Employee Value Credits: Driving Organizational Transformation

Employee engagement is a critical component of organizational transformation. Genuine employee engagement aligns the employees to organizational goals, enhances the employee capabilities and builds the competitive advantage of the company. It is not surprising therefore that employee engagement is on the agenda of experts and leaders in human resources management. Yet, there are very few cases where employee engagement has been institutionalized as an effective and sustainable business process, with a universal coverage of all the employees.

The roadblocks to authentic employee engagement are many. Oftentimes it is implemented as a top-down communication program, largely driven through supervisors and managers. It is also mixed up with the goal setting and performance appraisal exercise. Many times, multiple company-wide initiatives are taken which leave the employee confused and bereft of focus. Reliance is placed also on external consultants who may lack the business grasp and individual empathy. Amongst the various roadblocks, an excessive dependence on performance appraisal system as an employee engagement tool turns out to be the most problematic.

Over the years, multiple approaches have been attempted to make the appraisal system broad-based and participatory. However, these merely have resulted in larger appraisal forms and increase in the number of appraisers than in more effective employee engagement. The reasons are not far to seek. The appraisal systems, whatever the hue, focus essentially on individual performance. Given the large employee numbers they tend to be only annual, and at best semi-annual, processes. Even more unfortunately, the appraisal systems tend to get tied to compensation increases and promotions, often bringing in a conformance pressure, related to the growth expectations of the employees and business compulsions of the company.

Expert views on engagement

Expert studies on employee engagement point to complex nuances that connect or disconnect employee engagement and employee motivation. These range from simple incentive-engagement linkage theories to more complex multi-factorial behavioral theories. Five important alternative theories are summarized below.

Jody Heymann in his book, “Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce”, HBS Business Press, May 2010, holds that there is a demonstrated advantage in overall business performance among high-engagement companies compared with their low-engagement counterparts. According to him, it is time to unlock the potential increase in customer satisfaction, commercial sales, and diminished turnover rates that engaging and motivating low-level employees can bring, even in an economic downturn. He commends design of a customized incentive program that will increase the engagement and motivation of employees at all levels. He provides several approaches that can be tailored to almost every budget and business model, from all-expenses-paid company vacations to simple public recognition of a job well done. In this approach engagement is correlated with employee incentive and reward programs.

Kenneth W Thomas in his paper, “The Four Intrinsic Rewards that Drive Employee Engagement”, Ivey Business Journal, November/December 2009, suggests that extrinsic rewards like pay and bonus as well as other financial incentives are no longer sufficient to achieve employee engagement and motivation. He proposes a framework of four intrinsic rewards. These are: the meaningfulness or importance of the purpose the employee is trying to fulfill, the choice of work activities to fulfill the purpose, the feeling of competence and high quality delivery in performing the work, and the recognition that the purpose is fulfilled through performance. Managements which facilitate and encourage self-management by employees are seen to create high-engagement culture in organizations resulting in high performance.

In the case commentary titled “Why are We losing Our Good People”, Harvard Business Review, June 2008, Edward E Lawler III brings forth, through four experts, as to how empathy and rapport constitute the cornerstone of employee engagement. One expert commends establishment of a forum where employees can freely, and without fear of repercussions, express their concerns and apprehensions. Another expert suggests that the most important contributor to employees’ emotional commitment is a sense of connection to the company’s mission, and the company’s culture and values. The third expert suggests simplicity of management structure, clarity of corporate mission and equity in employee compensation as essential for effective employee engagement. The fourth expert concludes that an open door communication policy should be supplemented by holding leaders accountable to attracting and retaining good talent.

Nitin Nohria et al in their article, “Employee Motivation: A Powerful New Model”, Harvard Business Review, July 01, 2008, hold that the ability of an employee to comprehend is directly linked to the engagement he has. Specifically, they define engagement as reflective of the energy, effort and initiative employees bring to their jobs. Clearly, the more engaged the employees are the greater could be the performance impact. Nitin Nohria and his co-authors, however, caution against simple correlation. According to them, engagement is but one component of four factors, namely engagement, satisfaction, commitment and intention to quit that influence employee motivation. They believe that each of the four emotional levers would need to be differently pulled to achieve the right employee motivation.

A dramatically novel concept of “employees first” is now propounded by Vineet Nayar through a stirring case study of HCL Technologies Ltd, an Indian information technology major in his book “Employees First, Customers Second: Turning Conventional Management Upside Down”, HBS Press, June 2010. Vineet Nayar who is HCL’s successful CEO describes how the company defied conventional wisdom of customers first and then turned the hierarchical pyramid upside down by making management accountable to the employees first. This strategy, backed by a culture of trust based transparent communication and information sharing, created a sense of urgency and involvement in the employees, empowered them and unlocked their potential. The engagement strategy fostered an entrepreneurial mind-set, decentralized decision making and transferred the ownership of change to the employee in the value zone, according to Vineet.

Though the above five schools of thought appear to capture diverse possibilities on employee engagement, they may not offer the required framework for authentic employee engagement. The compensation and incentive linked approach is too simplistic to be of sustainable benefit while the employee-first approach is too radical for universal adoption by all companies. The mid-way behavioral approaches tend to be abstract and require leadership nuances that are unlikely to be widespread in organizations.

The Paradox of employee engagement

The opportunity in authentic engagement is that the typical employee has the intrinsic capability and aptitude to contribute to his or her organization’s processes and activities in more ways than the formal job profile demands of him or her. This, of course, is subject to the caveat that the organization has good recruitment filters which selects higher percentile candidates and has, in addition, comprehensive on-boarding practices that enable employees acquire a good grasp of the company’s business and operations. However, the challenge in a permissive system of letting employees contribute in multifarious directions is that it could lead to dilution of core responsibilities to the detriment of the goals that an organization must fulfill in a focused manner.

The paradox of employee engagement lies in terms of balancing the creativity of an employee with the focus of the organization. Over a period of time, the more creative an employee is allowed to be, the more diffused his role is likely to be; on the other hand the more focused an employee is expected to be, the less creative he is likely to become. The organization and leadership have the responsibility to solve this paradox in a comprehensive and sustainable manner to unlock employee creativity without compromise to the focus of the organization.

Such an approach needs to develop a canvas that is larger and more impactful than quality circles, suggestion schemes or idea initiatives. All of such schemes whose utility has been well established are specific and relevant to the jobs the employees carry out, and would need to be continued, regardless of any larger initiative for capturing employee creativity and seeking employee engagement. The proposed framework called employee value credits is a well-guided but open-sky initiative that enables an employee to be creative with no restrictions but at the same time prevents diffusion of focus.

Employee Value Credits – the framework

The fundamental premise of the employee value credit framework is that each employee will have the capability and plan to contribute in several areas that are not only directly or indirectly connected with the job but also some which could be currently out-of-organizational orbit but may have value at a future point of time. Each employee contributing in such a manner would be motivated to contribute only when an appropriate recognition is provided. As one is aware, the only three classic motivated aids that are available are on-the-job implementation, monetary reward and non-monetary reward.

All the three motivational tools have limitations vis-à-vis the need for authentic and global employee engagement. On-the-job implementation of new ideas is doubtless highly satisfying to an employee but the ideas that can be implemented under this route tend to be few. Monetary rewards can also be only limited in scope and in some cases may be better spent only after the real value of the engagement process is demonstrated. Non-monetary rewards by way of appreciation letters or public celebration tend to have only a transient ‘feel good’ factor. The framework of employee value credits, on the other hand, provides a robust and sustainable mechanism for employee engagement and motivation.

The theory of authentic employee engagement is based on the following five core principles, each being of equal importance and priority:

1. Creative: Employee engagement brings out the creativity in each employee, and enables him or her to contribute to the organization through not only operational performance but also through creative value-add.

2. Expansive: Employee engagement grows on the employee and the organization in an expansive manner, and enables the employee and the organization relate to each other not only on the job but also off the job.

3. Collaborative: Employee engagement breaks down the silos (individual versus individual, individual versus company, and domain versus domain), and enables the employees contribute through collaboration.

4. Expressive: Employee engagement removes fear and diffidence and enables both the engager and the engaged become expressive, and helps employees bring out the latent issues clearly and powerfully.

5. Timeless: Employee engagement is not about finding quick-fix and rapid-fire solutions to current needs; it is all about creating a bank of ideation value from which ideas can be tapped as their time dawns on the horizon.

Clearly, the principles do not become operational by themselves. The leadership of an organization must demonstrate its commitment to genuine employee engagement by a set of policies. First, it must make clear that employee engagement is not an opportunistic initiative solely to aid performance. To reinforce such a perspective, all performance improvement initiatives (example, suggestion schemes) which are job focused must be allowed to continue. Second, it must choose the mentors, or the engagers, in the engagement process carefully. To ensure this, the choice of engagers needs to be made a prestigious matter. Third, an institutional framework needs to be created to collect, receive, and analyze as well as credit the employee inputs for inherent or potential value. The framework of Employee Value Credits makes this happen.

Institutionalizing the EVC framework

The framework of Employee Value Credits starts with the creation of a dedicated department, headed by a leader positioned as a direct report to the chief executive officer. The leader of the EVC department (EVCD) should be a seasoned, empathetic mentor with an outstanding grasp of the current businesses and a good understanding of the related and substitute businesses. He should have the resilience and flair for building value for tomorrow. EVCD should be manned by professionals who have subject expertise corresponding to the functions and domains that exist in the company’s value chain with excellent conceptual and analytical capabilities.

EVCD has the responsibility, along with the human resources department to propound, articulate and propagate the concept of employee value credits and the processes that enable employee engagement and value generation. EVCD also shall have the responsibility to seek, identify and coach the engagers to enable them conduct the employee engagement process in the optimal manner. EVCD should have the authority to identify and course-correct the functions, domains and businesses which are tepid to the concept of employee engagement.

The employee value credit processes can be institutionalized through a set of guiding principles as set out below.

Responsible department: EVCD shall be primarily responsible for assigning employee value credits to the ideas, plans and programs that are generated by the employees across the organization. Employee value credit is the value that is assigned by the EVCD to each idea of an employee after due consideration and analysis.

Value definition: Value is defined as incremental revenue generated by an employee idea (that is profit adjusted) divided by the incremental capital investment required for implementing the idea. Each one million dollar of value, for example, could qualify for one value credit in a large organization. Profit adjustment of revenue is achieved by dividing the revenue by the gross margin percentage. Ideas with less than ten percent gross margin may not qualify for the value credit mechanism.

Value target: Depending upon the value chain, each business, domain or function (called employee entity) shall be eligible for setting for itself a value credit target for the year. EVCD shall have the responsibility and authority to negotiate value credit targets for each employee entity. The setting of value credit targets shall be a wholly voluntary process.

Iterative process: Each employee entity shall have the flexibility to accept individual employee value credit targets as part of the overall employee entity value credit target setting process. Ideally, it shall be an iterative bottom-up and top-down process with active participation by employee entity leadership and EVCD.

Evaluation: As employees provide their ideas to EVCD, which need not necessarily be subject to clearance by hierarchy, EVCD shall evaluate and provide value credits to the individual suggestions. For each employee and employee entity such value credits shall be grossed up over the year. At the end of the year EVCD shall publish the grossed up value credits for each employee entity and employee.

Tradability: Employees shall be able to trade their value credits at the end of each year for cash compensation during the annual appraisal processes or retain and accumulate them for future encashment or for retirement benefit. Employee entities can trade their gross value credits for special allocations beyond the normal budgeting allocations. This system would provide incentives to employees at individual level and to employee entities at corporate level.

Enhancements: There could be sophistications added to the value credit process by differentiating between ideas that have short term impact (say, within one to two years) and those which would have medium and long term impact (say, three years and beyond). Obviously, different credit systems need to be adopted between the two categories.

Flexibility: The value credit system could be refined to provide fixed credits for ideas with short term impact and minimal forecasting uncertainty, and scalable credits (basal plus variable) for ideas with long term impact and maximal forecasting uncertainty.

Collaboration: There could be functions and domains (such as corporate planning, industrial engineering) which could have certain advantages in ideation by virtue of their functional specialization. At the same time, they would need technical inputs to succeed well in their jobs. Entity value credits could be exchanged between such employee entities reflecting the mutual exchange of inputs.

When operated as a continuous process, the employee value credits framework helps the organizations achieve authentic employee engagement, unlock employee creativity, achieve employee motivation and enhance corporate growth.

Summary

The Employee Value Credit framework recognizes the intrinsic capability of all employees to be creative, collaborative and value adding. It also recognizes that not all ideas are borne equal; nor can they be treated equal. Employee value credit framework recognizes that ideas can be for current business development or could be for future businesses and accordingly provides for the needed flexibility. It rewards intellectual capability of employees at individual level and that of employee entities at aggregate level.

The Employee Value Credit framework provides incentives that are appropriate to individuals through value credit linked compensation and to departments through additional budgetary allocations to implement their plans. Needless to add, the creation of Employee Value Credit Department with an effective leadership will be a key trigger for implementation of this framework. In the overall, the employee value credits framework, when institutionalized, will create an organizational eco-system that is creative, participatory and collaborative for corporate growth.

Posted by Dr CB Rao on August 3, 2010