We reviewed a macroeconomic perspective on the issue in our past post, but…how does the company’s point of view fit into a global approach to this issue?
Well, it definitely looks like, at some point along the way, we’ve lost the perspective on what is the main reason to hire an employee and the pressure that this entails for the company.The underlying principle is that the value added by the employee through his/her performance must have a tangible impact on the final product or service the company is offering to the market. This is not rocket science, ok, but it can be interpreted in different ways. Take a company that manufactures pens, for example. Every cost associated to the operating processes existing from the very creation of the pen until its market delivery should be substantiated in regards of an increased added value resulting in a bigger margin (either a higher price or a lower cost). Thus, a change in the raw materials used or in the manufacturing process would immediately and clearly lead to a smaller margin, and precisely because of this is discarded. The company’s staff, on its turn, should also contribute to increase the pen’s margin, once marketed. However, this is easier said than done: this kind of principle is very present in start-ups (a must), but, as the company grows and so does the staff, internal processes become more complex and diverse, resulting in a loss of visibility of the real amount of value added by a certain employee to the final product or service. When this happens, his/her performance is typically assessed based on either the direct supervisor’s level of satisfaction or the compliance with certain performance goals. This is both correct and required, but very frequently insufficient (hence the consolidation of assessment models for corporate restructuring like Management by Missions). Be that as it may, losing perspective on the real (in terms of value) contribution of an employee to the organization is potentially dangerous, and even more considering that the average weight of labour taxes on wage costs for European companies was 23,7% (though very unequal between countries) in 2013, a very similar percentage to that of the United States. In countries like Sweden, this rate climbs to 33,3%, and hence the obvious interest in maximizing the employee’s productivity shown through examples like the one mentioned in the previous post.
In order to get a clear picture (thanks to El Blog Salmón please note this is written in Spanish) of what entails hiring a new employee in Spain in terms of costs, just consider that, in order to pay an average monthly gross salary of 1.500€, resulting in a net salary of 1.269€, a 2.019€ cash outflow is required. If you are a wage-earner, please read the figure again and now imagine that you are the one responsible for ensuring that this salary is paid monthly (in addition to searching and dealing with customers, paying suppliers and distributors, taxes and keeping a reasonable amount to make your living). You might also want to think about the probable redundancy costs (especially if you live in a European country) and, worst-case scenario, potential judicial costs resulting from the dismissal of the worker. Now ask yourself if that is a very appealing scenario and whether you still think that you have any incentive to hire this person. If the answer is affirmative, what would you ask in exchange? What kind of guarantees or control over his/her performance would you like to have? In the past (and, unfortunately, in too many current companies), the answer to these questions would typically lead to a so-called face-to-face working approach: stable, firmly supervised and based on hierarchy, in which the employee was paid to work the more number of hours, the better under a model to control performance based tasks or goals. In other words: time and obedience that were traded off against security and stability. This was the traditional system of incentives, a sort of symbiotic relationship by which the employer acted on the grounds of a certain mistrust towards an employee that required permanent control, basically because the very model encouraged him/her to work as few hours as possible at the prospect of an invariable salary.
Nowadays, this is an absurd and (luckily) dying model. There’s an increasing consensus about the necessity to change the focus from the process (workday) to the contribution (cost-benefit analysis of the achieved results). Technology is playing a decisive role, no need to say, when it comes to the consolidation of new models, such as home working, flexible working or non-hierarchical networking, but on top of that companies are becoming increasingly convinced that a satisfied and happy employee is far more productive than a merely supervised one. However, there’s one more step to take in order to consolidate the paradigm shift, and this is, again, the reinforcement of the new system of incentives. Forget time and obedience in exchange for security and stability: they are dead. The new tradeoff is performance, adaptation and efficiency in exchange for flexibility, variable salary and work customization.
Working by individual projects, home working, self-employment and entrepreneurship promotion are along these lines: reducing the burden and commitment of traditional hiring to focus on more flexible, open and customized schemes that enable a better visibility of the employee contribution to the company’s achievement. And this is not about facilitating the dismissal of workers or promoting low-quality jobs (a traditional perspective on this type of approaches), but simply enabling a more balanced model of risk and benefit sharing between agents (companies and workers) resulting in a system of incentives much more adapted to the current competitive scenario.
We’ll review the employee standpoint in our next article
This article is also available in Spanish
About the author Marc Sansó
Ph.D, MBA. Management Consultant, Professor and Researcher. Keen on competitive strategy, digital economy, FC Barcelona and horror movies
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Shaping competition: my last paper presented at the 31st International Business Research Conference