"
To take the simplest example, I had a meeting one day with a group of people from a Silicon Valley company. They had done an enormous amount of pre-work. They could tell you all about the old culture and the behaviors in the old culture and why the old culture was disgusting. And they had a clear picture of the new culture and why this was going to be better, based upon business issues and turnover and a bunch of other matters.
So I said to them, "When you're recruiting a new person, do you actually think of whether this new person is entering the door more similar to the old or the new culture?" And they looked at me like this is some big revelation. I said, "If you don't recruit people who fit this new model, how are you ever going to get to the new model?"
So it begins even at the recruiting stage. It's that basic aphorism of life: You can't get anywhere if you don't know where you're going.
Once you've become enormously clear about the set of core dimensions of people and their behaviors that are required for your success, you will have the tools to improve your recruiting. If you're clearer about what you're looking for, you are in a much better position to develop a set of selection techniques and the ability to discriminate on these dimensions.
Then you ask yourself this question: "It's fine that we want these team behaviors and skills, but what are we doing in our training and development activities to build them?"
I see so many organizations that have individual training programs based on individual skills -- like time management and negotiation skills -- and that's all fine in terms of individual development. But if you don't also have some programs that build core behaviors that are necessary for your business, then you're not going to get the changes that you are looking for.
And then you ask the same question with respect to pay. How does our pay system encourage or discourage the behaviors that we want and build the skills that we want? And you go through all the various management practices and do a simple kind of logic diagnosis.
Then you have to do something that many organizations are unwilling to do -- when you find the inconsistencies, you have to make changes. You can't say, "Well, our compensation system came down with Moses on the Tablets, and therefore we're unwilling to change it even if it's producing stuff that we don't want."
S&B: It sounds as if you're saying that if you're going to change your people orientation, you'll end up changing everything.
JEFFREY PFEFFER: Yes.
Reprint No. 98308
Joel Kurtzman is editor-in-chief of Strategy+Business.