Wednesday, January 14, 2015

What Theory Can and Cannot Do in (HR) Practice

the·o·ry \ˈthir-ē\ : an idea or set of ideas that is intended to explain facts or events (Merriam-Webster)

I’m gearing up to again teach my course on Personnel Economics to graduate and advanced undergraduate students interested in human resources (HR). Each time I teach this course, I’m struck by the difficulty that students have in understanding the role of theory in HR practice. I’m not talking about understanding the actual theories—that’s a story for another day; rather, I’m talking about what theory can and cannot do.

For starters, theory doesn’t  make something true. Standard theory in personnel economics assumes that work is lousy (but endured to earn income), workers are self-interested and rational, and money is an important motivator. I then cringe when someone says that personnel economics teaches us that work IS lousy, workers ARE self-interested and rational, and money IS an important motivator. It doesn’t. Someone who uses or favors a particular theoretical paradigm certainly hopes that the underlying assumptions are realistic to a certain degree, but assuming something doesn't make it true.

Similarly, it’s important not to confuse theoretical assumptions with what someone thinks should be the correct behavior (“normative prescriptions” in academic jargon). To assume that organizations are focused on profit maximization, as is common in economic theorizing, does not mean that organizations should be focused on profit maximization. To assume that workers are motivated by money does not mean that workers should be motivated by money. Unfortunately, it’s easy for a bedrock assumption to become so ingrained that people start to think of it as the desired behavior. Maybe it should be, or maybe not, but simply because it’s a theoretical assumption or a theoretical emphasis doesn’t automatically make it a desirable normative prescription.

Moreover, theory doesn’t cause things to happen in practice. The standard assumptions in personnel economics yield a number of theoretical predictions. For example, standard economic theorizing rooted in these assumptions predicts that a worker who is paid a fixed salary will shirk (that is, will exert the least amount of effort required to keep their job). Workers in teams are predicted to free ride. Workers in tournaments or contests are predicted to do things that increase their chance of winning but that don’t create value for their employer. I then cringe when someone says that personnel economics causes workers to shirk or that tournament theory caused someone to undermine a co-worker. Theory doesn’t make anyone do anything. A certain behavior might be consistent with a theory, but the theory didn't create this behavior.

So what can theory in HR do? Theory should help us think about, and therefore understand, behavior in the workplace. Personnel economics theorizing says that IF work is lousy, IF workers are self-interested and rational, and IF money is an important motivator, then workers are predicted to do certain things depending on the context (for example, shirk if the context is a fixed wage compensation system). So to the extent that these assumptions accurately capture a segment of an organization’s workforce, this theorizing can help predict behavior and therefore inform the design of HR policies (for example, using pay-for-performance instead of a fixed wage). But maybe these assumptions do not accurately characterize some workers. Then a different set of assumptions and a different theory is needed for understanding behavior and designing policies.

For this reason, it’s important to be very clear about the underlying assumptions in all of the different theoretical paradigms that are used to guide HR practice, whether rooted in economics, psychology, sociology, or other disciplines. Jobs are diverse and people are complicated. No one theory accurately captures all workers or all jobs. And theorizing something does not make it true. But thinking carefully about assumptions and theoretical predictions can provide deep insights, help make sense of observed behavior and patterns in data sets (big or otherwise; see my earlier posting "Moving Past the "Gut Feeling" Rhetoric in HR Analytics"), and when used appropriately, foster the creation of better HR policies and the construction of desirable normative prescriptions. So theory can be powerful, when used correctly.

As one of my former students said, "Personnel economics is not a rule book, it is a tool kit." The same is true for all theoretical frameworks in HR. HR professionals should understand what theory can, and cannot, do. 

Tuesday, December 2, 2014

Will the Real HRM Please Stand Up, or the Problem with Hard Unitarism

Think of what would make for a lousy job. Low wages, long hours, little autonomy, autocratic managers. Scholars call this a low-road or hard human resource management (HRM) approach. But is low-road HRM really HRM? In a practical sense, yes it is--it’s certainly one way for managing human resources, so in a definitional way, it's a form of HRM. But intellectually, I think it’s better to reject low-road HRM as HRM so that we can better appreciate the differing assumptions and implications of varied approaches to managing people. For practice-oriented readers, think of this as an opportunity to think about what HRM really means. For scholarly readers, this allows us to see the hard unitarism frame of reference as the oxymoron that I assert it is.

The British industrial sociologist Alan Fox is widely-credited with first identifying the unitarist and pluralist frames of reference in industrial relations, and then adding a third, radical frame. In my own work, I’ve added a fourth: an individualistic, egoist frame that focuses on individual self-interest. In the forthcoming Finding a Voice at Work? New Perspectives on Employment Relations (Oxford University Press), edited by two UK employment relations scholars, Stewart Johnstone and Peter Ackers, I was pleased to see Bruce Kaufman use my four frames of reference. But two chapters continue to use Fox’s three-dimensional framework.

I think this is problematic because both low-road and high-road HRM strategies are forced into the unitarist frame of reference. This is done by distinguishing between hard and soft unitarism. In the words of Johnstone and Ackers (p. 2),

Old fashioned ‘hard’ unitarists assume that...the best approach is for management to command and control the organization. Work rules and strong management are believed to be needed to ensure workers perform as required.

To me, this contradicts the central premise of unitarism that the employment relationship is largely characterized by a unity of shared interests among employers and employees. That is, if workers need to be aggressively controlled and commanded, then there isn't a set of shared of interests. Unilateralism is not unitarism. Admittedly, unitarism can have an element of unilateralism because human resource management is often determined with little employee input. But unitarist human resources practices are designed with the objective of benefitting employees and their organization through high-commitment policies that create win-win interest alignment. A low-road employer that unilaterally slashes wages or benefits simply because it can is exercising a very different kind of unilateralism—a kind that I don’t think warrants the label “unitarism.” Indeed, a command-and-control management strategy is probably better seen as emerging from a radical frame of reference in that this employment relationship is highly conflictual and rooted in hierarchical power differentials.

A second description of hard unitarism in Finding a Voice at Work? is seemingly more congruent with my requirement that unitarism involve shared interests:

There is a ‘hard unitarism’, which typically is grounded in economics and which is most fully developed in the ‘the new economics of personnel’. In this formulation it is the capacity of managers to offer financial incentives on both an immediate and a deferred basis that produces the congruence of interests between workers and employers” (Ed Heery, pp. 21-22).

But this, too, is problematic because financial incentives do not really produce a congruence of interests. Rather, incentives are designed to provide the worker with a self-interest to act in the interest of the employer. Indeed, the need for incentives in the first place comes from a belief that workers and organizations are each selfish and will act in their own self-interest. 

Admittedly, this is a subtle distinction, but ultimately this is a different way of thinking about the employment relationship than what underlies the high-road HRM model. So I think it is better replace Heery's version of hard unitarism with an individualistic frame of reference. I call this an egoist frame of reference in which the egoist employment relationship is rooted in the pursuit of individual self-interest by rational agents in economic markets. Employers and employees engage in voluntary, mutually-beneficial transactions to buy and sell units of productive labor based on the what the market will bear. If the organization’s HRM policies are not in the worker’s self-interest, she will quit.

The need for this frame of reference is reinforced by the confusion that can come from mistakenly equating unitarism to neoliberalism. Neoliberalism embraces laissez-faire economic policies and the operation of so-called free markets. So forms of human resource management that emphasize adherence to markets, such as imposing wage cuts when unemployment is high, are consistent with neoliberalism. But they are not rooted in unitarism. So maybe there should be hard egoism (emphasizing markets) and soft egoism (emphasizing incentives), but not not hard unitarism.

This might seem like an esoteric academic debate, but I think it gets to the heart of how we want to define HRM. We can certainly define it as any strategy for managing people. But I think it’s better to distinguish among the key principles that underlie these strategies. In this way, hard unitarism is a problematic oxymoron and low-road HRM is self-interested unilaterism, not true HRM that seeks alignment of shared interests (which has its own problems, but that's a story for another day).

Wednesday, November 5, 2014

Deeper Lessons from Recent Employee Wellness Program Controversies

It’s no secret that employee wellness is an important issue today. As just one example, Honeywell’s wellness program penalizes employees if they don’t complete a biometric screening. According to newspaper reports, the penalties can include a $500 medical plan surcharge, the loss of up to $1,500 in contributions to health savings accounts, and up to $2,000 in tobacco-related surcharges. This has landed Honeywell in hot water because two employees complained to the U.S. Equal Employment Opportunity Commission (EEOC), and the EEOC subsequently filed a lawsuit against Honeywell saying that these noncompliance penalties violate federal law. I’ll let others comment on the legal merits of this case, but I think there are at least three lessons here that go beyond Honeywell and the specifics of this dispute.

First, the emphasis on penalties rather than rewards in some employee wellness programs underscores the need for those who design corporate policies of any type to have a sound understanding of what drives human behavior. If one believes that employees are exceedingly rational (as is common in neoclassical economics), then it shouldn’t matter whether something is implemented as a penalty or a reward. For example, a $500 reward for complying is viewed by a dispassionate ultra-rational person as the same as a $500 penalty for non-compliance.

But research in psychology and behavioral economics demonstrates that real decision making isn’t dispassionately rational; rather, it’s shaped by a number of cognitive biases and limitations. Of particular relevance here is the phenomenon of loss aversion—that is, individuals are significantly more bothered by a loss than a gain. So it probably matters--maybe a lot--whether wellness plans (and many other policies) emphasize penalties or emphasize rewards. Admittedly this is complex. On the one hand, this might imply that companies should design policies around penalties because employees will work harder to avoid them than to achieve rewards. But what seems to have happened here and elsewhere (e.g., Penn State) is that the threat of a penalty seems more coercive than the possibility of a reward, so employees have a stronger negative reaction from the outset when the program uses a penalty-based approach. Maybe these are exceptional examples, but the fundamental point remains—corporate policy-makers need to have a deep understanding of human behavior in order to design effective policies.

Second, the Honeywell lawsuit can be a tale that illustrates the importance of employee voice. The opposition to the Honeywell wellness plan, at least by some workers, harkens back to a year ago when Penn State similarly launched a wellness plan that included a monetary penalty for employees who failed to complete a health questionnaire (a very invasive questionnaire, by the way, that included asking women if they intended to become pregnant, but that’s a story for another day). Unlike many U.S. corporations, U.S. universities have strong traditions of employee voice by key employees (in the form of faculty governance). There was an uproar on the Penn State campus in reaction to this plan, there was a special meeting of the faculty senate in which administrators were told of passionate employee objections, and the penalty part of the wellness program was withdrawn. Maybe it’s just coincidence, but I find it telling that Honeywell is facing a lawsuit because when workers lack a voice, they need to turn to other avenues for redress. Wouldn’t it be better for all involved to resolve many issues through employee voice rather than through the courts?

Third, on some level, it’s natural to have sympathy for Honeywell and other employers. Health care costs are obviously a major challenge, and something needs to be done. But I think the deeper lesson is that this is another symptom of a fundamentally broken system. The U.S. is fairly unique in having a health care system that is so closely tied to voluntary, employer-provided insurance. At its worst, this system can dampen overall employment, contribute to job lock (employees not leaving jobs because of the difficulty in switching health carriers), and burden American employers with anti-competitive costs. And this system isn’t necessarily good for health care delivery, either, because the private health insurance system can increase costs by dividing up risk pools and increasing administrative costs.

We need to remember, however, that corporate American was instrumental in shaping this system in the first place (see Jennifer Klein’s book, For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State). From the 1940s on, business lobbied against national or universal health insurance so that employees would need to rely on employer-provided benefits, and therefore be loyal solely to their employers, not to the government or even worse, to a labor union! So we probably shouldn’t feel too sorry for Honeywell and other corporations as they grapple with health care challenges in the system that they largely created. More importantly, rather than rearranging the deck chairs on the Titanic by fussing with incentives (and even worse, penalties) through employee wellness programs, fundamental reform that decouples health care coverage from employment should be the real issue of the day.