Jeffrey Pfeffer, Ph.D. Author, "The Human Equation"

Bowen:     Are people angry in the workplace .

Pfeffer:    Well, it depends upon, of course, the workplace. Nobody at Southwest Airlines is angry. Southwest Airlines is listed in Fortune Magazine's most recent issue as the number best place to work in America. People at the Sass Institute are, I'm sure, not angry. That's another great place to work. There are people in some workplaces who are clearly angry. There's even an expression for it which is I guess called "going postal" after the violence at the postal service. There is workplace violence. I've seen statistics which indicate that co-worker violence in the workplace is actually a substantial cause for death for people in that age group. And certainly there is evidence that people in at least some workplaces are not particularly happy and not particularly trusting of their organization. But I must emphasize again that this does not characterize every workplace in America. There are great companies that are treating their people with respect and dignity and building a competitive advantage through how they manage their people.

Bowen:     Dr. Pfeffer, in your opinion, are people more fearful and angry today than they were, say, ten years ago?

Pfeffer:    There are certainly problems in the American workplace today, in the sense that even as companies have talked about the importance of building human capital and the importance of people for their competitive success, they have in many instances done things that have destroyed loyalties in the connections between people and their organizations. And these actions, of course, have left many people, I wouldn't necessarily say more fearful, but certainly more anxious and more uncertain about what their work life is going to hold for them in the future.

Bowen:     People have lost jobs in the past. We've certainly seen large numbers, in the thousands. This is a result of what we now call downsizing. This is nothing new. What makes the situation different today then from an earlier time?

Pfeffer:    Well, that depends on what you mean by an earlier time and how much earlier. There certainly is nothing different today than what there was three or four or five years ago. But certainly 15, 20 or 25 years ago, there was in the United States an expectation that when you went to work for an organization as long as you did a good job and as long as the organization did reasonably well, you would have a career in that company. And today, I think the difference is, first of all, that idea of a long-term career has been severed. And not only that. Companies are today downsizing, not because they're under financial stress, but simply to increase their profits in the immediate term. And so there is less of a reason for them to downsize and there is less of this kind of long-term expectation of a career.

Bowen:     It sounds like the downsizing is a practice that is in vogue. Are you suggesting that this is more fashionable than it is necessary?

Pfeffer:    Yes, certainly very fashionable. You just need to look at the short-term stock market reaction to downsizing announcements. And I would emphasize short- term because the evidence suggests that over the long-term companies that down-size actually under-perform other companies in their industry and the market. So there is certainly an element of fad and fashion to the downsizing and to the use of contingent and part-time work as well.

Bowen:     Well, to support you point, there was an article in the Wall Street Journal that in fact indicated that less than 50-percent of the organizations who have gone through down-sizing realize the kinds of results or effects that they intended at the outset. You reference the notion that if people worked hard, did a good job, were loyal to their employer, that they'd have a job for a long time to come. A career, as it were. And the basis of that belief constituted, as we both know, a psychological contract, as it were. But all of that seems to be changing and what's replaced it, as you call it in your book, is a new employment contract. Can you say more about that?

Pfeffer:    Well, the new employment contract suggests that what companies at least believe they owe their folks is not a long-term career, but simply the idea of getting them "employable." Or in other words, getting them ready for their next job. The problem with this, of course from the company's point of view, is that if you get someone ready for their next job, they may in fact go on to their next job. So you're really not building the kind of human capital and long-term investment in people within your organization that's going to make you successful. And so downsizing typically doesn't work. And as a matter of fact, the statistic that you just cited, about 50-percent of the companies or so not realizing their benefits leads inexorably to the next conclusion which is that since down-sizing basically does not solve many organizational problems, the evidence is quite strong that companies that down-size once will do so again and again. And AT&T is, I think, an excellent example of that.

Bowen:     Well we've certainly read a lot, heard a lot about down-sizing and re- engineering and these are initiatives that certainly strike fear and anger in the hearts of American workers, but aren't there other management practices that evoke these same kinds of emotions?

Pfeffer:    Well, management has done a number of things, I think, at least in some organizations. There are some, of course, who have done the right thing to break trust with their people. It's not only downsizing, but it's the way it's done. In the Silicon Valley, very often people are told they are laid off in an auditorium and escorted out of the building by security guards which of course conveys an absence of trust to the folks. In many organizations people are not given very much information about how the company is doing or about what the organization's plans and strategies are. So I think it's very hard for them to understand where fit in to the picture. In some organizations, people are not treated with respect and dignity by their bosses, but are treated really as quite being very dispensable objects. And all of these things, I think, cause people to not feel very good about their workplace.

Bowen:     I'm curious, Dr. Pfeffer, can you cite specific examples where organizations have been adversely impacted as a result of employee reactions?

Pfeffer:    Well, I think there are a number of examples. Certainly one that 1 site in the book "The Human Equation" which I just completed is the example of Apple Computer. Apple really had for many years an idea of, you know it was a special place to work and people went there because that they thought they were thought they were helping to change the world. And then when Apple began to get into trouble, they announced waves of layoffs. They did the layoffs with this kind of escorting people out the door with the security guards. People were very fearful. There is some evidence from interviews I've done that people were reluctant, for instance, to finish projects, because they thought when they finished the project they might lose their job. Some of the better people in Apple were kind of asking to be laid off so they could get the severance and go find another job. And in short, Apple had created an environment in which, in a competitive job market, it was going to be very hard for them to attract and retain the kind of talent that was necessary for them to turn the organization around. It's actually very interesting. A fellow by the name of John Whitney, who has written a book called "The Trust Factor." And John is an executive who has turned around companies like PathMark over the years. And what John would do when he was in a turn-around situation was go in and basically get the size of the organization right, and then tell everybody who remained that they would have a job, and he would actually in many instances raise their salaries. And his thought was in a turn-around situation, that is really when you need your talent, and you need the skills of the people and you don't want your best people walking out the door. And so, instead of basically, instilling fear, he would instill the idea that you were secure. We're going to give you a good salary. Actually, on many instances, raise your salary. And we want to keep the best people here to really help turn this organization around. That was pretty much the opposite of what Apple had done.

Bowen:     In your book, you gave an example earlier on of Henry Ford and his having put through a wage increase. It's a great story. Can you retell that for our audience?

Pfeffer:    You know one of the points that that story really illustrates is that everybody talks about "the new employment contract," and the idea that these are new contingent employment relationships. But, in fact, this is how work was organized about a hundred years ago when the factory system and the Industrial Revolution began in the United States turnover was quite high and it was very much more like a spot labor market where people would come and go. And Ford Motor Company at one point had turnover of approaching 400-percent per year. And that was, I suppose, fine given certain production systems. But on an assembly line, where you have to have every position staffed you basically had to have an army of people standing by for the folks who didn't show up or walked off the job or whatever. And that was quite expensive and there was a lot of production disruptions and delays. And so what Henry Ford decided was that he could not stand this very, very high level of turnover. There was no skill development, because with 400-percent turnover per year, plus, minus, you're not going to get any kind of substantial skill development. And so instead of having that kind of traditional employment arrangement, he put in a $5 a day wage which at that time was a very high wage. He had a tremendous number of applicants for jobs which permitted him to be very selective which is important. And, of course, once people got those good factory jobs at Ford Motor Company they would tend to stay in those positions because they it was a good job at a good wage.

Now what's interesting is the response of the media, particularly The Wall Street Journal, at that time. They thought that this was a terrible thing and it was going to be the end of capitalism or something because be had decided to pay these folks all this money.

Bowen:     That's interesting. And the ultimate result for the organization?

Pfeffer:    Well, Henry Ford said he never did this as a social reform effort, and he never did this just out of an act of generosity. He said it the best business decision he ever made, because with a much reduced level of turnover, people could develop skills and you didn't have to have a lot of extra people standing around and you had a much smoother and more efficient production process.

Bowen:     I am interested in organizations that have had in place policies of continued employment. And probably the best example that comes to mind for me is IBM. And that policy was changed not too long ago and I am curious as to what your thoughts are on that.

Pfeffer:    Well IBM is an example that is often cited to me when I talk about the importance of employment security as an element of a high commitment or high performance workplace and I actually believe it's probably the central or key element. And people say, look IBM had full employment and they got themselves into trouble. It is certainly the case that full employment in and of and by itself is not going to guarantee economic success. You need to do a lot of other things besides that. But when IBM fell on hard times, they began to lay people off. And they did something which often times I think which is not very effective, which is opposed to getting the layoffs over all at once, they did them in waves. And when you do layoffs in waves, the people who are left behind after the first wave of layoffs say well this could be okay. But then there's a second wave of layoffs and everybody in the organization begins to think is there going to be a third? Is there going to be a fourth? What is my long-term future? And you will tend at that point to lose some of your better people. And so I think that IBM, even though it has done quite well over the years and has responded quite well to a bunch of initiatives that include a lot of things other than laying people off, could probably have retained more talent had they done fewer layoffs as opposed to going through these cycles of downsizings.

Bowen:     So, Dr. Pfeffer, in your opinion, what are the long-term implications of the management practices that we've been talking about, that is the adverse practices, and are there alternatives to these conventions?

Pfeffer:    If you believe what companies today tell you which is that people are the most important asset -- it's the only thing that is non-duplicable because you can copy technology and everybody has access to the same financial resources and the de-regulation has brought down a lot of protective market barriers. So the only thing that companies have which distinguish them is their culture and their people. To the extent that that is true, then when companies do things that destroy their uniqueness and destroy the intelligence and the competence of their workplace by high turnover and by these kind of very short-term employment practices, they will suffer over the long-term financially. But on the other hand, the companies that do a different set of things will benefit financially, so over time you would expect to see fewer and fewer of these what you might call more negative or hostile workplaces existing. And I think that's probably right. You know, Hewlett-Packard used to have a turnover rate which is about half of the Silicon Valley average, today the turnover is about a third of Silicon Valley's average. And H-P is growing in its dominance of the electronics and computer industry. The Sass Institute, which is the largest privately-owned software firm in the United States, today does three quarters of a billion dollars worth of business and has a turnover of about 4-percent even in the software industry. So there are companies that are doing things effectively, and they will over time gain market position vis-6-vis the companies that are managing in this other way. You can actually see this very clearly in the auto industry. Twenty years ago, the auto factories were like pretty hostile places. There were factories in which the foremen brought guns to work. There were places in which foremen had iron bars and kept their doors locked. And certainly, you didn't have any high commitment or high performance work arrangements. Then with the advent of the Toyota and the Japanese transplants, you can see even the U.S. auto plants have migrated in that direction, because if they don't, they're not going to be able to survive.

Bowen:     So in essence, some of the things that we're seeing in today's economy, workplace, society, are replications of earlier trends.

Pfeffer:    Oh, yes. We're seeing a search often times for short-term cost savings. But there is a number of issues involved in this which are not very sensible if you think about it. First of all, many of these organizations have confused the labor costs with labor rates. They think that if we can get rid of our permanent people and have temporaries or part-timers who don't cost us as much on an hourly basis we've save money. But the question is not what people cost, but what, of course, they can do. And labor costs are a function of two things: the rate you pay you pay somebody and also their degree of productivity. So that's one confusion that you see frequently. The other confusion is to confuse labor costs with total costs. Even in the apparel industry, which is off-shored much of its production, there are studies that indicate that the labor costs in a tee-shirt are about 17-cents and even in a man's suit is only $12.50. So labor costs are in many instances a small component of total costs. And the third fallacy that's involved in this search for short-term cost savings is the idea that the only way to compete is on the basis on cost. And there are, of course, other bases for competitive success including quality or product innovation or service or some combination of those. And so I think what you're seeing is a lot of organizations focusing too narrowly on the wrong thing. And that has caused a lot of difficulty.

Bowen:     So the balance between cost and value is sort of a re-framing of you get what you pay for. You often times get what you pay for.

Pfeffer:    Sometimes you get less; sometimes you get more. I say to executives all the time, I say you would not think that you're going to be able to go to the oil market and buy oil for less than the market price or wheat or grain or anything else. But many of these executives believe that somehow they are going to be able to have employees that are making less money and that are working in these more insecure arrangements and still maintain the quality of the people in their organization. And that simply doesn't work.

Bowen:     Well, what differentiates the leaders in the pro-people organizations from their counterparts?

Pfeffer:    There are many things that differentiate the leaders. Probably the most fundamental and important thing that differentiates them is their attitude and their perspective towards their people in the organization. Sometimes I look at people sometimes and I say are you a cost or an asset? I think the leaders of these high-performance organizations, have a different view of their people. When they look at their people, they don't see costs to be minimized, or commitments to be broken or people to try to put in some kind of part-time or contingent employment relationship. Rather, they look at them and they say these are the only things, the only quality that separates us from the competition. And therefore, we need to take a perspective in which we develop these folks and bind them more tightly to the organization rather than separating them from the organization. And so it is a really a very important issue of perspective. Where do you see your competitive success coming from. And the leaders of many of these organizations see their success is coming from their people. A colleague and I wrote a case on Southwest Airlines. And when we met with their head of human resources at the time. Basically the first words out of her mouth is she said, "You know, in 26-years we've never had a layoff or a furlough." And we look at her because this is a very unusual in the airline industry. And she said, "We wouldn't put our most important asset, which is our people, on the street in the hands of the competition. We think we've got the best workforce. We want to keep that workforce." That's a very different perspective than many organizations would take.

Bowen:     You indicated that pro-people management practices typically produced productivity advantages in the order of 30 to 40-percent. With that kind of evidence, why aren't more organizations climbing on the bandwagon?

Pfeffer:    Well, that is actually the $64,000 question and actually will constitute a study that a colleague and I have undertaken now. But I think there are a number of reasons or a number of barriers to this. Part of it is the perspective issue that I've already addressed. The idea that if you don't see people as a source for competitive success, you don't believe the evidence even if you see it. I think part of it is the time-horizon that many organizations have adopted. Certainly, the economic returns you've cited of 30 to 40-percent are real and have been documented in industry after industry ranging from the automobile assembly to semi-conductor fabrication to service industries and so forth. But these are not returns you see in a day or even in a week or even in a month. The things that you have to do to build that performance (include) putting people in self-managed teams, investing in training and skill development, sharing information with folks so they can actually implement that knowledge and things like that all take time to have an effect. It takes time when you train a set of people for that training to pay off. It takes time when you put people in teams and share information with them for the ideas that come out of the work arrangement to be implemented and produce results. And if you're of a short time-horizon, you won't give it time to have effect. And also, if you don't basically believe that this is an effective way to manage people (then) the first things that you'll incur is the costs, and the benefits come down the road. Because before you can get, as I am often fond of saying, before you can get a return on investment, you have to first make the investment. So before you can get a return on training, you first have to do the training. So what comes first is the cost. And when you don't receive the immediate return, then people get nervous. And so I think that is another issue that has caused organizations to not be willing to make the investment these investments.

Bowen:     And certainly, I would imagine, Wall Street and the investment community plays some large part in encouraging CEOs to go for the quick fix.

Pfeffer:    Well, you know, everybody blames a lot of things on mutual fund managers and pension fund managers, and many of these folks, I think, have not pushed businesses to right directions. But the mutual fund managers, of course, themselves are evaluated in many instances on a quarterly basis and quarterly performance returns and these things you see in the ads for mutual funds which has put a lot of performance pressure on them so they have, in turn, put a lot of pressure on the businesses for relatively short-term financial results. But a lot of the companies that have done great jobs managing their people. Companies such the independent power producer which operates electric power plants all over the world, or The Men's Warehouse, the off-price retailer of tailored men's clothing, in both of these instances, you have organizations with leaders that basically sat that we are going to manage these organizations for the long-term. I mean, George Zimmer of the Men's Warehouse says "We put our employees first, our customers second, our suppliers third, the community fourth and the share holder last." Richard Branson of Virgin Atlantic Airways says basically the same thing: "We put our employees first, the customer second and the share holders last." And what Richard Branson has said is, "Look, if you manage this way, you will in fact produce much greater returns in the long run to the share holders because if you put your employees first then you get trained and wonderful and dedicated employees who produce great and loyal customers and that's where the profit comes from by having customers that return again and again to your store or to your airline and that's what produces the economic benefit." So often times, in searching for the short-term economic fix, you do things that really destroy the long-term value of the organization.

Bowen:     It used to be that an angry employee in a union shop could file a grievance and be assured of a hearing and even in non-union shops, when the threat of organizing was there, it would bring an audience to employee complaints. What mechanisms exist today for processing employee concerns and emotions before they become larger than life?

Pfeffer:    Well your comments about unions are, I think, a very important one. Because certainly the opportunity for employee voice in the workplace is diminished, though, of course, there are non-union employee grievance and arbitration procedures which some companies have instituted voluntarily. TRW did such a thing many years ago and it has worked quite effectively. Some organizations do have ombudspersons or they will have employee committees to handle employee grievances and employee problems. These are relatively few as a percentage of employers, but they are, in fact, the very nice model to set up some kind of committee of representatives of people from throughout the organization to provide employees at every level in the organization, some way of getting their problems heard. What employees will tend to do today, particularly in California but I suspect throughout the U.S. given the tightness of the labor market. Now if people are unhappy and they have no way of basically, expressing that grievance or having their grievance redressed within that organization, in a tight labor market, they quit. And that is probably how employee anger is getting expressed today: involuntary resignation.

Bowen:     You mention in "The Human Equation" the orientation of the United States toward unions and balance that with globalization and the orientation toward unions in other countries. Would you care to make a comment on that?

Pfeffer:    Well we are, of course, the least unionized of any of the major industrialized countries. And more than that, we more than any other industrialized country, even probably New Zealand, certainly than Singapore, both of them are poster children for kind of market competitiveness. We have decided to leave the employment relationship to a set of voluntary exchanges between employers and their workforce. And so the government has stayed out. To the extent that the government has intervened it has been to really weaken the power of unions. There are lots of examples of that, including the famous 1983 copper strike at Phelps Dodge in Arizona where the government supplies public workers to escort replacement workers in and arrest a bunch miners on trumped up charges. And you can see they are trumped up charges because most of the charges were never taken to trial and no convictions were earned and so on and so forth. So the government is really in many instances taken the side of the employer against unions which is one of the reasons why our unions are so weak in this country compared to other nations. And the other thing that the government has done is to tend to leave everything to the free market forces, which is fine except that in the absence of government intervention or regulation or rule-setting, what has happened in the U.S. is that we've come to rely on a system of legal redress for these grievances. So another way, I guess, in which employee anger is handled is that they sue. And the court system, first of all, is inherently an adversarial system which is not a good way to set up cooperative relations.

But in addition to being an adversarial system, it's a very expensive system. It's very expensive to settle wrongful discharge cases this way. It's very expensive to handle employment disputes this way, because you have lawyers involved on both sides, and they, of course, make their money the longer the case runs the more money they make. So the adversarial system, this kind of litigation approach, to resolving workplace disputes, results in a system which creates an adversarial atmosphere and which uses a lot of resources in the process. So I'm not sure that this is a particularly efficient way to go.

Bowen:     So it sounds like there are not only bottom line costs, but longer-term costs associated with an unhappy workforce. So what should companies be doing, Dr. Pfeffer, to change all of this before it is too late, if you will. In your book you refer to seven core practices of successful companies. Can you outlines those practices?

Pfeffer:    Sure. First and most important, I actually believe, is employment security. Offering people secure employment and the opportunity to develop a career within a single organization. That is very important. If you are going to offer people employment security, it is very important to recruit the right people. So selective recruiting. And selective recruiting has a number of components. One is having lots of applicants for your positions, and, but secondly, being very clear about the specific skills and abilities that are necessary given your business.

Once you have recruited a great set of people that are going to be able to stay with you for a while, the third practice which is enormously critical is to emphasize training and to not believe as some U.S. companies do, that training is some residual frill that can be cut any time the economy turns down.

A fourth practice that is enormously critical for organizations is to organize work in some form of self-managed teams or decentralized structure so that when you've to these skilled, talented folks who are committed because they are going to be with you for a long time, they are also in a work setting in which they can actually use their abilities and their talents and their training.

Another practice which is very critical if you are going to have these folks contribute to the organization, you need to share information with them. And information sharing really involves sharing information on performance, information on organization's strategies, information so that people understand what the organization is up to. And then if you want people to work in a team-like environment, it is very important to reduce status differences. The large executive offices and the huge executive salaries and all the perks that separate some people from other people.

And, finally, paying high wages which are contingent in many instances on organizational performance through things such as profit-sharing or stock-ownership is a way of aligning incentives and also make sure that people receive the benefits of their efforts to improve the performance of the firm.

Bowen:     Do you have any recommendations for individual employees who are trying to earn a living in today's uncertain environment?

Pfeffer:    Well, the first recommendation I would have is go get one of these lists of the thousand best companies to work for in America and try to get a job in them which lots of people have done which is one of the reasons that the companies tend to be not only desirable places to work, but very profitable. Because the best people want to work there. And I'm quite serious about that. I think the second thing people ought to do is think hard about the dimensions of their work environment. People tend to tell you if you ask them that they aren't working just for money, and I believe that. But often times, they evaluate their job options and job offers just on a monetary basis. But there are ways of learning what kind of a workplace you are joining and you ought to try to do that so that you're joining a nice kind of workplace. If you find yourself in a workplace that does not build mutual trust and mutual commitment between itself and the people, then you really have to pursue, I think, an employability strategy. You have to say "what am I doing on a daily basis to get my skills and my competencies ready so that I am able to survive if my employer lays me off or if I decide that I've had all the fun that I can stand and want to go on to another place." So certainly individuals need to take responsibility for building and developing their skills. But they also need to take responsibility in lots of ways for effecting the place that they work either by voting with their feet or by doing some other things to try to put pressure on the organization to improve itself.