Essays

21st Century Human Resources: Employee Advocate, Business Partner, or Both?

The human resources (“HR”) field can be segmented into three eras. The first era developed in the late 19thcentury out of labor tensions as public concern grew due to the sometimes violent relations between employers and employees.[1] Some characterize HR’s beginning as a managerial function as well as a steward of the employee experience. As labor and employment laws were enacted HR was also tasked with ensuring firms’ legal compliance. Over time, HR moved into a second era where it developed knowledge in employment staffing activities such as recruitment, training, compensation, and benefits.[2] In the 1980s, the HR function was extended to include the role of strategic business partner.[3] The evolution of HR has been driven by enhanced competition for skilled employees, globalization, increased workforce diversity, and a shift to more technologically grounded positions.[4] This essay explores the tension between HR’s original role as employee advocate, and the later shift toward HR as business partner. This tension not only has important implications for employee expectations regarding how HR will serve them, but more broadly, what they expect from their firms.  The conclusion is that these tensions are so fundamental that while the HR “function” must include both, the roles of individual HR professionals should not confuse the two.

HR professionals in the third era are expected to be involved in formulating and implementing business strategy.[5] Nevertheless, HR remains little more than a cost center in many firms.[6] An efficiency-driven mindset makes little sense in companies that drive business strategy in other ways, such as through innovation. Accordingly, many do not believe HR has indeed transitioned from its traditional activities in the second era to the strategic role in the third era.[7]  It is important to clarify that the HR functional activities of the second era are still necessary for firms, but in the third era then need to be aligned with the strategic objectives of the organization. Accordingly, strategic business partners act concurrently and in parallel with the traditional HR function rather than fully replacing it.  Thus, the third era should not be viewed as replacing the second era but instead as an extension of the second era.

The two distinct roles are herein classified as “Traditional HR” and “Strategic Business Partner.” Together, these distinct but aligned roles make up the “Properly Structured HR Function.” Traditional HR’s role as an employee advocate is still alive. This advocacy role may include raising concerns about how employees will be affected when important firm decisions are being considered.  Another example would be if a firm was anticipating a layoff. Traditional HR would insist communication of the layoff to employees be timely and that forums such as town hall meetings be set up so that employees have an opportunity to ask clarifying questions. Traditional HR requires some level of strategic decision making but at a smaller degree than Strategic Business Partners.

Strategic Business Partners add value to firms by focusing on “the Business” rather than merely on “HR Business.”[8]  For example, HR Business might be a customer service representative going through twenty hours of training, while the Business relates to the goal of this HR activity, namely, firm performance. A Traditional HR efficiency focus would emphasize the cost per trainee, while Strategic Business Partners focus would include the impact on strategic success.[9] A modified statement that makes this connection would be that the twenty hours of training led to a certain percent increase in sales revenue.

Strategic HR requires that HR be equipped with the competencies associated with the business issues involved in strategy formulation and organization design.[10] Accordingly, Strategic Business Partners must not only recognize that people play an important role in the success of any firm, but which people do so and how, may vary across firms.[11] Within any business, each role has a different level of importance. Accordingly, all positions can be divided into three categories; strategic, support, and surplus.[12] With the help of line managers, Strategic Business Partners should identify which positions are strategically critical positions within the business.[13]  These positions have the most influence on the strategic success of the firm. Support positions have an indirect strategic impact on the business by supporting the strategic positions but surplus positions have little strategic impact.[14]

Similar to the differences in positions’ importance, no two employees are identical. Each employee holds a different place along spectrums of ability, engagement, and aspiration. Inevitably, some employees will have the right combination of these attributes to make meaningful contributions to the firm. Some academics have called the employees with these attributes, “A Players.”[15] Strategic Business Partners must identify who these “A Players” are within the firm, which will likely be less than 20% of employees.[16] While HR may be viewed as a hub for talent management, line managers are critical in the process of identifying and developing the “A Players” by evaluating employees’ performance and potential. Strategic Business Partners should then work towards matching the “A Players” into the strategic positions if they are not already in them.[17]

While Traditional HR continues to act as an employee advocate in its own way, Strategic Business Partners act as employee advocates within a new meaning.  In this sense, employee advocacy means allocating more time and resources to “A Players” by providing them with stimulating work, recognition, differentiated compensation, and additional training.[18]To achieve this goal, Strategic Business Partners must solicit support and align Traditional HR functions with Strategic Business Partner advocacy for “A Players.”[19] For example, the Strategic Business Partner might request Traditional HR to assemble the best compensation packages in order to retain the “A Players.”

In effect, the Properly Structured HR Function has a tiered system of time and resource allocation. Traditional HR provides the classic role of employee advocacy for employees in the support and surplus roles. Employees in strategic positions receive the same support the employees in the support and surplus positions receive from Traditional HR as well as additional support delivered by Strategic Business Partners. Otherwise put, the additional resources and time that “A Players” receive is another layer of employee advocacy in order to enhance their firm-specific skills.

The Properly Structured HR Function is likely only realistic for large firms and may vary by design between industries. Strategic Business Partners may spearhead HR strategy in organizations large enough to have such roles but line managers must be included too. HR processes should be driving business processes to create firm value.  It is of course difficult to evaluate how far HR has extended into the role of Strategic Business Partner.  Future studies should evaluate how much the paradigm has shifted from a pure HR efficiency mindset to also including value adding strategies. Firms solely focused on cost reduction have room to extend farther into the role of Strategic Business Partner. ℵ

Chris Maugans, Esq. graduated in May 2014 from the University at Buffalo with an M.B.A. and J.D. His business studies focused on human resources management while his legal studies focused on labor and employment law. He currently works in a dual human resources and legal role at Erie Community College and serves as Legal Counsel for the Buffalo Junior Chamber of Commerce.

  • [1] Gould, W. B., IV. (2004). A Primer on American Labor Law (4th ed.). Cambridge, MA: The MIT Press.
  • [2] Kaufman, B. E. (2001). Human resources and industrial relations commonalities and differences, Human Resources Management Review, 11, 339-374.
  • [3] Ibid.
  • [4] Brockbank, W., Ulrich, D., Ulrich, M., & Younger, J. (2012). HR from the outside in: Six competencies for the future of human resources. New York, NY: The McGraw-Hill Companies.
  • [5] Lawler, E. E., III & Mohrman, S. A. (2003), HR as a strategic partner: what does it take to make it happen? G 03-2 (430) Center for Effective Organizations. http://ceo.usc.edu/pdf/G032430.pdf
  • [6] Hammonds, K.H. (2007). Why We Hate HR, Fast Company, Retrieved from http://www.fastcompany.com/53319/why-we-hate-hr
  • [7] Ibid.
  • [8] Brockbank, W., Ulrich, D., Ulrich, M., & Younger, J. (2012). HR from the outside in: six competencies for the future of human resources. New York, NY: The McGraw-Hill Companies.
  • [9] Ibid.
  • [10] Lawler, E. E., III & Mohrman, S. A. (2003), HR as a strategic partner: what does it take to make it happen? G 03-2 (430) Center for Effective Organizations. http://ceo.usc.edu/pdf/G032430.pdf
  • [11] Barney, J. B. & Wright, P. M. (1997). On becoming a strategic partner: The role of human resources in gaining competitive advantage (CAHRS Working Paper #97-09). Ithaca, NY: Cornell University, School of Industrial and Labor Relations, Center for Advanced Human Resource Studies. http://digitalcommons.ilr.cornell.edu/cahrswp/150
  • [12] Beatty, R. W., Becker, B. E., & Huselid, M. A., (2005, December). A players or A positions? the strategic logic of workforce management. Harvard Business Review, 110-117.
  • [13] Ibid.
  • [14] Ibid.
  • [15] Ibid.
  • [16] Ibid.
  • [17] Ibid.
  • [18] Martin, J. & Schmidt, C. (2010, May). How to Keep Your Top Talent, Harvard Business Review, 55-61.
  • [19] Becker, B. E., & Huselid, M. A., (2001, June). The Strategic Impact of HR. Balanced Scorecard Report. Boston, MA: Harvard Business School Press.

Effective Employee Incentive Plans: Features and Implementation Processes

A 2007 WorldatWork survey found that 70 percent of compensation professionals believe that incentive pay is “important or very important” to the success of their organization.[1] The economic downturn has accentuated the need to contain compensation costs by holding down fixed-based salary expenses. To maintain competitive pay plans, an increasing number of companies are giving more employees across different job functions the opportunity to earn variable, performance-driven incentives for achieving individual and organizational goals.[2]

This paper will evaluate the effectiveness of broad-based employee incentives, identifying the features of effective plans. For our purposes, “broad-based” is used to signal that more than 50 percent of employees are eligible for this variable pay plan.[3] In addition, the terms “variable pay plan” and “pay for performance” are used interchangeably as they appeared in the original sources.

Effectiveness

Recruitment and Retention Effects

Implementing a pay for performance system has been shown to resolve organizational problems because it aligns the preferences of firms and employees. In addition, creating a pay for performance system serves as a sorting mechanism to identify and attract the most capable employees. This type of system has shown that individual pay incentives significantly improve productivity.5

Pay for performance systems have further been proven to have two advantages for organizations: attracting more high-quality employees and motivating employees to exert more effort at their jobs. There is some risk involved with pay for performance systems, and the incentive effects of the system may negatively impact risk-averse employees since they have a fear of failure under this plan.[4]

Productivity Implications

Daniel Pink, author of Drive: The Surprising Truth about What Motivates Us, asserts that using “carrots and sticks” to motivate is counterproductive to motivation and productivity. Companies that have switched from salaries to individual incentives have increased productivity dramatically—some by as much as 44 percent. Linking pay to performance not only motivates but also helps to recruit and retain the most talented employees. New graduates seek to join organizations that make use of performance-related rewards, and they have long-term loyalty to these organizations.[5] The use of variable pay has also grown in popularity, as 67 percent of companies offer some form of variable compensation to employees below the executive level. Likewise, the practice of compensating managers below the senior executive level with stock options and other forms of long-term incentives has risen dramatically. This is because performance-sensitive pay aligns the interest of all levels of employees with the interests of shareholders.[6]

Features of Effective Plans

Top Management Support

Supervisors must understand the incentive pay process in order to support and administer it. Oftentimes, a lack of understanding causes managers to ignore or adapt the process as they see fit. Moreover, if supervisors are not trained on how to measure performance, the process will not be standardized across the company.[7]

Having buy-in from key stakeholders is crucial for the success of an incentive pay system. For example, if top management does not support such a program, lower-level managers will place little importance on effectively administering the program. Hence, a lack of top management support often leads to a lack of accountability.[8]

Communication

Consistent and methodical communication is necessary when implementing an incentive pay plan. It will ensure employees understand what is expected of them while decreasing the likelihood of morale problems that result from misinterpretations of how incentives are awarded.[9] Furthermore, one survey found that just 25 percent of respondents communicate to specific employee groups, but of those that did, 74 percent said it was either an effective or very effective strategy.[10] American Airlines used effective communication to successfully implement its compensation plans, as discussed later in this report.

Performance Management

Oftentimes, a flawed performance management system is the main reason an incentive pay system in not successful. When designing a performance management process that will be linked with pay, it is imperative that both employees and managers know what the individual goals are, how they will be measured, and how they will be compensated when achieved.

Managers must also be careful to ensure that there is adequate differentiation between high and low performers. If mediocre employees are given an average merit increase, they will perceive that their performance is adequate. Conversely, if excellent performers only receive a little more in incentive pay than average performers, they will perceive that the company does not value their performance.[11]

Appropriate Rewards

The amount of incentive a company should offer to an individual depends on current income, amount of effort needed to invest, likelihood of obtaining the reward, acceptance of risk, equity of reward and contribution, and industry standards. A minimum for incentive pay is considered to be 5 to 15 percent of an individual’s base pay.[12]

Considerations before Implementing a Plan

The best compensation plans take into account several key considerations. Before instituting a pay for performance system, companies should define which employees should be eligible for the program. Furthermore, it is important for companies to determine the role of equity in a total rewards framework from the perspectives of the employee and employer, as well as in terms of cost. Steps should be taken to (1) review the current objectives and purpose of the equity plan; (2) identify alternative rewards; (3) develop a communication plan for how the effectiveness of the program will be measured; (4) gather employees’ perspectives via surveys, focus groups, or internal research; (5) gather external market information; (6) determine the costs; (7) develop recommendations for design change; and (8) create the communication plan. The communication strategy for the program should encompass the value employees place on various rewards and how the changes will be perceived by employees. It should then monitor and manage employees’ reactions to the changes in their compensation structure.[13]

Objectives of a Broad-Based Incentive Plan

When creating an incentive plan, the organization has to determine and clearly define the goals for the program. The objectives should be aligned with the business strategy. These goals should be utilized to shape the incentive plan as well as the expectations and objectives of individual employees.[14] A main reason why incentive plans fail is because they are introduced as an inflexible process.[15] The incentive plan should be first implemented on a small group of employees in order to determine the flaws and rectify them before implementing them across the enterprise. Once the plan is implemented, it should be regularly adapted.[16]

If companies want a pay for performance system, the firm should define the desired performance and establish methods of measuring it first. Then, connect goals for individuals, for business units, and for the company. Meanwhile, track everyone’s progress and periodically give back the data to raise everyone’s awareness of the program.[17] Sixty-two percent of compensation professionals report that their organizations did not attempt to measure the return on investment of their compensation program.[18]

Degree of Uncertainty

In addition, organizations must consider the degree of uncertainty when implementing a pay for performance plan. When the firm’s earnings are highly variable, too much uncertainty associated with the realization of outcome-based incentives can cause employees to reduce effort or take actions designed to reduce the variability of their pay. It is best when organizations have compensation systems that have components of both high base pay and high variable pay.[19]

The amount of line of sight employees have influences their motivation and how well they respond to a pay for performance system:  the employees who have closer line of sight feel more empowered and view the pay for performance system as fair and equitable.[20] Studies have shown that in order to make a pay for performance system most effective, a pay guarantee that pay for performance earnings cannot fall below fixed salary earnings should be put in place. This mitigates the risk associated with a pay for performance system and will ensure that even the most risk-averse employee’s performance will not suffer due to the system.[21]

Case Study

American Airlines introduced broad-based variable compensation plans that are designed to allow all employees throughout the company to participate so the entire organization can share in the success. There are two components to the incentive plans—accomplishment of goals related to customer service and financials. American Airlines managers sought input from employees, the unions, and the Board of Directors to create these broad-based variable compensation programs. When employees achieve the customer service goal, they receive a $50 reward each month. For non-management, support staff, and other lower level employees, awards under the financial component—in combination with the customer service awards—provide total annual plan payouts ranging from 2.5 percent of eligible earnings at threshold, 5 percent of eligible earnings at target, and 10 percent of eligible earnings at maximum.[22]

Conclusion

Research indicates that broad-based incentive plans can be utilized as a means to encourage both employee performance and productivity. When implementing an incentive plan, several considerations are needed to ensure the plan is successful. However, it is important to note that incentive plans cannot ensure employee productivity by themselves. They must be coupled with effective human resources practices in order to ensure a successful work environment. These include determining the appropriate rewards, instituting comprehensive performance management systems, widespread and effective communication, as well as buy-in from top management to support the compensation plan.

Over the past decade and increasingly in the past year, variable pay has become the standard as companies reward strong performance and lower overhead costs. This trend is expected to continue in the coming years.[23] ℵ

Allison A. Gordon is a recent MILR graduate of the School of Industrial & Labor Relations at Cornell University. She will be joining Motorola as a Senior HR Advisor.

Jennifer L. Kaswin is a student at Cornell University, pursuing an MILR at the School of Industrial & Labor Relations.