Saturday, April 13, 2013

Agency Problem and HR Profession

Think of a perfect company where almost every employee is happy,engaged and has high performance work ethics. The reason - they were chosen perfectly for the right job and their incentives match their expectations. There is minimum attrition and hence the only recruitment need is for organization growth. Every employee respects each other, believes in company's compensation structure and even everyone knows each other's salaries. This perfect company is very generous with employees making great contributions but also is very fast in firing people with negative work ethics. Hire slow and fire fast keeps the sanity of the workplace.

But things are never quite perfect. Ineffective recruitment is very common - large scale recruitment without proper job-skill match or work ethics alignment creates a lot of very ineffective employees. Each ineffective employee multiply the inefficiency of the company - increasing cost and resource wastage and lowering profitability, customer satisfaction and market competitiveness. Once you have a pool of bad recruits, it is very difficult to attract great people. Two reasons - great people don't want to work in a mediocre company and also bad selectors(who were the initial bunch of bad recruits) cannot or do not want to select great new recruits. The culture of bureaucracy over meritocracy prevails. Good people leave the company. To fill those positions the company needs to attract new recruits at a much higher cost. To compensate the higher cost of new recruits(who are not great quality recruits and are highly overvalued) the company cannot keep a competitive compensation for the existing employees. The result - higher attrition of existing employees(some of them were really good, wanted to stay with the company long term and make a difference) and highly demotivated workforce.

Now the question is which case is attractive for an HR employee or for that matter the HR organization. Theoretically HR success metrics from a shareholder's perspective should be keeping the Highly effective and motivated employees for the highest term possible and thus increase company revenue, profit and market value. But practically - in a perfect world there is nothing much to do for a HR organization and that calls for a small HR organization(HR is a cost center in traditional accounting). Because everyone is happily engaged with their work - you don't need a big team to arrange Team building activities or daily social events(or send Team Engagement emails). Because of low attrition you don't need a big team to handle employee separation or new recruitment activities. Only a small group of HR Generalists can support the essential payroll and clerical tasks. As a HR professional do you really like to work in such a world? Of course no.

That's why we need complex compensation structure, annual performance reviews(where fixed percentage of employees has to be grouped into best, medium,worst categories),high attrition and costly replacement. Oh yes- These poor employees are not engaged - lets' send an invite for virtual cricket match....everybody loves!   

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