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Baffled by bankers’ bonuses? Read agency theory

Published February 9, 2012 by Jo Jordan

I am writing this post, as is my wont, to record some notes from a paper I read:

Azevado, R.E and Akdere, M.  (2011). Examining Agency Theory in Training and Development: Understanding Self-Interest Behaviors in the Organization.  Human Resources Development Review, Volume No Not Known, 18 pages. If you want a copy, both authors are presently at the University of Minnesota.

I read the paper because agency theory is the theory behind the big bonuses that are provoking so much controversy.

The application of agency theory to Training is new and nothing to do with bonuses.  But I wanted to tidy up my own thinking about agency theory and if you do too, I’d recommend reading Azevado and Akdere’s paper.  They explain the basic precepts of that school of thinking very well.

I don’t like agency theory and I wanted to pinpoint exactly why I think it is misguided.  I’ve boiled my objections down to three essential points:  the distaste agency theorists have for self-interest, their belief in a zero-sum game, and their belief that the world is so static and unchanging that any one person knows best.

Self-interest

Adam Smith said:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest”.

Some people are sincerely concerned about self-interest, and like the far left, so are agency theorists.

Personally, I am delighted that the self-interest of the butcher, the baker and the brewer leads to a butcher, a bakery and a pub on the high street. I believe in caveat emptor (buyer beware) but I am not panicking that the butcher, the baker and the brewer might from time-to-time charge me 1p too much.

I also don’t panic that today the butcher tries to sell me something that he is trying to ‘move’.  Provided he has taken my self-interest into account and sold me something to fit my needs, we are ‘square’.

I get my needs met now. I get my needs met over the long term because his shop stays open.  And my business does better because he can buy from me!

(Funny that – the last female butcher that I met was my own grandmother.)

Generativity vs zero-sum gains

Agency theorists begin with an assumption that if I pursue my self-interest, then I am not pursuing yours.

Or at least, they believe that inherent in belonging to an organization is the need for the organization to ask me not to pursue my self-interest in some form or another.

It certainly is the case, for example in a soccer game, that I shouldn’t pass the ball to the opposition on purpose, or showing off to my mates in the crowd and not pay attention to the game.

But why should my self-interest be sacrificed as a matter of principle or practice?  If we need to sacrifice anything, let’s compromise and make sacrifices all round.  And wouldn’t it better to put our efforts into making a business environment which is rich enough for us all to pursue our self-interest?

To take a simple example, does it matter if I am miner, metallurgist, engineer, accountant or diamond cutter, provided that all of us work together to mine the diamonds safely and sell them profitably to people who want them?

I’ve found that where people stand on this point is fairly key to their choice of work and choice of organization.  Some people want quick returns. They really don’t believe an organization is more than the sum of its parts.  So be it. We’ll help them go where they need to go.

Those of us who don’t believe that life is zero sum game should stay away from organizations run in terms of agency theory. We will hate them.  And we need to put our money where our mouth is. We have to make our own organizations as good as we want them to be – and successful commercially.

‘Gap’ thinking vs positive management

Agency theory seems tremendously old school to me in the notion that there is a right way to do things and that someone somewhere knows what this right thing is.

Now there are definitely wrong ways to do things.  There have to be things we wouldn’t countenance no matter what.

Expertise is also real. And it takes time, a long time to learn.  Indeed, good organizations arrange themselves so that people can develop expertise and learn from each other.

But the idea that we know the whole answer and we can insist that people do things our way is very unrealistic.  If it was ever possible, it is not possible in today’s world where we rely on networks of experts.  We each bring our own perspective to a problem and we are richer for it.

Returning to agency theory, if no one knows what the best answer is until we have discussed, how do we evaluate whether our agents are pursuing our interests vigorously?

Worse, if we do not allow the room to work out what our interests are, haven’t we built into the organization the very thing that we fear most – that our agents withhold information that is valuable to us?

So in short, these are my three objections to agency theory.

I think self-interest is good, not bad.  We want people to think about their self-interest because we will have a healthier, sounder and more resilient organization (and economy).

I don’t see the world as a zero-sum game. I don’t see the world as a cake to be divided up.  At best I see the world as having no cake until we’ve baked it.  And there are cakes and cakes. Real wizards will make us a cake even when the ingredients for their favourite recipe are not available.

I don’t think we know upfront what our self-interest is.  Good organizations are forum where negotiations and bargaining lead to mutually prosperous ventures.

How does any of this help me understand bankers’ bonuses?  Well they are mystery, to be sure.    Agency theory is not standard organization and management theory but to turn away from thinking that captures attention with promises of large rewards, we need not only an alternative but an understanding of the thinking itself.  Do read Azevado and Akdere’s paper.  I found it helpful even though, or possibly because it was about the less emotive topic of Training.

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A salary structure for a turbulent world

Published April 22, 2010 by Jo Jordan

LizO of HRPractice in Harare asks

Dear Jo, how can I get role clarity and understanding , compensation internally equitable and consistent and worthwhile performance without the old tried and true job descriptions, Paterson etc ????

In a sentence Liz sum up the goal of job evaluation and salary structuring and the main change in work of the past and work today.

Our Goal remains

Role clarity and understanding , compensation internally equitable and consistent and worthwhile performance

Our Procedures change

Job descriptions take time to produce and are outdated so quickly that managers add  ‘and anything else I think of” at the end.  When we define something as anything, then there is little point in having it.

What of the past can we confidently take into the future?

First and foremost, we should be happy to be in a place seeking role clarity and understanding, internally equitable compensation, and consistent, worthwhile performance. Whatever the hassles of pursuing those goals, they indicate that people believe in their collective venture and each other.  That’s great.

What constraints should we consider?

Express and implied terms of employment

Whether we have job descriptions or not, good descriptions or bad, we must remember that there are express and implied conditions of employment.  Over and above the requirement that the employee is paid on time and does not act in conflict of interest with his or her employing organization, there are usually cultural and legal limitations on what an employer may ask the employee to do.  We should list what we know, add to the lst as we go along, and keep the list as simple as possible.  In an ideal world, we will have a short list that in one page lays out our obligations in a way that we are unlikely to breach either the law or deeply held cultural beliefs.

Jobs that are jobs

Within those broad boundaries, people want ‘proper’ jobs and work better when they have proper jobs:  the need a goal that can be laid out in public next to the goals of everyone else, they need training, they need resources, they need authority, they need clear guidelines on when to refer to others.  I think putting energy here is a better use of HR time than writing job descriptions.  A training manual is better than a job description, in other words.

Career ladders

I would add one goal to your list.  People want to see their futures too.  Of course, our futures are affected by firm profitability more than anything else.   The Labour Relations Act allows employee representatives to inspect the accounts.  Few people understand them though and it makes sense to help everyone see where the company is. Some firms, for example,  ingeniously printing current goal on canteen napkins and play a special tune every day when overheads are met and people start working for profit.   What we communicate depends upon the business and the key factors and requires some creativity and good understanding of the business.

Once a firm is profitable, people want to see how they can climb the ladder.  In some firms this is a nightmare because the next level up requires special training outside the firm (e.g. nurse to doctor).  In so far there is a ladder, the equitable structure should reflect the ladder. After all, as someone said about UK, if someone is motivated for 9 pounds a day, why does someone else needs thousands of pounds a day to be motivated?  Money doesn’t buy performance.  It signals to young people the availability of certain life styles provided certain paths are followed.  In short, we don’t pay a boss thousands of pounds for his time. He puts in the same time as everyone else. We pay him thousands to encourage youngsters to go to school and learn his skills.  In a sentence, the pay structure makes the ladder visible.

Paterson job evaluation

With these considerations in the back of our mind, yes, I’d use Paterson.  It is very reliable and the discussion of bands helps clarify roles.

Before I begin

Before I began, I’d take the precaution of listing all the jobs, their pay and their benefits on a spreadsheet and classifying jobs roughly myself.  You want to look ahead to how many jobs are seriously out of position.  When you draw a graph of pay against jobs, it should conform to a neat exponential curve with pay bands that overlap a little but not too much.

To manage the maths, the Paterson grades will be recorded as numbers (1-12) and the pay will be turned into a log.  10=1 100=2 1000=3.   (There is a formula Excel).  In that way, we flatten the exponential curve and we can check that the slope of the line (regression) is between 1.33 and 1.50. That means the grade-0n-grade increase in pay is between 33% and 50%.

Going to Paterson, the grades make good generic job descriptions.

A: Entry level job where you are shown what to do.  You are still a bit of a liability.

BL:  You have a skill that took some organized training, much like a light vehicle driving license.  Within the boundary of this training, you know what you are doing and you are “in charge” as a driver is in charge of a vehicle.

BU:  You have a skill that was acquired in a similar way to a driver’s license (heaps of practice) but it is far more responsible.  Examples are long distance drivers and bus drivers.  A BU might also supervise BL making judgments about very difficult situations.  Once the BU has interpreted the situation, the BL is able to take over and carry on.

CL:  This is a skilled level taking 3-5 years training where we have to think out what to do.  The typical examples are nurse, junior doctor, trial balance bookkeeper, degreed accountant, sergeant, lieutenant. CL is also used as a bottom end of management and might included people who have worked up from A .  They will be supervising several BU and the difference is seen in their time horizon.  BU are finishing a shift of or a journey.  CL are focused on weekly or monthly goals so there is a lot more juggling to do.

CU:  This is rarely an entry level position.  Usually a CU is an experienced CU and works alone or mentors CL.  They have the same ability to understand how the time periods of months and weeks vary and to tell other people what to look for.  In the army they would be Captains and Majors.  In hospitals, they would be Senior Medical Officers.  In schools they would be subject heads.

DL:  The entry level to middle management requires people to lay out systems.  Should they buy in the wrong tools or not have cash available, then the CU cannot do their jobs.  Sadly lots of people in these roles have drifted up but are unable to plan ahead for a whole year adequately.  In a factory, they not only plan and watch progress towards an annual goal, they usually are on 24 hour call when the system crashes.  They are responsible for the overall system though CL keep it running on a shift-by-shift basis.   Some mines appoint entry level engineers here.  Recently qualified medical consultants enter here.  Often newly qualified CA’s enter here.  This is a Lt Colonel in the Army responsible for keeping an entire battalion battle-ready.  They would be a Chief Superintendent in charge of a District in the police.  General Managers of factories begin here.

DU:  Is the skilled level of  DU.  They’ve put in several systems, or done so much surgery that they can mentor other DL’s.  They would be Brigadiers in the Army responsible for 4-5 Battalions.  If they don’t “see ahead”, then the DL’s won’t have the budgets and systems in place to function.  In the police, they are the provincial commanders.  They get involved with big events but they are largely pattern watchers.  They understand patterns across time spans of 1-2 years and get things in place on time for others to roll things out.  A DU in business is likely to manage a set of factories each of which is self contained but linked to the others.  A Captain of a long distance aircraft is here.  Though their planning horizon is only journey, the complexity of the system they are managing requires them to anticipate lots of if-thens.

EL:  Is the beginning of senior management.  Their time horizon should be five years – anticipate the obstacles we will face in the next five years.  Can’t see it in UK some how. Events always seem to take managers by surprise. Contrast the sitting-on-hands with TESCO who rerouted produce to Spain and trucked it in.  That couldn’t have been rolled out quickly with advance anticipation of adverse events and general preparation.  Junior managers are effective with senior managers have done the ground work.  Typically senior managers do a juggling act of planning out a whole function and managing another plan of change simultaneously.  Or they are managing the links between functions.  It’s not just rolling out a plan.  There has to be a element of saying we are following Plan A but if this happens, we will have to be ready to go Plan B, and if this then Plan C.  They are balancing the present with the unknown.  Spend to much time on the what-if and the company will fail now.

EU: Experienced version of EL.  Should have 3-4 EL reporting to them requiring coordination and overview.

F:  Designing a whole organization

Alpha:  Monitoring world events (Chairman of Board)

Beta: Changing conditions in the world

Thinking ahead to a structure

When applied to structuring work, you don’t want to split the grades into quarter grades (B1 and B2, B3 and B4) unless you are like the army or a mine where everyone is doubled up to allow for continuity during an emergency.  Have A’s report to BL who report to BU etc.

Sometimes when the minimum wage is very low, the entry level is pegged there and there is a big dog’s leg into A band when the person joins up permanently.

You can see why you should do a rough check yourself before you start talking.   Thereafter you have a simple system where people get paid and they know what they need to do to move up.  The training must be available of course otherwise it is not possible and they will devote their energies to side ventures.

You can also leave spare money in a pot to be divided up at the year end (or November) and tailor benefits.  One well know firm used to have the very good benefits kick in after 5 years because there was high turnover before then.

How to sort out a mess

Before I talked to anyone, I would do my own preparatory work and sort out a skeleton for the key jobs.

Then (depending on how the problem was presented)I would discuss role (not pay) and guide the discussion to talk about career structures.

If pay had already become an issue, I would simply say that I was there to sort out a pay structure, but before I could, I must understand the levels and how some one got to be really good.  That I would go round and talk to every one to see what I could learn but it would also be useful to sit down in groups and talk through how one gets to learn the business.  Then I will on my consultant’s hat and lay out some proposals for them to look at.

The odds are that they will find the solution themselves and we only have the administrative task of tidying up the payroll over a period of a few years.

To give an example of how this might pan out,  once I proposed a simple structure: Learning the job, Knows what they are doing, Could run the business for a day, Could run the business for a week, Could run the business for a month.  When we know Paterson, then we see immediately that I have proposed levels that are A, BL, BU, CL, CU.  There is still the level of DL above these. Using a slope of 1.40 that would be fairly typical in the private sector, if the guy in A band is earning 10 dollars, the fellow in BL will get 14, in BU will get 20, in CL, in CU 38 and in DL, 54.

Depending how long it takes to move through those levels and other pragmatic considerations (including how much fiddly bookkeeping I am prepared to do), I might put in some notches.  Or I might not. I always go for the admin-lite solution that delivers more control and more cash to the employees (presuming I begin with sound business sense and everything I propose is linked to making more money faster within the company). It simplymight be better to hand out decent cash bonuses from time-to-time and some businesses are so volatile the best the owners can do is pass on windfall gains.

Once I have a clear structure like I proposed, phrased in clear business terms, then I am clear about the training people need to go up the ladder, the opportunities they need to learn and even the systems I need to put in.  People can’t run the business and make sensible business decisions if the accounts are in shambles, for example.

I’m also able to communicate clearly what matters and people will take charge of their own training. They will be looking around for tasks they don’t know how to do and making sure they’ve learned from people who do know.

HR is a a creative business (TG) and people respond to simple, comfortable systems leaving us with a lot less work to do.

The question of whether you need to write jobs descriptions.

My answer would that in places that change a lot, why write them?

Concentrate on

  • a clear simple contract
  • transparent orderly pay that doesn’t put the company at risk
  • managers’ skills in delegating whole tasks and coordinating teams rather than micro-managing
  • good emergency welfare budgets to help people keep their lives stable
  • sensible career structures (with planned exit strategies – like articled clerks- that benefit the employees).

We need simplicity in HR and a spotlight on trust.  We don’t need more paperwork and complication.

What do you think?

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Pay professionals – data slurpers – data visualizers – wanted

Published October 20, 2009 by Jo Jordan

Do you believe that executives are worth their pay?

85% of people voting on The Economist debate beginning today vote NO.

You can vote as well! 

Yes or No?

Do you have a professional interest in pay?

If you are a

  • work & organizational psychologist
  • HR manager
  • union official
  • manager
  • politician
  • political activist

I encourage you to log in to the debate and read the comments.  It is free.

I usually skim over the contributions from the public because I doubt anyone is reading.

But this time, the comments from the public on executive pay provide invaluable data.

Would you like to join a research team on the executive pay debate?

This is an unusual opportunity to document the pay debate and to establish a reputation in compensation management.

Could you help with

  • recording the comments (or slurping them off the net)?
  • listing the arguments by parsing and analyzing them with software or by hand?
  • summarizing which questions were asked & answered?
  • writing up the report?
  • preparing compelling visual presentations?
  • marketing & distributing the report?

Please let me know what you can do, and I will put together a team.  If you aren’t particularly internet-literate, that is fine too.  We could do with people who contribute substantive questions and who review and edit the project as it proceeds.

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How much lifestyle are you earning?

Published September 16, 2009 by Jo Jordan

I am about to depress you.  So grab a cup of coffee, or your favorite beverage, and put your feet up.  And put your arithmetic head on.  I am about to turn numbers upside down and talking some shocking truths about how hard you have worked for that cup of coffee and how much you have to be paid to earn a lifestyle of luxury.

Or to be mischeivious, how much we have been paying some very well paid people for having lunch and going to sleep.

Thought Experiment 1: You are worth $1 or GBP1 or Euro1 per second. Count 1 potato, 2 potato, 3 potato. Click, click, click.  Count it out like a metronome. Click, click, click.

Each click is a dollar coming in.  Not a lot, is it?   Barely pays for the coffee you are drinking, the sofa you are sitting on, your broadband connection.

Actually, it is is $30 million a year.

I put it on a graph for you. You might want to check my arithmetic again. I’ve done the calculation several times but I am getting old and I’ve begun to make mistakes with numbers.

Compare with $1 per sec

Thought Experiment 2: Over the shock? Well, lets count 30 seconds. 30 potatoes – wow, that takes a long time.

Wait – patiently. $1 arrives.

Count another 30 seconds, another $1 arrives.   $2 dollars per minute.

Coffee is beginning to seem really expensive.

How much is that? $15 million, of course.

No, $1 million a year.

You have to divide by 30 not 2. You are now earning 1/30 of the person earning $1 every second or $30m a year.  Shock?  That long wait is $1m a year.

Compare with $1 per 30 secs

And look again.  The person earning $1 per minute, every 60 potatoes, is earning half what you are earning (500K).

Thought Experiment 3: Now imagine earning $1 every 15 minutes.  I am not going to ask you to count to 900 potatoes.  It will feel an age.  Certainly long enough to linger over your coffee and check your mail.  $1 by the time you have finished.  That’s all.

That 35K a year.  A respectable salary in England.

Compare with $1 per 15 mins

Thought Experiment 4:  And now imagine $1 per hour.  What do you do with $1?  Buy a packet of crisps?  That’s less than 9K a year.

Compare with $1 per Hr

Thought Experiment 5: And finally let’s look at the minimum wage.  75c an hour.  Around $6500 a year.  Green line at the top. Less than a litre of milk.  Half a loaf of bread.

Still it is better than $1 day which is the green line second from the bottom.

The red line underneath that is $1 per month.

Compare with 75c per hr

Seeing the other picture?

You are probably feeling a little muddled.  Good.  It’s good to turn numbers upside-down and inside-out and get another perspective.  So what have I done, here?

  • I’ve reminded you that employers quote wages by the hour because accountants use that number to do their costing.  This number doesn’t concern you.  What concerns you is the total per year (after taxes) and either the amount per second or the time it takes you to earn $1 – which is what I’ve shown you.  That’s the lifestyle you’ve earned.  Total after taxes divided by (365 days x 24 hours x 60 minutes x 60 seconds).  At a dollar per second that comes to over 30m a year.
  • I’ve shown you how the gap between pay rates gets very big, very fast.   The way pay rates are quoted encourages us to make mistakes.  $1 per 30 seconds and we think half-a-minute and think we have half-the-lifestyle, when actually, we have 1/60 the lifestyle, or 1/60 the lifestyle, or 1/360 the lifestyle.

Forget about costs to your employer.  Let them run their own business.

You should be concentrating on the lifestyle you earn.

Ask: What do I earn per second because I am alive every second of the day not just the time I spend making money for other people.

Every second of the day.

Now tell me what you earn per second and how you intend to drive that up!

P.S.  If you want to play with the numbers or the graph, it is on Chartle.

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The hidden tricks of high level HR

Published June 28, 2009 by Jo Jordan

Controllers survey the field at Misawa Air Bas...
Image via Wikipedia

Have you heard of Elliot Jaques?

I was on Brunel University campus on Monday and glimpsed the Elliot Jaques building.  Elliot Jaques was blazoned in large letters across the side.  Of course, in the grand tradition of prophets not being respected in their own land, Jaques’ work is barely know to British HR managers and occupational psychologists.

Jaques on organizations

Jaques wrote about large organizations and the role of each level of the hierarchy.  What does the Colonel do that is different from the Captain and what does the Captain do that is different from the Lieutenant?  And more to the point, are these differences also found in a hospital?  What does the Consultant do that is different from the Registrar and is that different from the Houseman does (what do they call housemen these days?).

Jaques in practice

Understanding these differences is useful to organization practitioners for three reasons.

1.  To design jobs so that we aren’t tripping over each other or talking over each others heads.

2.  For designing pay systems (I did say that British organizational gurus seem to have skipped Jacques).

3. For designing training & development programs and by implication assessing where people are on their development path.

The system was modified slightly by a fellow called Patterson to take into account very large organizations like the Royal Mail and Tesco’s who train their staff from absolutely basic level jobs.  Let me explain the expanded Patterson system because when I looked for a good link on the internet, nothing much came up in the first three pages.

Patterson job levels

  1. Unskilled work.  I can show you how to do the works in a few minutes and I can see “from the outside” whether you have done it.  British pay rates are about 6 pounds an hour – the minimum wage.
  2. Semi-skilled work.  You need to be trained, much like learning to drive, but once you can do the work, you do it without thinking.  Your work is checked more by quantity and usually checked at the end of an shift.  Much of work in the British public service seems to be in this category.  Check the box.  Unless the equivalent of a car-crash has happened, it is counted as done.  That’s not to say it is not important.  It’s very important.  It’s simply done at this level of complexity and is the big difference between the work done in a Japanese factory and an Anglo-American factory.  British pay rates are about 7 pounds an hour which you will notice is 1.16 or 16% more than the first level.
  3. Semi-skilled work with responsibility.  In this category, you may have slightly more complicated skills, like driving a long-distance goods truck.  You are on your own and the damage you can do if you don’t achieve minimum levels of performance is fairly considerable.  Alternatively, you might supervise people at levels 1 & 2.  You will dole out their work and check they have done it.  But you are unlikely to train them or be able to vary the system.   I’ve just looked up a driver who carries cash and the pay rate seems to be 9.50 an hour.  This is about 36% higher than the last level.  Interesting as it was the same organization as the first.  I’ll comment on that in another post.
  4. Skilled work.  All skilled workers fall in this group, be they nurses or doctors, mechanics or engineers, accountants or teachers.  Generally, it takes 3-5 years training to acquire the skill and in each and every situation we encounter, we have to work out logically what we have to do.  So the mechanic has to look at your car and decide how to service it (does this still apply?). The hairdresser looks at your hair and decides how to cut it.  The GP finds out your story and takes some readings and dispenses some advice.  British pay rates at the entry level are about 11.50 which is about 25% more than the last rate.
  5. Skilled work with responsibility. Yes, skilled work is responsible.  All work is responsible.  At this level, we have enough experience to work on our own and enough experience to supervise people at level 4.  Note well, there might be trainers and supervisors at level 4.  Lieutenants and sergeants fit into level 4 this category because their basic skill is supervising.  Lieutenants are trained to do this from the outset and sergeants have come up through the ranks.  At level 5, we include the trial balance bookkeeper who runs everything efficiently, the CEO’s PA, the ward sister, the Registrar who has ‘been there and done that’, and the Captains and Majors in the Army.  Pay rates in the UK are about 15 pounds an hour which is about 30% more than the previous level. (Note the Army pays more.)
  6. Middle management.  The middle manager coordinates the work of several skilled people.  Each person is experienced and used to reading the situation and applying their professional know-how.  And they are quite capable of supervising the novices at level 4.   The big question is how does the jigsaw puzzle of these jobs fit together and as this is not a jigsaw puzzle but more like air traffic control at Heathrow, what do the skilled controllers need to do their job well and what degrees of freedom do you have for altering circumstances under which they work?  Some factors like flights coming in are not under your control, for example.  Which factors vary and are under your control?
  7. And the roles after this include middle management with responsibility, senior management (2 levels) and top management (3 levels).  Another day, another post.

Why is it important to get these levels right?

Let’s take something we look out for in assessment centres.

What level are you communicating at and what level have you assumed the other person to be?

When a skilled person becomes competent, they are able to explain what they do.  When they work with a novice, they point out the features of the situation that are important, ask the novice for a plan to check they are using the right professional know-how and to relieve the novice’s anxiety that they have understood, and then set a time to review when the novice has had a chance to try out their plan and to see if their efforts work.

Let’s be clear.  If you haven’t had similar training, you will not understand what is being said.  If you have been around a while, you might be   able to ‘follow’ without doing, just as a pilot understands what an air traffic controller is doing without being able to do it ‘himself’, and vice versa.

Difficulty 1.

The 1st difficulty comes in when the senior person simply doesn’t have the experience themselves to communicate clearly how situational details and professional know-how comes together.  Hence the rules to young lieutenants – listen to you sergeants, listen to your sergeants, listen to your sergeants.   To take the air traffic control example, an air traffic controller who is not totally fluent shouldn’t be supervising someone who is in their first 1 to 2 years service.

Difficulty 2.

The 2nd difficulty comes when the senior person tries to communicate with someone who is not trained in their area.  They are in for a shock, aren’t they?  That is a whole new experience set and takes time to learn.  Imagine an air traffic controller talking to the cleaner.  It takes a little work to understand that, no, it is not obvious to the cleaner why they shouldn’t put the paper strips in the waste.

Difficulty 3.

The 3rd difficulty comes in when the skilled person is promoted to the next level up and they haven’t understood their new role.

They are now supervising skilled people who know what they are doing.  Contingent leadership theory covers this well.  Don’t give detailed instructions!  Don’t try to motivate!  Delegate!  Just indicate what needs to be done and how it fits in with other work going on in other sections. Your skilled staff will take it from there.  If you’ve explained the overall situation well (and believe you me, we all mess up from time-to-time), your staff will deliver.

The sign of the inexperienced manager is that they forget there are many different situations and they assume their interpretation of the situation is relevant and start instructing their staff as if they are novices.  Interpreting the situation is the skilled person’s job.  The skilled person is on the spot and has immediate information about the circumstances.  The manager does not have this information and is likely to make the wrong call.  Third, the manager’s job is to provide the resources for your staff to respond to situations as they arise.  That’s the manager’s job.  Don’t wander off the job and start doing someone elses job just because it is in your comfort zone!

Take air traffic control again as an example.  Imagine an air traffic controller manager hears the voice of an traffic controller become more urgent.  The worst thing in the world would be to take over.  If, to take an extreme example, it was clear the air traffic controller was having a heart attack, the manager would get another controller to take over the station.  If the manager takes over, he or she would not be doing thei job – which is to monitor the overall situation and the interconnections between the jobs. It there was some tension at a station, they might walk over, but not to interfere – but to be immediately available to receive requests for more resources.  The picture from Zemanta illustrates beautifully – two senior people are standing-by to take instructions from the skilled person on the job. They haven’t taken over and the next scene will be them turning away to organize what the air traffic controller and the pilot needs to resolve this crisis successfully.

In business settings, the relationships may not be so clear.  If you walk past someone who is doing something you don’t like, don’t interfere and don’t start to comment. To keep yourself oriented, ask yourself these questions.

  • How does this job fit into other jobs?
  • Does the person doing the work understand how the jobs fit together – or better still, have we forgotten to tell him or her something?
  • Ask yourself what you are reacting to – your inexperience, or a real danger that the jobs won’t fit together at the end of the day?

Can you maintain your role?

This is a tough one for people moving into management, especially if they haven’t had good role models in their own managers.

To judge where a manager is a on the learning curve,  psychologists get quite sneaky in assessment/development centres.  They’ll drip feed you ‘rumours’ that a skilled person is not working in a skilled way, and then see if you can maintain your role.

  • Can you maintain your focus on how the outputs of all your level 4 people fit together and work together to achieve a good collective result?
  • If not, why do you think that the situation is so alarming that you have to do the equivalent of interfering with an air traffic controller as they speak to an aircraft?
  • Is your reaction based on professional information at this level 7.  Or, is it based on panic because the skilled person has a different style from you?

I remember one superb candidate in an assessment center who disregarded the ‘dripfeed’ and began a performance review of a senior salesperson “how is the market, John?”

Brilliant question.  To state this in a general abstract way. Ask “how are you finding the situations that you were appointed to manage?”

This exceptional candidate received a full report from her ‘subordinate’, listened to it carefully, and responded to it in its own terms.  Then, once they were both oriented and playing their own roles without muddle, she attended to rumors that he had been using a company car for personal purposes.  She didn’t muddle the issues and she didn’t let him off either.  She made it clear in a cheerful but implacable way that the car was not to be used in that way and she didn’t get into the excuses.  When one of the excuses was dissatisfaction with pay, she put that aside to discuss that later.  That was important and very much her job.  But it had nothing to do with cars and cars had nothing to do (really) with how much work it was taking to achieve sales in that sector.

She was only able to achieve this clarity because she was clear at the outset about their respective roles and she didn’t fall for the temptation of giving her opinion on matters that were irrelevant.

Rehearsing for your middle management job

Finding the right question is qhard though.  I wonder how many psychologists serving assessment centres and HRManagers interviewing could phrase them.

So figure out your question.

Let’s imagine an air traffic control manager was following up a complaint about a skilled air traffic controller.  Yes, it is tempting to jump to the complaint.

  • Begin with the responsibility of the job.  How is sector ABC?  Find out what is going through the air traffic controller’s mind.
  • Then it is easy to begin with – I’ve had a complaint about this.  And wait to see how it all fits in.
  • It’s very likely you will learn a lot.  Keep the conversation at the level of managing sector ABC and how ABC sector fits in with DEF sector and GHI sector (and of course, with finance, marketing and HR).

Sometimes there is no issue except panic and the panic is yours. So deal with it.  And thank your stars you have a light day today!

Going back to Brunel and Jaques

Yes, I am surprised that local HR gurus don’t know their Jacques. He’s handy for structuring thinking about big organizations in all three areas – job design, pay and development.  We can take it as said the pay scandals wouldn’t have happened if HR had been reviewing their handiwork with his principles and those of his descendants.

I have another question though.

How do hierarchies fit into social media?

We know the old dinosaurs of large mechanistic companies have to change their ways.  GM is on life support.  The banks in Britain are alive mainly because of the massive ‘blood transfusion’ from the rest of economy that may kill us instead.  The organizations of the future will be smaller and networked but there aren’t enough around yet to see patterns – or are there?

Yes, in a sophisticated networked organization, most students join us around levels 2 and 3.   Graduates should be trained for level 4 (skilled) with the idea they will be at level 5 in 3-4 years (skilled and able to supervise novices).  I think this pattern will remain much the same.

Thereafter, do we have hierarchies?  Maybe – it’s possible to conceive managing networks the same way as managing hierarchies.  Or are we going to have to understand the complexity of organizational life differently?

Is the Elliot Jaques sign at Brunel University just a curiosity like the lace buildings in my town?  What do you think?

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First, understand the business!

Published September 25, 2008 by Jo Jordan

Business-oriented HRM curriculum

I am teaching undergraduate and postgraduate HRM and for the last 8 weeks I have been walking the post-graduates, in particular, through a simple heuristic for understanding a business model and its HRM implications.

Of the many different businesses they have chosen to work on, two please me in particular: the first is Islamic banking and the second is insurance broking (in Cameroon).

Simple heuristic for understanding a business

I am grateful to Michael Riley of Sussex University for learning (via his writing) a simple heuristic for understanding a business.

Inspect the revenue graphs and understand how revenue varies

  • as a trend (increasing or decreasing)
  • seasonally
  • with events
  • and randomly in the short term.

Once we understand ‘sales demand”, we can look at the derived labor demand.  In manufacturing, labor demand may be mediated by technology.  In services, like banking and insurance broking, labor demand is far more direct.  When we have a good feel about who we will need, when and where, then we can set about managing our labor supply.

Variability in Islamic banking

My Islamic banker, after shyly announcing he was an Islamic banker and taking the trouble to educate me on the principle of “no interest” and the products they sell, reacted as most people do when they talk about HR.  He started describing the HR systems and described a business that was ultra-stable.  Because Michael Riley’s heuristic had cued us to look for variability, we asked a few more questions and this is what we come up with.

  • Their long term growth or contraction depends upon reputation.
  • They have three Islamic festivals, such as the Eid which is coming up shortly, when as at Christmas, spending (and borrowing) is very high.
  • As with all banks, they are affected by weather, economic and political events which they monitor closely.
  • After 9/11, they came under suspicion even from Islamic customers.

Now that we understand how the need for service varies, we can imagine when line managers will be calling for skill and the skills they will call for.  And we have a fair chance of matching labor supply to labor demand.

When we achieve this match (which will never be perfect), then we can contribute to the ‘bottom line’ of the organization.

How we do that is the technical skill of HRM.  But to use our tools, first we must have a mental image of the match we are trying to achieve.

Insurance Broking in Cameroon

The insurance brokers in Cameroon, as far as I can see, are structured as any independent insurance brokers would be.  They are a family owned firm.  Their business peaks at the calendar year end and has a steady though variable stream of business throughout the year.

Once again, once we understand this pattern, we can easily see what is necessary to match the demand with supply.

Sales Demand and the Credit Crunch

Interestingly, the cause of the credit crunch seems to be some back-room sales activity: borrowing money on the wholesale markets.  I think if HR Directors had fully understood the sales demand of their firm, they might (and this is speculative) have partitioned the business and noticed earlier that the non-wholesale parts could not sustain their payrolls.  They might certainly have taken active steps to protect the pension funds which is a serious obligation if they are also Trustees.

I remember working with the HR Director of a combined investment, corporate and retail bank.  She had noticed that their payroll exceeded their interest income (not relevant to an Islamic bank!) and they were being sustained by fees.  On that basis, she had carefully structured her payroll into ‘columns’ beginning with the essentials (basic pay, state insurance, pension, health insurance, etc) moving across the page to luxuries.  She then brokered a signed agreement with employee representatives that in a downturn, they would start removing benefits from the right hand side first.  This is proactive, sensible HR policy.

As all the above is absolutely speculative, I wonder if anyone has information on the HR and the credit crunch?  And if anyone else uses Michael Riley’s heuristic?

UPDATE: For an HR Managers perspective on the Recession, I have written a summary on a new post.

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