While some organizations invest at the same level of other organizations, many operate under the guise that more is better. They over-invest in human capital. The results of such an approach can be both disappointing and disastrous. A few executives do this intentionally; others do it unknowingly. Either way, this is a strategy that deserves serious attention.
With this strategy, organizations invest in human capital beyond what is needed to meet the goals and mission of the organization. Executives implement almost every program or project they see, provide every employee benefit available, and teach every new idea that comes across the horizon. For most over-investing organizations, this strategy is not a deliberate pursuit; rather, it occurs unintentionally through a desire to do everything possible to ensure that human capital is well funded.
An example of over-investing is an automotive company located in North America. This firm, with headquarters outside the United States, spent almost $4 million on a wellness and fitness center for its North American employees. The rationale for investing in this center was to increase the attraction and retention of employees. The executives wanted to maintain high job-satisfaction levels and thought that the wellness and fitness center would help accomplish these goals. In addition, they thought that a fitness center would be an excellent way to contain or lower healthcare costs. Some executives believed it would even reduce absenteeism and job-related accidents.
When examining these measures after the center opened, the status was far from what one would expect:
Job-satisfaction levels were extremely high—beyond what was expected or perhaps could even be achieved in most organizations.
Attraction was not an issue. Just a rumor that there might be additional jobs on the assembly line would create an overwhelming amount of applications in the HR department. (At one time, as many as 10,000 applications were received after an announcement that 200 jobs would be added in the plant.)
Retention was not an issue. The company was experiencing less than 3 percent annual turnover—too low by some standards. Unless there is significant growth, a turnover level that low is unhealthy. Lower turnover probably could not be achieved, even if a variety of solutions were implemented. Low turnover was a product of satisfied employees, a superior benefits package, and wages that were double the average in the area. If attraction and retention improvement were the motive, the wellness and fitness center was a futile investment.
Healthcare costs were below average for the manufacturing industry in the area. With the implementation of the wellness and fitness center, the costs were contained, but not reduced; the cost differential was very small—not enough to cover a fraction of the cost of maintaining the wellness and fitness center.
The manufacturing facility enjoyed one of the best safety records in manufacturing. Because there is not (nor has there ever been) an accident problem, a reduction in accidents did not materialize since the center was developed.
Absenteeism was not an issue and did not change significantly with the implementation of the wellness and fitness center.
Thus, from the return on investment (ROI) perspective, the wellness and fitness center failed to add value. This is a classic case of over-investing—adding a benefit or service that does not increase the value to the organization, yet adds significant costs.
The dot-coms littered the landscape with examples of over-investing, as company after company lavished their employees with benefits, perks, programs, and opportunities to buy their loyalty, motivate them to high levels of achievement, and retain them at all costs. One interesting organization investing heavily in human capital is SAS Institute, based in Cary, North Carolina. Jim Goodnight, the cofounder and CEO, has a reputation for showering his employees with perks. For example, employees work only thirty-five hours per week; sick days are unlimited, and can be used for tending to ailing family members. Company specialists can arrange expert help for aging parents. Benefits are extended to domestic partners. Employees at headquarters can take their preschool children to one of four daycare centers (two on-site, two off-site) for $300 per month (meals included). Each of the 24 buildings on this 250-acre campus has a break room on every floor stocked with refreshments and snacks. Employees can choose between two full-service cafeterias, and work off their meals in a 54,000-square-foot gym, with free personal trainers, an Olympic-sized swimming pool, aerobics classes, and a dance studio. A soccer field, tennis courts, and a putting green round out the sports amenities.
Is all of this necessary? Some would characterize this as going beyond what is needed to build a motivated, committed, and engaged workforce. Supporters suggest that this is the primary reason for their low turnover; however, according to internal executives, no analyses have been conducted to connect these perks to a specific retention amount.
SAS almost routinely appears in Fortune magazine as one of the 100 Best Companies to Work For. One publication characterized Goodnight as “extravagant.”[1] In Fortune’s analysis, they report, “This software maker is the closest thing to the worker’s Utopia in America,” highlighting the on-site childcare, health center with physicians and dentists, massage therapists, and a profit-sharing program as well.
In less than three decades, SAS has evolved into a world leader in intelligence software services, with 9,000 employees, offices in three countries, and revenues of over $1 billion. The company is very successful and enjoyed twenty-four consecutive years of double-digit earning growth until the technology crash in the early 2000s. Goodnight credits the success of the company to the gung-ho, dedicated workforce. Through a variety of perks and benefits, he attempts to make the employee’s lives easier and believes they will give their all to work. As a private organization, SAS is not subject to the scrutiny of Wall Street analysts. If that were the case, the employee benefit structure might be different.
Is investing in human capital to this extent a good thing? Some will argue that you cannot over-invest in human capital and that the more you provide employees, the better. Others would argue that each time a new program, project, or benefit is added—particularly one that becomes a permanent fixture—operating costs are increased that will eventually place a burden on the company. At what point is there diminishing return on investing in human capital?
Some advocates suggest that over-investing in employees is not an issue—the more you invest, the more successful the organization. Obviously, this is the position often taken by unions and other employee-advocate groups. However, others will note that over-investing occurs regularly and is unnecessarily burdening organizations with excessive operating costs. This approach puts pressure on others to follow suit, thus creating an artificial new benchmark.
Investing until it hurts is often not a deliberate strategy. Executives are unaware that the increase in spending is not adding value, as the case study on the automotive company illustrates. This company thought that the wellness center would enhance job satisfaction, without taking the time to analyze the current situation and project the impact of the investment.
In many cases, companies add benefits, services, and perks without anticipating the full impact of these investments. The two most vulnerable areas are retirement plans and healthcare benefits. In the 1970s, some companies began to switch from defined benefit plans to defined contribution plans, shifting the investment risk to the employees. Many organizations still provide these traditional defined benefit pension plans, which have proven to be extremely costly and difficult to change. Failure to make the switch has caused some firms not only to have excessive costs, but even to move into bankruptcy.
For the most part, executives do not anticipate the tremendous changes that lead to the burden of retirement. First there is the investment risk of the pension plan. When you maintain defined benefit plans, it becomes more costly for employers than anticipated, particularly in a recession. Second, employees are living much longer, thus retirement costs are increasing. Third, employers are often much more generous because they think short-term rather than long-term as they provide benefits and negotiate lucrative labor contracts.
Competition sometimes drives companies to adopt the strategy of over-investing. Some executives see others providing benefits or additional services so they think they should offer them as well. When a new benefit, program, or service is implemented in an organization, the publicity it generates causes other firms to jump on the bandwagon and implement it for their employees because they do not want to be outdone. For example, United, Northwest, American, and Delta Airlines provide lucrative benefit plans to remain competitive among the industry. Contrast this with newer airlines such as Southwest, Jet Blue, and AirTran, which do not have traditional pension plans. United Airlines faced pension payments of almost $600 million in 2004 and $4.1 billion by the end of 2008; Northwest and United Airlines have pension deficits close to $100,000 per employee; Southwest, Jet Blue, and AirTran have none.
Some executives over-invest because they have too much faith in the issue of investing in human capital. Executives conclude that every investment will eventually be returned in some way at some time. This describes the philosophy of overspending on human capital; employees are such a precious resource that they should be nurtured, supported, and maintained appropriately. IBM is a company that has always taken pride in human capital investment. For many years, they practiced the concept of full employment—refusing to lay off employees. IBM executives assumed that full employment meant that they would have loyal, stable, highly motivated employees. Unfortunately, that plan had to be abandoned as IBM faced a crisis in the 1990s.
This belief was also the motivation behind providing lucrative benefits for IBM’s employees. For example, in 2002, IBM had to contribute almost $4 billion to make up the deficit in their pension plan. At the same time, they found that 75 percent of their competitors did not offer a pension plan and fewer still paid for retiree health care.[2]
As IBM attempted to change, its plan came under attack, particularly by employees. For example, IBM attempted to change the pension plans in 1995 and 1999. Some employees objected to this and ultimately sued. In 2003, employees won the first round in the case against the employer and IBM now calculates the case could cost as much at $6.5 billion if the plan’s proposed remedy is accepted. This is a big number for a company with only $7.3 billion in cash on hand. Also, IBM is attempting to change its healthcare costs for retirees. In 1999, IBM capped the amount a retiree would pay at $7,500. Although IBM is certainly in no financial distress, its medical costs have been rising faster than revenue. In 2003, the company reported spending $335 million in retiree healthcare.
A final area that causes over-investing is talent chasing. In the 1990s, recruiting great talent for the organization became a critical issue. Literally, there was a war for talent, as organizations battled each other for highly skilled, highly specialized individuals. The war for talent spurred tremendous salaries, ever-increasing perks, signing bonuses, and other unheard of benefits. These perks and benefits were given not only to senior executives, but to middle- and lower-level professional employees as well. This placed a heavy burden on these employers, which, at the time, seemed reasonable—they could afford it. When economic times changed and they could no longer afford it, executives had to remove these perks. The result: a disgruntled workforce and increased turnover, a situation they were trying to avoid in the first place. This is a vicious cycle that can only be avoided by careful planning, with more focus on creating a workplace that is challenging, motivating, and offers exciting opportunities, instead of a place where employees are pampered and paid excessively. Part of the problem is that many executives believe that retention is directly related to pay, when it is not.
Whatever the reason, over-investing does exist and can be detrimental to the organization. A lucrative pay and benefit package is not so impressive. What’s more impressive is the performance of a company like Southwest Airlines with its consistent profitability, low turnover, and wages and benefits less than other top airlines.
There are several signs of over-investing that occur in organizations. The first and most obvious is the less-than-desired financial performance of the organization. Delta Airlines, for example, is one of many organizations teetering on the verge of bankruptcy. The CEO warns that unless the airline continues to receive concessions from its employees in pension liability and reduction in wages, the airline will face imminent bankruptcy. At one time, Delta was one of the most successful airlines. It is now in peril for many reasons. Stiff competition is one; the most difficult to embrace, however, is their huge pension cost. In 2003, the pension deficit was $5.7 billion. The deficit as a percentage of the company’s market capitalization is 379.1 percent. In essence, Delta could go under because of the excessive spending on human capital, not airplane purchases or fuel costs.[3]
There are a few instances where companies are over-investing in training and development. For example, consider the comments of the CEO of Sears, Roebuck, and Company when announcing disappointing financial performance. In an interview with the New York Times, the CEO indicated that the company’s poor performance was due, at least in part, to the excessive amount of training. He said that the amount of time employees spent in training left stores understaffed. Employees enjoy training, want to take any course that is offered, and store managers support the training. The result: There is not enough staff to serve the customers, causing customer dissatisfaction and ultimately loss in revenue. As in this case, when a company offers a variety of training opportunities, taken to an extreme, performance can deteriorate.
Some companies make a deliberate attempt to invest a certain number of hours or days in training. Consider, for example, the Saturn Corporation, once the shining star at General Motors. Saturn had a commitment that each employee in the plant would spend over one hundred hours each year in training. Manager bonuses were attached to this goal and trimmed significantly if those targets were not met. As expected, employees attended all types of training. Some employees complained that they were attending unnecessary training programs—often unrelated to their work—simply to make their training goals. What was designed to show a commitment to learning and development turned into expensive spending practices—and, in some cases, a major turn-off in the eyes of employees.
The signs of over-investing appear in an excessive number of programs. When Les Hayman took over SAP’s human resources department, he discovered that it had more than 1,000 different programs in various stages of development. “We promptly culled them by two-thirds,” he says. “Everyone in human resources was under tremendous stress, but a lot of it was wasted. They were doing things that had no impact on the business.” Hayman surveyed the rest of the company and asked what they actually needed. “There were a lot of places where what we had built was really out of step. We had areas where the board had set a business strategy, but it wasn’t translated into compensation planning at the level of the field organization. If you don’t align the organization behind the strategy, it’s a hope rather than a strategy.”[4]
Hayman also revamped much of the curriculum at SAP University. “They were spending more time worrying about generic training courses, such as negotiation training and time management,” he says. “You can hire outside people to do that.” Instead, he and the institute’s director devised new courses that focused on specific tasks that SAP managers handled in their jobs, such as giving performance reviews. Drawing from his own career experience as an autodidact—he taught himself computer programming, for example, by designing a computer game—Hayman also reduced the role of training in staff development. “You learn best by doing,” he says. “So we build 10 percent of development around training, and another 20 percent around coaching. The other 70 percent comes from on-the-job training.”
The cost of human capital usually appears in financial statements as part of the operating costs. Sometimes excessive operating costs are the result of over-investing in human resources. Companies within the same industry with excessive human capital costs have a distinct disadvantage in operating costs. For example,
With their significant pension burden, IBM has a much higher operating cost than Microsoft, which does not have the traditionally defined benefit plan.
Retail stores, such as Sears, with more lucrative healthcare and pension plans, have a difficult time competing directly with Wal-Mart, which has much lower healthcare and pension costs.
Southwest Airlines has significantly lower operating costs when compared to some of its rivals, United, Delta, Northwest, and Continental.
Thus, the huge operating costs driven by excessive spending puts some organizations at a disadvantage.
High salaries are often an indication of over-investing—a sign that there is too much compensation for the industry. This trend develops when salaries are adjusted more than the competition and more than the economic reality dictates. The result is a higher compensation cost, perhaps higher than appropriate. The steel industry has been plagued by high labor costs for years, ultimately leading to the demise of many of the steel plants in the United States. While there are other contributing factors, the high labor costs are singled out as one of the more significant. Bethlehem Steel, which had high labor and benefit costs, was at a serious disadvantage in the cost of steel—sometimes as much as a $30 to $50/ton differential when compared to firms with lower human capital costs. In 2002, Bethlehem declared bankruptcy, wiping out retiree medical plans; their pension plan was taken over by the Pension Benefit Guaranty Corporation. At the same time, the employees’ benefits were cut. Bethlehem’s attempt to remain competitive in wages in the early years, ultimately led to their demise in later years.
In some cases, total benefits package can be the problem. Lucrative pension plans and healthcare cost arrangements have left many companies saddled with high costs and contracts that cannot easily be negotiated. For years, the U.S. auto industry complained about the high cost of its benefits package. Today, domestic car makers have some of the largest pension obligations and pools of retirees anywhere. General Motors has 514,120 participants in its hourly pension plan; 371,503 of whom are retired. Pension and healthcare costs for those retirees added up to $6.2 billion in 2003, or roughly $1,784 per vehicle according to Morgan Stanley. By contrast, the Japanese competition started manufacturing in the United States in the late 1980s at a far lower cost. Toyota’s U.S. plan has only 9,557 participants and their pension cost is estimated at something less that $200 per vehicle. The impact on profits is dramatic. Excluding gains from its finance arm, GM earned $144 per vehicle in the United States in 2003. GM’s margins are now .5 percent—among the worst in the industry. According to Morgan Stanley, without the burden of pension, retiree, and healthcare costs, the automaker’s global margins would be 5.5 percent. That’s not good news. In comparison, Asian car makers (like Honda Motor Corporation) earn 7.5 percent on their global sales.[5]
Either of the above examples can point toward over-investing. These situations often evolve slowly, catching the HR executive and other senior leaders unawares.
Over-investing occurs in other parts of an organization. Consider, for example, the IT area. In recent years, large companies have invested a great deal of money—and faith—in IT systems as a means of leading vital organizational or competitive change. More than half of the investment includes systems devoted to enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM), and e-commerce operations.
All too often, however, hopes are dashed, and the effort is deemed a failure. Various studies show that in 30 to 75 percent of cases, new systems do not live up to expectations, do not register a measurable financial impact, improve work processes, or bring about organizational change. In some cases, the result is catastrophic. Nike, for example, spent hundreds of millions of dollars on a system that forecasted sales inaccurately; Hershey Foods suffered through a Halloween season in which it failed to keep its candy in stock with major retailers; and FoxMeyer Drug filed for chapter 11 at least in part because of problems with its ERP implementation. These companies often purchase huge quantities of IT for reasons that have nothing to do with their business models or long-term strategies. All too often, a company sees that its rivals have purchased ERP or CRM applications and signed on to participate in a business-to-business (B2B) exchange, and it feels compelled to do the same. This follow-the-pack approach results in IT overspending. Morgan Stanley, for example, estimates that between 2000 and 2002, companies threw away $130 billion of the IT they purchased.[6]
Companies waste billions of dollars every year on new product enhancements that consumers do not want, cannot use, or will not pay for. The fact is that most new products, from automobiles to washing machines, are over-engineered. But corporate efforts to rein in excessive engineering costs frequently fail. CEOs and CFOs at manufacturing companies tell the same story: To achieve a margin on new products, engineers know they need to hit a target cost, but somehow they do not. Why not? Engineers argue they need to spend more to meet consumers’ expectations.[7]
Several forces come together to cause over-investing. Some of these are realistic challenges; others are mythical. Either way, they cause firms to routinely over-invest.
The automobile, airline, and steel industry cases are examples where the companies had to meet union demands to avoid a work stoppage. Thus, in their quest to have additional pay and benefits (and sometimes even more restrictive work practices), the unions have added to the economic decline. For the most part, these companies could not afford to have a work stoppage at any cost. Executives were meeting demands considered excessive to survive “today,” even though they put their “tomorrows” in jeopardy. For many of those industries, tomorrow has come. This situation cannot be blamed entirely on the unions. Some critics blame the companies for giving in to the unions or creating the kind of adversarial relationship where a more acceptable agreement cannot be reached. Others blame the companies entirely for creating the problem.
During the 1990s, retention became the main battle cry for many organizations. The labor market was tight, skilled employees were scarce, and organizations would do almost anything to keep employees or attract new ones. This often led to investing in human capital well beyond what would be necessary or acceptable in many situations. It may be concluded that offering lucrative benefits, perks, and signing bonuses were necessary for business survival; however, many organizations and even industries were able to keep low turnover without having to resort to this strategy.
The problem may be a case of not understanding what really drives turnover and retention. To the surprise of many managers, the findings of research conducted by Mercer Consulting revealed that pay levels had the weakest impact on actual turnover; this was a striking contrast to what exit interviews usually suggest. As an illustration, the modeling in Fleet Financial Service determined that a 10 percent across-the-board increase in pay levels would reduce turnover by less than one percentage point. Thus, relying primarily on pay adjustments to stem turnover would have required a major commitment of resources with little payoff for the company. The real drivers of retention, according to the analysis, had little to do with pay and much to do with factors related to careers, such as promotions, pay growth, number of jobs, and breadth of experience.[8]
For many years, executives have operated under the belief that more satisfied employees are more productive. By spending additional money on a variety of programs, services, and benefits, a company should increase the job satisfaction of its employees. If satisfaction increases, the resulting productivity compensates for the additional expense. Unfortunately for those who believe the happiness-equals-productivity equation, research indicates that job satisfaction does not correlate with productivity in most settings. Attempts to improve job satisfaction do not necessarily translate into corresponding improvement in team performance, measured in productivity and quality. The result: over-investing in human capital—beyond what is necessary to improve the performance of the organization.
Some executives over-invest to remain competitive in the market. They must attract and maintain highly capable employees and are willing to pay the price for them. They sometimes offer stock options to all employees, which can cost the company much later. They want certain capabilities and use various perks to obtain and keep talent. The talent becomes an important part of competitive strategy. The intangible value is an important part of this over-investment—as much as maintaining the low turnover.
Some executives want to showcase the benefits package along with the awards received for investing in people. The goal is to be highlighted in magazines as a “Great Place to Work” and win awards for “best practice.” This recognition is considered a part of competitive strategy and of developing the brand.
Some companies over-invest because they are searching for a quick fix. A serious problem exists that must be corrected; turnover is extremely high, absenteeism is destroying service delivery, or employee complaints are causing deterioration of quality and productivity. Believing money can solve the problem quickly, executives implement new projects, programs, or solutions. Unfortunately, these new services and benefits sometimes exceed what is needed and ultimately add a long-term, almost permanent layer of costs. Once implemented, they are difficult to remove.
Some executives have an appetite for new fads. They have never met one they did not like, so they adopt new fads at every turn, adding additional costs. The landscape is littered with programs such as Open Book Management, Seven Habits of Highly Effective People, Empowerment, Fish, and dozens of leadership solutions. Once a fad is in place, it is hard to remove, adding layers of additional benefits and programs and going beyond what is necessary or economically viable. Executives are returning to basics: creating a great company, building a branded scorecard, or implementing Six Sigma.
Some organizations over-invest because they are unwilling or unable to conduct the proper analysis to see that their investment pays off or that additional investment is needed. Analysis is a critical part of strategic management. Time and time again, if a corporate leader is successful, his or her vision is cited as the cause and lauded as the foundation of the leader’s greatness. Vision, however, is only one component of the strategic management process. To develop an effective strategy, executives must determine where the organization is, agree on where they want to take it, and establish a plan to get there. Too many leaders seem to think that their vision alone should set this strategic development in motion. In the strategic management process, vision isn’t the starting point—it’s a byproduct of competent analysis.[9]
Sometimes, organizations suggest that there is no time for analysis—they must move quickly. Analysis does take time and consume resources; however, the consequences of no analysis can be expensive. If a variety of programs, processes, perks, and benefits are implemented without understanding the need and what particular issue they are addressing, the results can be more damaging than if nothing is implemented. When incorrect solutions or projects are implemented, the consequences can be devastating. Additional pay and benefit packages may do no more than create jealousy, anxiety, and dissension from those individuals who do not receive them or who have a different level of benefits.
Some executives do not understand analysis, what it means, and what it can do for them. When determining the particular issues being addressed, the resulting analysis can appear complex and confusing. However, some analyses are simple, straightforward, and can achieve excellent results. Sometimes analysis is a matter of taking the time to do it, keeping it simple, and taking action only when the analysis indicates additional levels of spending are needed.
Some executives are deeply suspicious of any analysis for something as subjective as human capital. They indicate that investment appears obvious, particularly after examining what other organizations are accomplishing. In reality, the obvious solution, program, or project may not be so obvious. Consider the issue of offering a longevity pay bonus, that is, paying people for achieving certain milestones. For example, a bonus is provided after completing five years of service, then for completing ten years, fifteen, twenty, and so on. While this may appear to be a rewarding bonus for those receiving it, it has almost no motivational impact and is often not considered part of the base pay. It is not an attractive recruiting technique because it does not take effect for five years. Attempting to remove this bonus can have a negative impact on morale. Unfortunately, when it is implemented, few executives take the time to analyze the situation, to see what value it creates, what problem it is addressing, and what is the ultimate payoff.
Still, in other situations, the HR staff does not know what kind of analysis to conduct in order to determine precisely if the new benefit, program, or services are needed and if there is a projected payoff. Those responsible for these analyses have not been trained to conduct them. The preparation for a typical HR manager does not include analysis techniques, and there is often a reluctance to bring in consultants to help with the analysis. Without knowing and understanding what to do, it often goes undone.
Some organizations over-invest because they can afford to do so. They are profitable, enjoy high margins and ample growth, and want to share the wealth with employees. While this may be a desired strategy, sometimes the mechanism used to share the wealth creates a long-term commitment; the wealth is passed on through benefits and pay structure which are considered permanent fixtures. If conditions change, removing or changing these mechanisms can cause serious problems. Consequently, they have a tendency to stay in place, like it or not. Sharing the wealth with employees through one-time bonuses, without a guarantee that they will continue, may be more appropriate and beneficial in the long term.
During the 1990s, many high-tech companies made tremendous amounts of money, significantly increased their stock value, and provided many opportunities to invest in human capital. A number of them over-invested because they felt they could afford to. When the economy turned, the company could not sustain some of the human capital expenditures, thus creating a bigger problem than they might have had without the excessive human capital spending.
The most important disadvantage of over-investment is the potential for less than optimal financial performance. By definition, over-investing is investing more than necessary to meet the objectives of the organization. The relationship between financial performance and investing in human capital has been documented in studies, but not enough attention has been paid to the issue of over-investing. A typical consequence is depicted in figure 4-1. As the figure shows, a certain level of investment yields additional financial results. Some of the studies described elsewhere in this book show that increased investment generates additional financial performance, but there is evidence of a point of diminishing return, where the added benefits peak, then drop as investment continues.
As indicated, the over-investing area reflects no increased financial performance for additional investments. There then is a point reached where the actual performance goes down. This is excessive investing and represents some of the extreme cases mentioned in the beginning of this chapter. Over-investing can eventually deteriorate performance in the organization, particularly in industries where the human capital expense is an extraordinarily high percentage of the total operating cost. The knowledge industry is a good example. A company over-invests in human capital and the impact on the bottom line is severe. In other industries, such as the chemical process industry, human capital investment is low and over-investing in human capital has less effect on the financial performance.
Sometimes over-investing can lead to less-than-optimum performance and too little turnover. Building on the concept that over-investing focuses on job satisfaction (and not necessarily on employee engagement or an organization’s commitment), there may not be any subsequent performance exchange for the investment. Turnover is one of those variables that can be either too low or too high. Excessive investment often leads to lower turnover because employees are tied to the organization. There is debate about how much turnover is too little. Most will agree that dipping below a certain level of turnover can be dangerous. If turnover is too low, the workforce becomes stagnant, generating few if any new ideas and limiting the level of talent in the organization.
Consider, for example, Birmingham Steel Company, recently acquired by Nucor. In one plant, the company paid twice the average wage in the community—a tremendous wage advantage. However, the working conditions were considered unfavorable. Although employees disliked their working conditions, they remained with the organization because of the salaries. They were not motivated to be high performers, but only to perform well enough to keep their jobs. The workers were typically young males who were able to satisfy their taste for expensive automobiles, as was evident in the parking lot. Inside, employees were demoralized and unmotivated, but would not leave. They were present physically, but checked out mentally. Over-investing can create this type of situation and result in inadequate turnover.
Another concern about the consequences of over-investing is the impact on the shareholders. These days, shareholders understand more about human capital and want their companies to invest appropriately. If they see signs of over-investing, they want to know why. For example, what is the logic in developing a $4 million wellness and fitness center? The investor, observing any of the signs of over-investing described above may sound the alarm and question the investment. Therefore, to keep shareholders happy, there should be a more optimum level of investment.
Obviously, over-investing is not a recommended strategy. However, from the employee’s perspective, over-investing is a good thing. It provides more money and benefits to those who need it most, helping to drive up the average salary and benefits packages for all companies. Also, for those organizations that can afford it—and when it is not having an unfavorable impact on financial performance—it may send an important signal to others. It underscores the importance these organizations place on human capital and may bring additional attention and concern for those that are not investing enough.
This strategy may be useful as a quick fix for an organization in serious trouble. High turnover, excessive work stoppages, or increases in employee complaints all have a tendency to deteriorate the wealth of the organization. A short-term, over-investment is absolutely essential to overcoming these problems. Over-investing can be effective if administered wisely and when the long-term impact of added benefits and programs is considered.
Regardless of which side of the debate a person is on, over-investing exists and must be examined closely. This chapter details the signs of over-investing, the causes, and telltale indicators that a company may be spending excessive amounts on their employees. It also shows the forces that have come into play in recent years that often cause companies to over-invest in their employees. The consequences can be critical. However, there are a few advantages that make this a workable strategy for some situations.