This is the course notes I took when studying Managing Social and Human Capital, offered by Wharton on Coursera.

Unlike other parts of the business, human capital is about “people”:

  • They have legal rights, including unionization, which limit what management can do. Discrimination against gender, age, ethnicity, religion, etc., are forbidden by law.
  • Social norms also matter, including issues of fairness.

Unlike managing other parts of the business, you don’t have unlimited power as a manager, as an owner, the way you manage your people.

Motivation and Managing Performance

Motivation

How do you get employees to do what you want them to do?

You could try to manage people by having somebody stand over and watch them, but that doesn’t work very well. First, it’s really expensive to do. Second, how can you trust the person who’s watching if you can’t trust the first person?

The principal–agent problem occurs when one person or entity (the “agent”), is able to make decisions and/or take actions on behalf of, or that impact, another person or entity (the “principal”). This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard. In this context, the agent is the employee and the principal is the manager.

  • “Efficiency wages” motivates people by paying slightly higher than the industry average.
  • “Tournaments” (as in individual sport tournaments) awards higher level employees a lot more, thus creating an incentive for employees to move up. But the downsides are increased internal competition and incentives for employees to join weak firms.
  • “Rewarding A While Hoping for B” indicates that the rewarding system does not match the ultimate goal.

Designing Incentive Systems

From employee’s perspective, here is the trade-off regarding the incentive system:

  • Is the performance outcome within my control: if not, there is no incentive. For example, there is no incentive to lower employees if the performance outcome is for the overall company.
  • Is it possible to “sub-optimize”: i.e., get my goal at the expense of the overall business? If that’s possible, it’s “Rewarding A While Hoping for B”. For example, a sales person may optimize for his own sales performance by offering too much discount that reduces the profitability of the company.

The best solution is incentives are best kept simple. The exception to this is executives whose pay is tied to overall business outcomes. But even here, we get sub-optimization like relative short-term performance at the expense of long-term performance.

The psychologists have a more realistic, complicated view:

  • “Expectancy theory”: what do employees expect? If they don’t expect the employer to honor the incentive system, then the motivation diminishes.
  • “Path-Goal”: if I don’t know how to get to the goal, then the incentive for the goal is meaningless.
  • “Behavior Modification”: unexpected incentives (positive or negative) can modify people’s behavior unconsciously towards the desired behavior.

In the domain of social psychology, i.e., how people behave in the context of other people:

  • Conformity: within a group of people, individuals would do what others do to stay in conformity. In the context of workplace, by placing new hires with high performers in the company, employer can foster the desired behavior in the new hires.
  • Imitation: People tend to copy the behavior of those who have power over you (e.g., supervisors) or attractive to you (e.g., role models).
  • Compliance: people really react to formal authority and the trappings of authority are very powerful. For example, the Milgram experiment.

Cognitive Dissonance is the fact that people’s mind are difficult to hold conflicting information simultaneously, and people feel psychological stress when confronting with conflicting information and will do all in their power to change them until they become consistent.

  • Goal Setting: people tend not to act in violation of a previously-set goal (like quit smoking).
  • Pygmalion Effect: if a role model sets a higher expectation for people, and people are inclined to achieve more trying to meet the expectation.
  • Equity Theory: if we perceive something as unfair, we work harder to make it fair.

Hiring

Hiring matters because the performance of the workforce is not only about management, but also what kind of people you get.

Standard tests (such as IQ tests or personality tests) are not so useful in predicting how candidates perform. Recruitment (the process of persuading people to apply) is often under-used. Selection is hard because candidates lie. Past behavior is usually a good indication of future behavior.

The Attraction-Selection-Attrition model indicates that people tend to hire those similar to themselves. This means the hiring process can drive the culture of the company and also shapes who gets hired.

The reality of hiring no longer fits text-book descriptions:

  • The use of technology to find applicants: majority of those who change jobs now aren’t looking to move!
  • Applicant tracking systems use keywords to find applicants.
  • Outsource the whole hiring process to recruitment firms.
  • Outsource labor – staffing agencies, independent contractors, etc. Companies can get labor without hiring!

Performance Management

Performance appraisal is the most disliked part of management. We tend to want it to do too many things:

  • Assess past performance and tie rewards to it;
  • Improve performance for next year (area for improvement);
  • Plan development path and experiences (career development).

Over time, the goal for performance appraisal shifted away from development to assessing past performance. There are many mechanical models for performance, based on planning:

  • Company goals cascade down to individual goals for each year, but yearly cycle no longer fit business schedules;
  • Competency-based models, but it’s hard to pick out;
  • Complex scales/forced ranking, but it is relative to a small group of people and creates unfairness across a larger scale.

Even when the performance standards are clear, processing and communicating is hard because the inception may be skewed and biased. In addition, end-of-the-year exercise makes it difficult to even remember details, let alone give feedback.

Why it is uncomfortable:

  • Overconfidence bias: people are consistently overconfident about their own performance (average performers think they’re at 80-percentile) and thus leading do cognitive dissonance;

Supervisors are not perfect. They can also have biases:

  • Fundamental Attribution Error: we attribute certain bad behavior to the wrong reason;
  • Self-fulfilling prophesies: we tend to manage perceived good performers differently, and thus leading them to become actual good performers;
  • Relationship biases – similarities, attractiveness, etc., that we tend to think people we’re familiar or attracted to better performers.

Thus, a new model emerges in about 1/3rd of US companies that replaces formal annual appraisal with a “check-in” system that relies on culture than rules to have regular conversations about improving performance.

Both the check-in system and formal appraisal require giving feedback. To give effective feedback, we should

  • Create “psychological safety” that respects employees’ position, so that they don’t worry about questions such as “am I going to be punished about what I say?” or “what parts of the feedback are open to discussion (i.e., negotiation)”.
  • People have “Negativity bias”: they are hard-wired to worry disproportionally about negative feedback compared to an equivalent piece of positive feedback. Thus, we need to think about how we frame up the negative information.

So if you’re a supervisor, the single most important thing to worry about is getting better at giving people feedback in a way that they can take it in, that doesn’t threaten them, that they’re really listening to what you say, and that they’re going to change their behavior because of it.

Tasks, Jobs, and Systems of Work

A task means the individual thing that you are doing. A job is organized around a series of tasks that have a bunch of things in common. Jobs are arranged into organization charts, which identify reporting relationships and decision rights.

Once people start working together with other people, then the definition of jobs matters a lot because it affects how those people interact with each other, who does what.

Frederick Winslow Taylor tries to impose order to improve the productivity:

  • Design jobs in ways that are easiest to do (early ergonomics);
  • Take complicated and high-skilled jobs and break them down into individual tasks;
  • Assign simple tasks to low-skill workers so overall cost of doing the job decreases;
  • Tell everyone exactly how their tasks should be performed;
  • Piece-rate payments (salary is proportional to number of pieces done): share the gains with workers.

The drawback is that people soon hate these jobs because they are so boring. People like about work/jobs beyond the paycheck:

  • Social interactions with other workers;
  • Autonomy (control): they get to decide how the jobs are done;
  • Variety of tasks;
  • Appreciating the significance of their effort in the jobs;
  • Getting feedback on specific tasks (whether they are performing the tasks well).

Therefore, while the engineer’s way (Taylor’s) of designing jobs are more efficient, we should take in psychologist’s opinion so that people like jobs better. Ultimately, a good job design motivates employees to do a better job.

If you do the management of people correctly, it’s not just about being able to keep your costs down or able to implement and execute strategy or whatever the processes are the company wants. It is possible that you can actually create the competencies that drive the strategy of the business.

Making Good and Timely Management Decisions

Decision-making should be both good and timely. Organizations and leaders need to reach fast and accurate decisions under conditions of greater uncertainty and risk.

Fast Slow
Track real-time info. on firm operations and environment Focus on planning; gather limited info. on environment
Build multiple, simultaneous alternatives Develop a single option, go to 2nd if 1st fails
Seek advice of experienced counselors Solicit advice irregularly, less experienced advisors
Use partial consensus to resolve conflicts Take decisions after consensus, by deadlines
Integrate the decision with other decisions Consider the decision as a single action

The U.S. Marine Corps use the following guidance to decide decisively:

  • Marine commanders seek a “70%” solution, not 100% consensus. Make decisions with the majority but not all information.
  • Officers learn to explain unambiguous objectives – strategic intent – and then then leave subordinates to work out all the details. Managers should set the goal but not to micro-manage. “Eyes on, hands off”.
  • First-time mistakes are tolerated, even encouraged, if they point to stronger performance next time.
  • Indecisiveness is a fatal flaw – worse than making a mediocre decision. Because a mediocre decision, especially if swiftly rendered and executed, at least stands a chance.

Once the strategic intent is made clear, the group of people, who trust each other as an organization, should be able to come to a collective consensus relatively quickly.

Sub-Optimal Decision Making When Under-Prepared

  • Over-value early information in areas where you are inexperienced. For example, rely on a product’s list price to estimate its bargain price.
  • Become over-confident in own judgments when the terrain is unfamiliar. For example, make overly precise forecasts of sales growth for new product.
  • Seek confirming evidence and ignore conflicting data. For example, when advocating a new product, confine focus to its merits and ignore its shortcomings.
  • Positive organizational moods increase use of sub-optimal decision procedures, negative moods decrease their use.

Lessons for Management of Good and Timely Decisions

  • Prepare the management foundations early to help ensure that
    • communication from you is persuasive and clearly understood
    • credibility is high when others need to understand and accept your decisions
  • Prepare others to make effective decisions
    • continuously sharing your knowledge, information, and experience
    • make strategic intent clear, empower them to make decisions on their own
  • Exercise consistent management
  • Develop allies among those who work with you so that you can seek timely advice if necessary
  • Build diverse and cohesive teams for high performance under stress
  • Design organizations to foster management capabilities

Designing and Changing the Organization’s Architecture

Business strategy drives the organizational structure. Organizational structure are done via two ways:

  • Strategic Grouping (Divisionalization):
    • Production activity (functional)
    • Geographic/regional
    • Product/service (strategic business unit)
  • Strategic Linking:
    • Hierarchy or matrix
    • Liaison
    • Cross-divisional team

Once the organizational design is in place and is working, itself becomes a self-sustaining flywheel, or organizational inertia, that can keep going without much management. However, it creates impediment when the business situation change. Common reasons for failure in organizational change are:

  1. Not sufficient urgency for the goal of the change (<75% of team ready for change).
  2. A powerful coalition not yet created.
  3. Little vision underpinning the change agenda (failing the 5-minute advocacy test).
  4. Vision is not repeatedly and compellingly communicated.
  5. Anticipated obstacles to the change not reduced or removed.
  6. Too few shot-terms wins to sustain momentum.
  7. Declaring victory prematurely.
  8. Failing to anchor change agenda more broadly in company culture.

Reward System: Pay and Promotion

Inequity de-motivates people. Inequity means disparity between an individual’s work and reward. People seek to decrease inequities they face. Equity effects explain why

  • Temporarily under-rewarded individuals will decrease performance, and the over-rewarded will increase performance. For example, employees assigned to more or less desirable offices change performance accordingly (large office leads to better performance);
  • Under-rewarded individuals become more self-aggrandizing. For example, under-rewarded basketball players take more shots but score fewer points.
  • Over-rewarded individuals will become more cooperative. For example, over-rewarded basketball players contribute more in non-scoring areas (e.g. rebounds and assists).

An Eight-Step Model for Leading Change

  1. Establish a mindset of urgency, a burning platform
  2. Create a leadership team to drive the change
  3. Articulate a vision for a better world and a strategy for getting there
  4. Build buy-in throughout the ranks
  5. Empower action by change agents
  6. Identify short-term gains for reinforcing the long-term agenda
  7. Foster a culture of persistence and determination
  8. Reinforce and institutionalize the new world

The Manager’s Template for Human and Social Capital

  1. Consult with trusted associates, decide when 70% confident.
  2. Convey strategic intent, avoid micro-managing.
  3. Prepare self and team for good and timely decisions before needed.
  4. Create a management mindset for good and time decisions.
  5. Design the organization’s architecture to motivate and align people.
  6. Bring teams, compensation, promotion into pulling in the same direction.
  7. Reduce inequity in pay, promotion, and other organizational features.
  8. Manage organization change with both “head and heart.”