Introduction ‘Strategic human resource management (SHRM) is concerned with the development and implementation of people strategies which are integrated with corporate strategies and ensure that the culture, values and structure of the organization and the quality, motivation and commitment of its members contribute fully to the achievement of its goals’ Armstrong (1991, p. 81).
While human resource management (HRM) focuses on the potential and actual productive value of ‘human resources’ (HR) to an organization success, SHRM takes a more long-run focus by emphasizing the need of HR plans and strategies to be formulated within the framework of overall organizational strategies and objectives, and to be responsive to the changing nature of the organizations external environment.
The emphasis of SHRM is on strategic integration, which is matching HRM strategies to business strategy. Refer to Appendix 1 for the characteristics of SHRM.
Figure 1: Strategic alignment between HRM and its internal and external environment. Source: Nankervis, Campton and Baird (2002, p.
41) ‘SHRM is a model of practice, which like all models, require interpretation and adaptation by HR practitioners to ensure the most suitable alignment or fit between HR and business strategies and plans’ Nankervis, Compton and Baird (2002, p. 42). Figure 1 above shows the strategic alignment of HRM and internal and external environment. Refer to Appendix 2 for the reasons for HR strategies. Figure 2: Gaining competitive advantage through SHRM
Source: Fottler, Phillips, Blair and Duran (1990) Figure 2 provides an outline for determining and focusing on desired outcomes and anticipating essential HRM actions required for successful implementation of a company’s business strategy.
This process stretch management thinking about HR and influence decisions affecting people. ‘The strategic approach to HRM includes: ?Assessing the organization’s environment and mission ?Formulating the organization’s business strategy ?Assessing the HR requirements based on the intended strategy ?
Comparing the current inventory of HR in terms of numbers, characteristics, and HRM practices with respect to the strategic requirements of the organization and its services or product lines ? Formulating the HR strategy based on the differences between the new requirements and an assessment of the current inventory ? Implementing the appropriate HR practices to reinforce the strategy and achieve competitive advantage’ Fottler, Phillips, Blair and Duran (1990). Strategic staffing Staffing is defined by Mondy and Noe (2005, p. ) as ‘the process through which an organization ensure that it always has the proper number of employees with the appropriate skills in the right job, at the right time, to achieve the organization’s objectives’. There are many different types of decisions that have to be made relating to an organization staffing requirements. Organizations need to decide upon replacing existing staff, providing training to the staff, selecting people who can adapt to the culture of the organization and continuing and inevitable change, promoting, transferring, demoting and releasing people from the workforce when making strategic staffing decisions.
Strategic staffing is the process of implementing a plan of action to secure the needed talent through recruitment, selection, promotion and transfer. Strategic staffing need to be implemented for organizations to get the right people at the right time for achieving the goals and objective of the organization. Nankervis, Compton and Baird (2002, p. 79) stated ‘HR planning is to try to ensure that organizational objectives are met through the effective utilization of the human resource of the organization, taking into account changing circumstances within and outside particular organizations’.
The staffing function encompasses the implementation of the HR planning process. Strategies like internal growth make it vital for organizations to make strategic staffing decisions. Noe, Hollenbeck, Gerhart and Wright (2006, p. 74) mentioned ‘Growth requires that a company constantly hire, transfer, and promote individuals, and expansion into different markets may change the necessary skills that prospective employees must have’. To gain a competitive advantage this makes is important for organizations to realize the staffing needs and make strategic staffing policies in alignment with the organizational strategies.
When staffing process is carried out strategically it ensures managers that the organization’s human resources would consist not only of educated or skilled workforce. Skilled and educated workforce can contribute to the effective and efficient performance and productivity of organizations as this would help organizations to achieve a competitive advantage. Strategic performance management Noe, Hollenbeck, Gerhart and Wright (2006, p. 330) defined performance management as ‘the process through which managers ensure that employees activities and outputs are congruent with the organization’s goals’.
The aim of performance management is to establish a culture in which employees take responsibility for continuous improvement of business processes and their own skills and contributions. Performance management is central to gaining competitive advantage. Performance management have three parts, defining performance, measuring performance and feeding back performance. Noe, Hollenbeck, Gerhart and Wright (2006, p. 330) stated ‘performance management measures performance through performance appraisals, which is the only one method of for managing employee performance’.
Performance management has come to encompass much more than just appraisals. ‘A major trend in performance management is that while employee appraisals are the heart of performance management, organizations are now integrating a number of closely related functions including compensation, succession planning and goal management into the performance management process’ Loucks (2007). This holistic approach enables HR professionals to manage talent and supporting strategic goals to achieve competitive advantage.
The strategic purpose of performance management links employee activities to organizational goals and objectives. Performance appraisals can be used to motivate and improve performance of employees. By identifying internal strengths and weaknesses managers can focus on areas where there is need for improvement to make an organization to be productive to achieve the goals and objectives. Anthony, Kacmar and Perrewe (2002, p. 355) mentioned ‘a well designed performance appraisal system can encourage individuals to work together as a team.
If this is an organizational goal, it must face several challenges in designing and implementing such a system’. An effective performance management can help managers to implement strategies. Performance evaluations will have greater impact on strategy implementation when evaluators make meaningful distinctions among different levels of performance. ‘In a highly competitive knowledge-based economy, performance management is taking its place in boardrooms across the country.
Faced with pressures including the aging workforce and skills shortage, executives are becoming more involved in the performance management process as they realize that well-executed performance management strategies can help them get better results for the company’ Loucks (2007). As Loucks mentioned the strategic importance of performance management are mounting. There is need for organizations to follow systems that elicit job performance that is consistent with the organization’s goals and strategies as it helps companies to gain competitive advantage.
Strategic human resource development (SHRD) Noe (2005, p. 45) defines strategic training and development as ‘learning-related activities that a company should take to help achieve its business strategy’. SHRD is about improving and widening the skills of employees by training and development, by helping people to grow within the organization, and by allowing them to make better use of their skills and abilities to attain the strategic goals and objectives.
The Figure 3 below is a model that shows the processes of strategic planning that begin by identifying business strategy. Next, strategic training and development initiatives that support the strategy are selected. Interpreting these strategic training and development initiatives into actual training and development activities is the next step of the process. The final step involves the identifying of measures used to determine if training helped contribute to goals related to business strategy. Figure 3: The strategic training and development process
Source: Noe (2005, p. 43) The strategic training and development initiatives are based on the business environment, an understanding of the company’s goals and resources, an insight of potential training and development options. Noe (2005, p. 45) mentioned ‘strategic training and development initiatives provide the company with road map to guide specific training and development activities. They also show how the training function will help the company reach its goals (and in doing so, show how the training function will add value)’.
Refer to Appendix 3 for the strategic training and development initiatives and their implications. SHRD’s focus is first on the strategic level, which deals with overall aims and objectives and formulation of plans and policies. Secondly this interconnects to managerial level focusing on the process by which the organization obtains and allocates resources to achieve its strategic objectives. Finally it is linked to the operational level, the hands on and day to day processes of managing and organizing of work. Leopold, Harris and Watson (2005, p. 59) explained ‘Thus SHRD may be considered as a range of culturally sensitive interventions linked vertically to business goals and strategy, and horizontally to other HR and business activities, to actively encourage and support employee learning, commitment and involvement throughout the organization’. Investigating training needs is used in combination with environmental scanning and assessment of external forces and internal strengths and weaknesses of an organization to anticipate or respond to indentified challenges and opportunities. Such reactions maybe rooted in the here-and-now of skills deficit analyses and meeting gaps.
This is assuring that employee development is ‘fit for purpose’. Leopold, Harris and Watson (2005, p. 353) stated ‘ ‘fit for future’ agenda maybe responding to anticipated skills needed and gaps and is also part of a wider reflection of changes in the labour market, for example attracting potential employees into areas where there are perceived likelihood of skills shortage’. Leopold, Harris and Watson (2005, p. 353) also stated ‘ Much of the language associated with increasing access to ‘learning opportunities’ through workplace activities is linked to increasing the (for-profit) organization’s competitive advantage.
Language such as enhancing sustainability increasing efficiency and effectiveness; of increasing commitment of employees; of creating learning environment where unique skills of employees can be exploited for current needs and for the long-term survival of the company’. Strategic compensation and reward In the development of a pay system and reward systems, several policies must be made. Three of the most important are pay level policies, pay structure policy and types of rewards offered. Anthony, Kacmar and Perrewe (2002, p. 398) stated ‘an organization’s pay level is simply the average wage paid for a specific group of jobs.
Pay level is important because if influence both organization’s ability to attract and retain competent employees and its competitive position in the product market. Pay level policy refers to how an organization’s pay level compares with its competitor’s pay level’. An organization’s compensation system should be consistent with the overall strategy of the organization. Success depends on displaying consistent strategy supported by complementary organization structures, designs and management process. The two major strategic initiatives that occur today are growth and retrenchment. Anthony, Kacmar and Perrewe (2002, p. 04) mentioned ‘Firm’s growth mode would focus on employee performance and especially on external performance. This would force firms to pay attention to external competitiveness and equity. Total compensation packages would be oriented towards incentives and would be driven by recruitment needs’. Figure 4: Framework for strategic pay design Source: Williams (1999) To develop pay practices intended to become best, an organization must first recognize the importance of building reward and recognition practices within a framework that ultimately addresses both the extrinsic and intrinsic aspects of employee recognition and reward.
Williams (1999) explained the framework using the Figure 3 ‘this framework begins with the organization’s strategic business objectives and then considers company culture, values, and performance measurement capabilities as critical elements in the overall design strategy. Programs are designed to motivate performance aligned with critical business objectives and reward contribution and results in ways that are meaningful to employees and consistent with company values’.
When designing a pay system it is vital for organizations to take a note of the relationship between pay and employee performance when planning strategies for achieving and sustaining competitive advantage. Anthony, Kacmar and Perrewe (2002, p. 419) stated ‘equity theory proposes that employees examine the relationship between their outcomes from the job (such as pay, job satisfaction, recognition and promotion) and their inputs (such as education, skill, and effort). Dissatisfaction probably does not occur if positive inequity (the person feels over-rewarded)’. Satisfaction will lead to productivity that is the key to competitive advantage.
So it is necessary for organizations to formulate strategic compensation and reward systems and implement it for achieving their goals and objectives. Refer to Appendix 4 for further understanding of strategic rewarding and how Southwest Airlines design and implement rewarding strategies to achieve its goals and objectives and to be a successful competitor in today’s competitive environments. Importance of SHRM HRM today has taken a wider role in overall organizational strategy. HRM plays a vital role in creating and sustaining competitive advantage of an organization.
There is a growing need for organizations to practice SHRM because of the evolving changes that businesses need to adopt to be successful in achieving its short and long term strategic goals and objectives in the competitive environments that it exists in. Nankervis, Baird and Compton (2002. p. 22) stated the roles of SHRM to be ‘responsive to highly competitive workplace and global business structures; closely linked to business strategic goals; jointly conceived and implemented by both line and HR managers and focused on quality, customer service, productivity, employee involvement, teamwork and workforce flexibility’.
This shows the benefits of SHRM and suggests that by successfully implementing SHRM, the organization goals and objectives can be met to achieve competitive advantage. ‘The bridge between HR strategy and HR functions is the formulation of human resource plan (HRP) that incorporate the desired outcomes of HR strategies, are responsive to continual changes in industry environments and can be operationalized through efficient and effective HR functions’ Nankervis, Baird and Compton (2002. p. 79). For SHRM to be successfully implemented it is necessary to follow a process of SHRP.
SHRP can be said to be the foundation of SHRM. Nankervis, Baird and Compton (2002. p. 79) ‘HRP allows the HRM functions to position itself to take the best advantage of fluctuations in the economy or labour market. The likely effects of future economic, social and legislative conditions, or organizational changes, can be converted from constraints and pressures to challenges and opportunities’. SHRP therefore can help businesses to seek advantages from the limiting factors while implementing strategic plans.
For example if organizations make a decision to downsize, it might lead to loss of specialist staff and valuable intellectual capital. It might even lead to poor corporate image that lead to breakdown of psychological contract between employers and their staff which result in poor performance and loss of competitiveness. Downsizing is seen as a strategic HR tool to shape the organizations future with a well prepared HR strategy. If SHRP is not followed while implanting strategic plans it can lead an organization to loose its competitive edge. Nankervis, Baird and Compton (2002. p. 0) mentioned ‘the failure to adequately plan for an organization’s human resource, can result in losses in efficiency and sustainable costs to the organization, through unstaffed vacancies, expensive replacement training, over hiring or fragmented career management’. Nankervis, Baird and Compton (2002. p. 80) also mentioned ‘by SHRP which focused in retraining, multi-skilling, or early retirement campaigns reduces the high financial costs (e. g. outplacement fees, termination and superannuation payments) and the adverse effects on employee morale of poor planned redundancies’.
Conclusion As effective HRM practices are strategic, contributing to the goals and objectives of organizations, SHRM has shown to enhance organizations performance by contributing to employee and customer satisfaction, innovation, productivity, development of favorable reputation and profitability. Employees today are trying to learn new things and organizations are adapting characteristics of learning organizations to address the issues of globalization and changes revolving around like technological changes.
HRM functions are interrelated with one another making it vital for organizations to take a holistic view in strategy formulation and implementation to reach the organizational strategic goals and objectives to achieve and sustain the competitive advantage. WORD COUNT: 2642 List of References Books Anthony, W. P. , Kacmar, K. M. and Perrewe, P. L. (2002), Human Resource Management: A Strategic Approach, 4th edition, South Western Thomson Learning, Ohio, U. S. Armstrong, M. (1991), A Handbook of Personnel Management Practice, Kogan Page, London, U. K. Leopold, J. , Harris, L. and Watson, T. 2005), The Strategic Managing of Human Resources, Prentice Hall, London, U. K. Mondy, R. W. and Noe, R. M. (2005), Human resources Management, 9th edition, Pearson, New Jersey, U. S. Nankervis, A. , Compton, R. and Baird, M. (2002), Strategic Human Resource Management, 4th edition, Thomson, Australia. Noe R. A. (2005), Employees Training and Development, 3rd edition, McGraw-Hill, New York, U. S. Noe, R. A. , Hollenbeck, J. R. , Gerhart, B. and Wright, P. M. (2006), Human Resource Management: Gaining a Competitive Advantage, 5th edition, McGraw-Hill, New York, U. S. Journals Fottler, M. D. Phillips, R. L. , Blair, J. D. and Duran, C. A. (1990) ‘Achieving Competitive Advantage through Strategic Human Resource Management’, Hospital & Health Services Administration. (last viewed on 22nd august 2007). http://proquest. umi. com/pdf/b20ab77d0af6f502d6fa5273feb65c6d/1187785739/share2/pqimage/irs2/20070822075858556/4858/out. pdf Loucks, P. (2007), ‘Plugging into performance management’ Canadian HR Reporter. Toronto (last viewed on 22nd August 2007). http://proquest. umi. com/pqdweb? index=11=1227887641=1=4=3=PROD=PQD=309=PQD=1187875162=63584
Singh, P. (2002), ‘Strategic reward systems at Southwest Airlines’, Compensation and Benefits Review, Saranac Lake (last viewed on 22nd August 2007) http://proquest. umi. com/pqdweb? index=9=113196055=1=1=4=PROD=PQD=309=PQD=1187868971=63584 Williams, V. L. (1999), ‘Compensation done the ‘right’ way’, Vol. 78, Costa Mesa, (last viewed on 22nd August 2007) http://proquest. umi. com/pqdweb? index=9=47187924=1=1=4=PROD=PQD=309=PQD=1187862655=63584 APPENDIX 1: Characteristics of SHRM
A longer term focus – an inclusion of multiple-year strategic plans for human resource use is often considered the first step in the evolution of a strategically oriented HRM function. New linkages between HRM and strategic planning have emerged as a critical element in many implementations, while a two-way linkage describes a more proactive approach where HRM exerts influence on strategy formulation as well Proposed linkages between HRM and organizational performance – most models of SHRM include the proposition that HRM plays a key role in the achievement of strategic goals.
Since the expected outcome of company strategies is an improvement in the firm’s economic value, HRM must thus directly contribute to the firm’s ‘bottom line’ in order to be judged effectively. Inclusion of line managers in the HRM policy-making process – the recognition of HRM’s strategic importance may make it more of a line management responsibility, particularly in areas involving the selection and compensation of managers. A CEO of a large trucking company echoed this sentiment to us when he told us that ‘HRM is too important to be left to the HRM department’. Source: Nankervis, Campton and Baird (2002, p. 3) APPENDIX 2: Why human resource strategy? ?Defines opportunities and barriers for achievement of business objective. ?Prompts new thinking about issues; orients and educates participants and provide a wide perspective. ?Tests management commitment for actions; creates a process for allocating resources to specific program and activities. ?Develops a sense of urgency and commitment to action. ?Establishes selected long-term courses of action considered to be of high priority over the next two to three years ? Provides a strategic focus for managing the business and developing management talents.
Source: Nankervis, Campton and Baird (2002, p. 42) APPENDIX 3: Strategic training and development initiatives and their implications STRATEGIC TRAINING AND DEVELOPMENT INITIVESIMPLICATIONS Diversify the learning portfolio•Use new technology such as the internet for training •Facilitate informal learning •Provide more personalized learning opportunities Expand who is trained•Train customers, suppliers and employees •Offer more learning opportunities to non-managerial employees Accelerate the pace of employee learning•Quickly identify needs and provide a high-quality learning solution •Reduce the time to develop training programs Facilitate access to learning resources on an as-needed basis Improve customer service•Ensure that employees have product and service knowledge •Ensure that employees have skills needed to interact with customers •Ensure that employees understand their roles and decision making authority Provide development opportunities and communicate to employees•Ensure that employees have opportunities to develop •Ensure that employees understand career opportunities and personal growth opportunities •Ensure that training and development addresses employees need in current job as well as growth opportunities Capture and share knowledge•Capture insight and information from knowledge, skills, abilities, or competencies •Logically organize and store information •Provide methods to make information available (e. g. resources guides, websites) Align training and development with the company’s strategic decisions•Identify needed knowledge, skills, abilities, or competencies Ensure that current training and development programs support the company’s strategic needs Ensure that the work environment supports learning and transfer of training•Remove constraints to learning, such as lack of time, resources, and equipment •Dedicate physical space to encourage teamwork, collaboration, creativity, and knowledge sharing •Ensure that employees understand the importance of learning •Ensure that managers and peers are supportive of training, development and learning Source: Noe (2005, p. 46) APPENDIX 4: Strategic reward system at Southwest Airlines With the dawn of the 21st century, technological, political, regulatory, demographic and economic forces unleashed in the past will continue to exert pressures on organizations to change to ensure their survival and success. Initiating and sustaining successful change require considerable thought and action on related supportive structures and systems. Organizations and their subsystems, including critical human resource management systems, have to become increasingly strategic to succeed in an environment that is in constant flux.
That is, functional and unit strategies must be aligned with overall firm strategy to enhance organizational effectiveness. It is a widely held view that strategic compensation systems, an integral aspect of human resource management, are vital in ensuring desired employee behaviors and enhanced firm performance. ‘ This article provides an overview of strategic rewards and a detailed discussion of rewards at Southwest Airlines (SWA), including implications for management. The Need for Strategic Reward Systems Traditional rewards systems usually have a large proportion of the total package as base pay and just a small portion tied to employee performance as reflected in a periodic performance appraisal.
Such systems emphasize Tayloristic-type management structures and systems, including functional and hierarchical differentiation in organizational structures, rigid supervisory control and strict compliance with rules. The traditional structures have changed considerably over the past few decades and will continue to do so as organizations attempt to reinvent themselves. This has led to a call for the implementation of new and more strategic rewards systems, whereby an organization’s rewards systems are aligned with overall organizational strategy. Although traditional rewards continue to be used by the majority of North American organizations, there is some evidence that strategic reward systems are being implemented at an increasing rate. These strategic rewards, categorized by some researchers as the “new pay,”3 include performance based variable pay (individual and group based), skill-based pay (or competency- or knowledge– based plans), broad banding, team-based pay and recognition programs. In general, the empirical evidence on the effectiveness of these reward systems suggests that the new pay strategies are related to increased employee productivity and firm performance. 4 It should be noted, however, that for some of these programs, such as broad banding and team-based pay, the empirical evidence on their effectiveness is sparse. Challenges Given the relatively strong rationale for strategic organizational rewards, why are not most, if not all, companies implementing them? There are many reasons.
First, some managers lack the political will to implement changes in compensation systems that have been in place for decades. Second, there are some inherent difficulties in implementing strategic rewards. For instance, employees who do not trust management may view variable pay with suspicion. In fact, unions have generally opposed strategic reward systems based on the perception that, by reducing the proportion of an established base pay, such systems would place too much control in the hands of management. Finally, managers sometimes incorrectly perceive strategic rewards to be more costly than traditional rewards. These challenges are, however, not insurmountable. In fact, as the case study illustrates, SWA has successfully wrestled with these challenges.
With appropriate supportive systems and structures, the prospects for strategic reward systems for organizations in North America appear bright for the next few decades. In fact, organizations may not have a choice if they are to successfully compete in the new marketplace. SWA’s Philosophy and Strategy SWA was launched in 1971 by Herb Kelleher, its charismatic former CEO and president and now chairman of the Board of Directors, and Rollin King, a friend of Kelleher and later a board member. The company was based on the simple idea that people would fly an airline that took passengers directly where they wanted to go, when they wanted to get there, for as little money as possible, in a fun-filled environment.
The airline should provide lower cost point-to-point services delivered with more efficiency and service than any of the other major airlines. The airline began with only three planes servicing three cities in Texas. Thirty years later, SWA now flies more than 64 million passengers to 58 cities in 30 states, 2,700 times a day. Over time, SWA has become the envy of the airline industry (see Exhibit 1). In fact, other airlines have unashamedly tried to imitate SW. Ns policies and strategies-with limited success. Furthermore, as airlines reel under the pressures of the September 11, 2001, terrorist attacks, SWA is the only major airline that continues to be profitable.
These accomplishments take on additional meaning because they were achieved in an industry historically regarded as one of the most turbulent, rocked by forces such as deregulation, mergers and alliances, high fuel costs, oil embargos, labor conflicts and more recently, terrorism. SWA is one of the most heavily unionized airlines, with approximately 81% of its 33,000 employees covered by union contracts. So what is SWAs recipe for success? According to industry analysts and Herb Kelleher himself, it is the culture of the firm, especially its dedication to its employees. 5 As Kelleher states, “Ask anyone at Southwest for the secret of the company’s success, and you are guaranteed to get the same response: the people. It is the dedication and zeal of the company’s employees that have made it a premier customer service organization. Nothing comes ahead of your people. 6 Several aspects of its people-oriented culture are worth noting. Employees have considerable freedom and responsibility and a high level of employee involvement in decision making. The company hires the right people-those who match/fit the organization. It places an emphasis on training and flexibility in using the skills of its employees, and it uses strategic compensation and reward systems. Strategic Reward Systems Southwest’s compensation and reward systems are considered strategically oriented, even though most of the employees are covered by collective– bargaining contracts. As one author noted, SWPs reward systems “are viewed as a process for supporting and reinforcing the airline’s philosophy… ence … salaries, variable compensation, and recognition programs are part of the process of management and highly integrated with the things leaders and people do on a day-to-day basis. “7 For analytical purposes, strategic rewards may be classified into four groups: strategic base pay, strategic benefits, strategic incentives and strategic recognition programs. EXHIBIT I Strategic Base Pay Base pay is covered largely by union contracts; however, the collective-bargaining process and end results/final contract may be viewed as extremely strategic. One of the key aspects of SWNs strategy is to retain valued employees and secure long-term commitment.
These objectives are attained, in part, though seniority and job security clauses in the collective-bargaining agreement. In general, negotiated agreements reflect pay levels consistent with or slightly below market wages and salaries. This helps to keep labor costs in line with the company’s low-cost provider strategy. Nevertheless, employees can share in the company success through various contingent compensation programs, thereby increasing their overall pay. In fact, many of SWAs employees are millionaires, including all of those who started with the company in 1971. The airline industry is one of the most conflict– ridden industries, with seemingly never-ending labor disputes. Thus, one of SWA’s strategy is to reduce such conflicts.
However, this can only be achieved in an environment of trust and compromise. It is this perspective that the history– making 10-year contract, signed in 1995 with its pilot union, must be viewed. In terms of executive compensation, the CEO is paid at below the median of the market for executives in companies of similar size. Other senior managers are compensated slightly above the market, but they retain a smaller portion of the company’s stock. In this manner, company executives are relatively underpaid in cash compensation, but they are committed to the company’s long-term financial success and growth through stock ownership. Employees and executives have the same opportunities for stock ownership.
Strategic Benefits The list of employee benefits offered by SWA is truly impressive. It includes both traditional programs and a few innovative initiatives. For instance, like many other companies, SWA offers medical insurance, dental insurance, vision coverage, life insurance, long-term disability insurance, dependent care, adoption assistance and mental health assistance, among others. Many of these are at no cost to the employee. Furthermore, employees and their family fly free with SWA and enjoy discounted travel with other carriers. Employees also receive thoughtful gifts on major life achievements and a chance to celebrate often (see Exhibit 2).
One of the key concepts behind this array of benefits is the assurance that “employees matter” at SWA and that the company will do its utmost to take care of its most important stakeholder. Benefits help to reinforce the organization’s strategic intent of valuing its employees. EXHIBIT 2 Strategic Incentives The two main contingent or variable pay systems are the corporate-wide profit-sharing program and the employee stock purchase plan. The profit-sharing program, initiated in 1973, is strategic in that it encourages employees to keep costs as low as possible (thus likely higher profits), a key aspect of company strategy. Furthermore, it allows employees to share in the success of the organization.
Profits are shared equally based on employee earnings and company profits, with those who work longer hours or fly extra trips receiving a larger portion of the profit-sharing payouts. Traditionally, the program is composed of a cash component, as well as a deferral to retirement account; however, as a result of employee requests, beginning in 1990 the total payout was made on a deferral basis, thereby increasing the retirement benefits of the employees. This is important in an organization that actively promotes long-term commitment from its employees. Employees are offered several investment options, including company stock, enabling many retirees to become quite wealthy.
The company’s employee stock purchase plan allows all employees and managers to share in the risks and success of the company. In addition to the profit-sharing investment options, employees may purchase stock from payroll deductions at a discount through the employee stock purchase plan. In fact, through these purchases, employees now own about 12% of the company. The pilot contract allows for even greater investments in the company through stock options. Employees are acutely aware that the firm’s performance is pivotal to their pocketbooks. In fact, the stock price is displayed in each SWA facility so as to allow the employees to keep a constant track of SWAs and their own destiny. Strategic Recognition Programs Strategic recognition programs abound at SWA.
Many of these programs are specifically designed to encourage and reinforce desired behaviors and, consequently, company strategy. In fact, these programs have limited the need for more variable pay programs. Strategic recognition programs are at both the corporate and local unit levels, and reward and celebrate exemplary service and behaviors, as well as employee’s birthdays, anniversaries and so forth. Even though many of these programs originated and are managed at the local level, a few key characteristics emerge. They all enjoy the support of top management, with senior executives including the CEO often gracing the reward ceremonies; they mean something to employees/winners; and they encourage behaviors linked to firm strategy.
Some of the thought processes and effects of these programs may be gleaned from their descriptions. These include the “Heroes of the Heart” program, the President’s awards, and the “Winning Spirit” awards. The Heroes of the Heart program was initiated by SWAs Culture Committee in 1992. The committee wanted to devise a way to honor unsung heroes-the “behind the scenes” employees who customers rarely see. A subcommittee representing a wide variety of departments was established to find a unique way to honor such employees, resulting in the Heroes of the Heart recognition program. Each year, one group is selected for its outstanding efforts in serving and supporting employees in other parts of the company.
The winner of the award is kept secret until Valentines Day, when the announcement is made with much pomp and ceremony at the company’s headquarters in Dallas. The name of the winning group is painted on one of SWA’s aircraft that carries the Heroes of the Heart insignia. An article is also run in the company’s in-flight magazine, as well as its newsletter. The President’s Awards are also given annually to employees who demonstrate values and virtues embodied in the firm’s strategy: showing compassion for customers, untiring support for coworkers, leading by example, keeping promises and following through, bringing fun to the job and embracing change. Each winner is given a plaque written by his or her vice president, a monetary reward and a collage of photos taken during the award ceremony. The photos of the winners are also published in the company’s newsletter. The Winning Spirit Awards are given out every month to 10 to 12 employees whose actions reflect the company’s values and strategy. These awards are given to employees, nominated by colleagues and/or by customers, across SWAs system. A broad-based committee makes the final decision. Each winner is invited to the company’s headquarters where the CEO reads the letter of nomination and gives a Winning Spirit lapel pin to him or her. The winner also receives a framed photo with the CEO as a follow-up gift, and an article is published in the company’s newsletter.
There are several other awards/recognition programs at SWA, including programs such as “Together We Make It Great,” “Ticket to the Future,” “Walk a Mile,” “Helping Hands,” “Stuck on Service,” and “Go See Do” and such awards as “Joe Cool Award,” “Top Wrench Award,” “Superstars,” “A Shining Star” and “Voice Award. ” These exhibit similar characteristics as the above in that they promote behaviors pivotal in achieving the firm’s goals and strategy. The overall effects of these recognition programs and awards on SWA’s bottom line is not clear; however, as Herb Kelleher stated, the case for these programs lies in the long-term effects. “If you were a statistician you wouldn’t [have recognition programs], because you’d say, ‘well, we could save money if we didn’t do it. Southwest Airlines has the best customer complaint record in the American airline industry and who can say what that is worth? I could sit in my office one afternoon and cut SWAs budget substantially by cutting these things. But that’s like cutting out your heart. “9 It is this attitude that keeps the company ticking all the way to the bank. Implications for Management There is no universal “right” reward strategy, and every reward system will not be equally effective. Nevertheless, a review of the literature, including relevant case studies, reveals certain core principles that can help to make reward strategies more effective. Many of these principles are exemplified in the SWA case described in this article.
First, it is important that the reward is linked to what is important for the organization. That is, as the SWA case illustrates, the reward system must be aligned with organizational philosophy and strategy. In this way, the organization will encourage and reinforce behaviors and values that are crucial for success. Second, the planning and delivery of these rewards must explicitly demonstrate commitment from organizational leaders. Leaders and employees must be involved in the development of the rewards, the process must be trusted as being fair, adequate resources must be budgeted and the final announcement and delivery must convey a message that the reward is important.
In SWAs case, the CEO and other executives spend considerable time and effort to ensure that these conditions are met. Third, these rewards must have meaning and value. Winning these awards must be a significant achievement, and this must be communicated throughout the organization. Winners must feel proud about their achievements, and the organization must glorify the effort. For instance, at SWA, the name of the winning team in the Heroes of the Heart program is painted on one of the airline’s carriers and the effort of the winning team is communicated throughout the organization. Fourth, there must be a supportive organizational culture for these rewards to be effective.
That is, there must be trust, a pervasive sense that related systems are fair and an unequivocal perception that effort is truly appreciated. Furthermore, the culture must ensure friendly competition. Also, the criteria for winning and the judging process must be clear and effectively communicated to all employees. Finally, there must be a continuous evaluation of the effectiveness of new reward systems and strategies. This implies that changes must be made to those not working at optimal levels, and the company must constantly introduce new and exciting awards. Of course, the costs of these programs must be continuously evaluated to ensure that they contribute more than what they cost the organization Source: Singh (2002)