Compensation Is Getting Personal

Companies drill down on employee data to zero in on perks that spur the most productivity

Imagine that your company's human resources department does away with standard salaries, one-size-fits-all benefits, and the usual raft of yawn-inducing seminars. Instead, HR execs huddle over computer programs that slice and dice data on you and your cube-mates--controlling for age, tenure, educational background, commute time, residential Zip Code, even the age and condition of the office you work in. The aim is to predict your behavior, ascertaining exactly how to cut costs without sabotaging morale--as well as which incentives would spike your productivity the most. Could they pay you 20% less but give you a three-month sabbatical every two years, cementing your allegiance and jolting your output? If they dumped your 401(k) match, would you bolt from your job or barely notice? Does your boss's managerial touch inspire you or undermine your ability to produce? And what if, instead of parking you in a lecture in some stuffy hotel ballroom, you got a customized seminar that unleashed your ability to lock in 20% more in annual sales?

This may seem the stuff of corporate sci-fi--but it's actually here. A growing vanguard of HR heads are quickly embracing a new discipline, human capital management, that attempts to capture new gains from workers just as Six Sigma squeezed new efficiencies from factories. Some of the most groundbreaking work is coming from Mercer Human Resource Consulting, which is pioneering its new statistical modeling technology with clients including Quest Diagnostics (DGX ), FleetBoston Financial (FBF ), and First Tennessee (FTN ). These kinds of analyses are helping a lengthening list of blue chips figure out exactly what kind of a return on investment they are getting from the millions of dollars they spend on their workforces. "This is the new thinking in the new HR," says Kurt Fischer, vice-president of HR at Corning Inc. "Here's what we're spending. What are we getting for it?"

Caught in the profits crunch, companies crippled by anemic growth are desperate to energize earnings. Labor costs, which account for an average 60% of sales, represent a huge opportunity. Instead of placing precise bets on what compensation mix or management approach would work best, companies have usually thrown "everything at the wall, ratcheting things up slowly every year and hoping some of it works," says Dave Kieffer, head of Mercer's human capital group. When companies make cuts, just as much guesswork--and potential for backlash--comes into play. With the new technologies, companies can now accurately measure the ROI on their people.

The new human capital frontier is fraught with challenges, though. Critics worry that customizing the workplace so minutely could create a new office Darwinism that makes free agents of everyone, with little common ground and no ability to, say, collectively bargain. More specifically, employers' ability to sift through the employee ranks by neighborhood or educational level could lead to legal objections, especially when it comes to rewarding or penalizing people differently. So far, most of the new HR has focused on employee groups, not individual workers. But experts say that grinding down to the personal level is only a matter of time. "This will likely breed greater inequality, even for people in the same educational cohort," says Peter Cappelli, management professor at the University of Pennsylvania's Wharton School. "It raises big philosophical questions as to whether people are motivated by differences in treatment and whether we are going too far down the road of individual differentiation."

The growing interest in the new human capital metrics stems from a rejection in some quarters of benchmarking--the practice, promoted by many big consulting firms and management gurus, of aping the best-performing companies such as General Electric Co. (GE ) and Microsoft Corp. (MSFT ) The result has been a cascade of CEOs copying everything Jack Welch and Bill Gates did--with many of them failing. Some developed a mania for rank-and-yank performance reviews, without ascertaining if tenure actually enhanced productivity. Others adopted flexible, just-in-time workforces that they could switch off and on like a spigot, without assessing the drag on productivity part-timers could cause.

The perils of this kind of blind benchmarking were evident at one major hospital chain, where the CFO bragged that his aggressive use of part-timers was saving the company $5 million a year. Each time the CFO found a rival with a lower ratio of full-timers, he would ax more at his own hospitals--to the point where one facility was being run by a staff of 80% part-timers. Not surprisingly, those employees were often clueless about local hospital practices and wound up wasting the time of the full-time staff. What Mercer's analysis showed was that the use of so many part-timers was actually costing the company $25 million in reduced productivity--3% of annual revenues. By hiking the ratio of full-timers back up to 63%, the chain regained 18% in overall productivity within two months.

This points to one big difference between the new human capital management and old-era HR: Instead of looking outside to others for cookie-cutter answers, the new thinking argues that it's better to look at the company's internal labor market. One blue-chip beverage maker assumed its longest-tenured drivers were the most productive. After a time-series analysis--controlling for factors such as older drivers getting their pick of the best routes--the company realized that once its drivers hit the nine-year mark, productivity plummeted even as their pay rose. In this case the company reassigned the drivers to less physically taxing jobs. But another company may have been more cold-blooded and fired them. It shows the potential dark side of these tools: providing cover for what's essentially brutal cost-cutting. "Historically HR has wanted to be the equality police," says Mark Huselid, a Rutgers University HR strategy professor. But now there's a danger that HR brass could misuse the data in the process, "creating a monster," says Michael Scofield, a senior vice-president at workforce consultant Nucleus Solutions.

Still, the new human capital initiatives can provide valuable insights. After studying its ranks, First Tennessee realized that bank customers reacted far more favorably to experienced employees than it did to new hires. That meant that no matter how many college grads the bank hired nor how many experienced pros it brought in, it could not beat the tens of millions more in annual sales it could reap merely by increasing retention of current workers by at least one year.

In another such analysis, a blue-chip technology company learned that its pay structure was penalizing the highest performers and rewarding the weakest; lackluster employees were clustered in a cash-cow unit, while superstars were toiling in a still-profitless upstart division. "Most companies are just cutting without this kind of analysis," says Kieffer. That's not likely to last, as more and more businesses realize how much they're spending on something about which they know so little.

Read a Letter to the Editor about this story.

By Michelle Conlin in New York

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