HR for humans How behavioral economics can reinvent HR

 

Is it true that the more you pay people, the harder they will work? How can human resources move from focusing on processes to thinking about human motivation? Josh Bersin spoke with Tanya Ott about how behavioral economics disrupts HR—in a good way.

It sort of hit me like a ton a bricks – WHOA! This is what’s wrong with HR.   We’re not thinking about the world in terms of how humans react and human motivation. We’re thinking about the world in terms of interventions and processes and programs that we can roll out and push on people.

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TANYA OTT: We’ve all worked for people and most of us have managed people.   But do we know what we’re doing?   And what can we learn from popcorn sellers at a movie theater? This guy’s gonna tell us.

Welcome to The Press Room, Deloitte University Press’s podcast on the issues and ideas that matter to your business today.   I’m Tanya Ott and we’ve to a lot of interesting ground to cover today, so we’re going to get right to it with Josh Bersin of Bersin by Deloitte , part of Deloitte Consulting LLP. He’s focused on Human Resources.

JOSH BERSIN: One of the things that happens in companies is the HR department is continuously barraged with problems. You know, we need to hire people. We need to build better leaders. We need to improve capabilities. We need to do a better job of training. We need to understand employee engagement. To manage compliance. Reduce fraud. On and on and on. And HR departments are filled with very, very intelligent, well-meaning, hard-working people [who] have been trained to build programs and processes to solve those problems. Because what generally happens in HR (is) somebody comes to you with a problem and rather than just try to solve that one problem, what you generally say is, well, let’s see… can we design something that will scale across the whole company that will address this? And you know, the best example of this is the performance management process that goes on in companies around the world. Somewhere, sometime 30 or 40 years ago, somebody went to an HR department and said, “Will you help me improve the performance of my employees?” And somebody dreamed up this idea of, okay, let’s set goals and let’s create an annual review and at the end of the year, we’ll rate people and we’ll compare the ratings across other people and we’ll divide the money up amongst people based on their ratings and we’ll decide who gets promoted based on their ratings. And that turned into billions and billions of dollars of investment in this thing that turned into the annual performance appraisal in companies all over the world. And what we found as we studied this over the last 10 or 15 years, this one particular part of HR, is that 81 percent of the companies that do this don’t think it’s worth the time they’re putting into it. Yet it’s institutionalized everywhere. And so when I started reading about behavioral economics and learning what it was, it sort of hit me like a ton a bricks: “WHOA! This is what’s wrong with HR.   We’re not thinking about the world in terms of how humans react and human motivation. We’re thinking about the world in terms of interventions and processes and programs that we can roll out and push on people.”

TANYA OTT: And Josh says that just doesn’t work. Especially these days.

JOSH BERSIN: The big thing that’s happened in the last four or five years is that we’ve gone from a world of employees as sort of indentured servants to employees as volunteers. Where, you know, we come to work and, you know, we obviously want to make a good living and we want to do a good [job] and want to be recognized. But, you know, we get job offers through email. We can go on social networks and we can rate our employer. So it’s much, much easier for people to move from job to job and company to company than it ever was before. So this idea that we’re going to push programs on people and force them to do them doesn’t seem to work. Not only do [they] not necessarily obey, but maybe they comply but they don’t do it very well.   Or they passively comply and you don’t really get a very good adoption of the program. But even to make it worse, the other research that we’ve recently done is something called “The Overwhelmed Employee.” Today, thanks to all the technology that we have at work, we’re overwhelmed with stuff to do. I mean, emails—most of the people I talk to, when I mention the fact that I get 200-300 emails a day everybody nods and they say “Yep, I do too.” Emails, text messages, conference calls, video conferences, meetings. So if we want to roll out something that might be in an employee’s best interest and encourage them to actually use it we can’t just force it on them anymore. We have to encourage them to use it. Find a way to make it enjoyable or useful to them.

TANYA OTT: You mentioned a moment ago that, what was it, 80 [percent] or 81 percent of people that you surveyed said that annual review or annual appraisal process was pretty useless to them or just frustrating to them. And I guess what’s at the heart of that is that that process, while instituted and widely used, hasn’t been rigorously evaluated about whether or not it’s effective?

JOSH BERSIN: You know, Tanya, it’s a really good question. So, think about what HR does. HR is basically a support function. So we’re here to help the rest of the company do a good job at whatever it is they do. Sell, hire people, manage people, and so forth. So we are always ourselves if what we are doing is adding value. So the typical response to that is let’s study the impact of the HR department. Let’s do an ROI study of our new onboarding program, an ROI study of whatever it is we’re doing to see if it actually drove impact. And so one of the unfortunate results of the way the world works is that HR is constantly trying to cost-justify what it’s doing. And in the case of performance management, it’s a really funny thing; when 81 percent of companies say it’s not worth the time we’re putting into it, people clearly have not been [doing] an ROI analysis of it. Some of this stuff gets institutionalized. Books get written about it. People start doing it and they don’t question it. And I think behavioral economics is actually very disruptive to HR. I think if you apply the disciplines of behavioral economics, you find many, many things we’ve been doing in HR should be really thought about differently. And that’s why I think this is such a fascinating topic.

TANYA OTT: So let’s define what you mean by rigorous testing, when you call for rigorous testing. You talk about A/B testing. For someone who’s not familiar with that, what does that mean?

JOSH BERSIN: Well, okay, so continue on the performance management one for a minute. Everybody knows that the process they have kind of sucks. It’s not very fun for the managers. It’s not very fun for the employees. It wastes a lot of time. There’s a lot of paperwork. It doesn’t really improve performance. It’s more a matter of rating people. So let’s improve it. Maybe you get rid of it entirely. Maybe you have the employees rate the manager. Maybe you have a check-in every month. Maybe you have a check-in every quarter. Maybe instead of a five-point scale you have no scale. Or you have a three-point scale. Or you have a very qualitative measure. So there’s a lot of different things to do.   So rather than just, you know, hire a consultant and read a couple of books and try one of these, why not do some testing? One of the companies I talked with, the CHRO [Chief Human Resources Officer] told me she’s doing three different pilots of a better performance-management process: One where they’re using no ratings whatsoever. One where the employees are rating the manager. So they’re actually doing the opposite and trying to determine if that has an indicator of performance. In other words, if the employees are highly engaged and they like their manager, does that correlate to performance? And one where they’re doing a check-in process with much more regular feedback. And they have the current one, too. So basically they have experiments going on for a period of about two or three quarters where they’re going to try three or four different approaches and then they’re going to go back and they’re going to interview people and see which one’s working.

TANYA OTT: Huh!

JOSH BERSIN: I think most of the things we do in HR are like this. You know, most of the human interventions we do there’s no perfect answer. So we don’t really know if we got it completely right or completely wrong or maybe a little bit right. So if we can try two or three different approaches we’re going to be much, much smarter in the long run, and nowadays when we have so much technology and we can measure, you know, the adoptions of different things, it’s much, much easier than ever. So this is a very important new discipline.

TANYA OTT: So what exactly is this new discipline? Behavioral Insights has lots of parts to it, but there are three main principles that Josh thinks HR departments should understand and be using. The first is what’s commonly referred to as Moneyball. It’s named for that book—and movie—about baseball scouting.

JOSH BERSIN: Okay, this is a pretty simple one that I think people HR kind of know they need to do and that is use data, not just judgment.  So many, many things we do in business—and this isn’t just HR, this is management in general—is based on judgment and experience. So, when I hire somebody, one of the most complicated and strategic things you do as a manager is to hire somebody. You have to make a decision about whether this person is going to fit into the job, into the company, whether you personally can get along with them, whether the team will get along with them, whether they’re going to grow in the right direction that the company is wanting to grow, et cetera. There [are] many, many subtle parts to that. And historically, most people hire –certainly new hires—based on, you know, grade point average, where they went to school. Do they look or act like other people in the company? You know, do they sort of fit our model? And that’s a judgmental, subjective way of hiring people. And that’s exactly what they write about in Moneyball. How they, prior to the Oakland A’s, how the scouts would find baseball players. You know, they had strong arms, they walked a certain way, they had certain musculature and so forth. Well, if you actually look at data about high performers in most companies, many of the criteria that are used for hiring are incorrect. So the one that I’ve run into many, many times is, you know, sales performance.   Most people who are [with] big companies are hiring lots and lots of salespeople all the time. A lot of times hiring salespeople out of school. And one of the criteria of hiring younger people is where did they go to school? What companies did they work for in the past? And what was their grade point average? And study after study has shown that those criteria have little or no relationship to sales performance. In fact, one of the companies I talked to was an insurance company [that] told me that despite the fact they were really kind of a blueblood company and they love to hire people from, you know, East Coast schools, that had great grade point averages, they did a lot of analysis. And they found that actually there was no relationship whatsoever with where these people went to school, but in fact the highest predictor of sales performance in the first two years in this particular company was whether or not they had typos on their resume! Which is, you know, in some respects kind of obvious…

TANYA OTT: Yeah!

JOSH BERSIN: But people probably weren’t thinking about it. And there [are] dozens and dozens of examples like this that are going on. And we’re just, we’re probably two years into companies starting to figure out how to use all this data they have to make better business decisions on who to hire, how to promote, how much money to pay people, and so forth. So that’s the whole Moneyball thing.

TANYA OTT: You know, I think it’s kind of challenging because if you’re hiring people right out of school, you often times don’t have a lot of, you know, history to judge them on, right?

JOSH BERSIN: Right.

TANYA OTT: So the default is easy. Did they go to the school that I go to or a school that’s like the school that I went to?

JOSH BERSIN: Well, and that’s actually one of the biggest blind spots that we all have. You know we all have blind spots of, oh, this person’s like me or this person is like, you know, my old boss. Or this person is like, you know, somebody I used to work with. And all of the sudden, you’ve jumped to conclusions. But if you have data, you might find out that, you know, it’s actually, maybe it’s the person that it’s a little bit more uncomfortable to hire that’s actually the best person to hire based on data.

TANYA OTT: Well, you alluded to something that I do want to follow up on and that is the idea that we tend, as humans, to hire people who look like us. And there’s a really interesting study from the University of Chicago and Harvard about the names of people on their résumés when they’re applying for a job.

JOSH BERSIN: It was research that showed when people had African-American-sounding names, they were much less likely to be hired. And to me that is really upsetting. I mean, I happen to live in a very racially diverse community in Oakland, California, so I see that impact of racial discrimination just, you know, right here. And I think it’s really, really sad that we behave like that. So companies are doing things like they’re taking names off resumes. They’re using more data. And we have to come up with better tools to fix it.

TANYA OTT: There’s a big difference between some of this behavior insights research [that] is done in the lab vs. how it plays out in the real world. But you’ve had the opportunity to observe some of those world applications—like movie theaters and popcorn sales?

JOSH BERSIN: Well, yeah, this is a great one. So, you know, most companies have very wide variations in profitability around the different parts of their companies. So in the movie theatre industry, all the profits come from concessions. The ticket barely covers the cost of the movie to the theater. So if you don’t buy any popcorn or candy or any food, they’re barely breaking even on you. So they really want to encourage you to stand in line and buy the $5 box of popcorn or whatever it might be. So one of the theaters that we did a lot of work with, the CHRO and I were talking and he said, “You know, a little analysis and we found that we have very wide variations in concession sales,” and he said, “So I had the hunch that maybe it had something to do with the employees.” So, he looked at the employee engagement data and sure enough, he found the theaters that had a lot of popcorn sales had very happy, highly engaged employees. And he goes, “Oh perfect! I’ve figured it out. If we can improve employee engagement, we can improve concession sales.” So he did what most HR people do—he tried a “push.” He said, “Let’s do a training program for our managers on how to manage people well, how to create a great work environment, how to do a great job of customer service and really stimulate the employee engagement in those theaters that have low levels of employee engagement.” (pause) And guess what?

TANYA OTT: Did it work?

JOSH BERSIN: Nothing changed! (laughs) Didn’t have any impact at all. You know, he spent nine months doing this and I don’t know how much money, but a lot. So, he said to me, “You know one day I was in the shower and I said to myself, we can’t teach people to be happy.   We have to hire happy people!” So he said, “Let me look at how we’re sourcing people.” And sure enough, he went back to the recruiting and, you know, the questionnaires and the interview guide for how they were hiring people to come work in the theaters. It was about, did you have extracurricular activities at school? Did you have leadership potential? Did you have good grades?   Did you finish your degree? All sorts of sort of pedigree-related criteria, none of which had anything to do with whether you were actually going to be fun and enjoyable to be around in a movie theater! So he went back and he said, “You know, we[’ve] got to figure out how to find happy people and screen them differently.” And so they went through a variety of interesting ideas on how to do that. You know, one of the ideas that actually comes from Southwest Airlines is you ask candidates to tell you a joke as part of the interview process.

TANYA OTT: Oh my gosh, I would so fail that!

JOSH BERSIN: Yeah, I mean, so would I! So that’s why I don’t work in a movie theater. But you do find different things. So sure enough, a year later they had a huge turnaround in profitability by doing that.

TANYA OTT: There’s a lot of data that big companies have on their people, but how do they ensure that the way that they structured that data collection on their employees and how they interpret it isn’t itself subject to bias?

JOSH BERSIN: You know, that’s part of the job of this new breed of HR professional. I would say that this new HR professional that understands behavioral economics and respects data and knows how to do analytics has to have a little bit of knowledge of statistics. I had a CHRO say to me one day a year or so ago, he said, “I’m not hiring anybody else into HR that hasn’t had at least one course of statistics.” Because if you don’t understand statistics, you may not know that the data you have is either meaningless or maybe it is important. So some of this is retraining the HR professional. It’s building new skills within HR and just building more respect for data. And also the other problem we have, this happens all the time, is even if you do all this work, you come up with a new model and you say, “We’re going to hire people differently” or “We’re going to pay people differently” or “We’re going to incent people differently,” the business leaders will often times say, “Ehhh, I don’t believe you. I don’t like that. I always like hiring people from my school [so] we’re going to keep doing that.” And so you also have to have the guts or the nerve to push back on business leaders who are biased and may not understand that they’re not making the best decision and prove to them that the way you’re doing it now is better. And I’m actually finding that that’s more of a challenge than I thought.

TANYA OTT: So that’s Moneyball. One of the other major behavioral insights is the idea of “nudge”. And that, of course, is a hugely popular word in the world of behavioral economics. And that is nudging people to make the right choice for them in a multitude of ways, but one of the most famous is the idea of choice architecture where you sort of nudge them into the right choice by leveraging their natural psychology.   Explain that a little bit.

JOSH BERSIN: Well, one of the things we all deal with at work is a myriad of things coming at us and where do we spend our time and where do we waste our time? Should we be doing this or that? Talking to this person or that person? And you know, when you’re early in your career and when you change jobs you don’t really know where to spend your time. The more senior you get, the more sort of savvy you become about where you’re going to drive the most impact and what’s going to be the most useful for you. And you also have issues in companies now where people are basically tired at work. They have too much going on. The digital stimulation is a little bit overwhelming. And so they burn themselves out. So, how do we do that? You don’t send them to another training program that just basically takes up more of their time and sometimes frustrates them more. The word [I like to use] is curate the work environment. Try to get rid of the clutter. Reduce the complexity. Simplify things so that people don’t have as many decisions to make. There’s actually a really interesting article, I don’t remember what magazine it was in, where Barack Obama makes a comment that he said, “You know, when I became the President I basically got rid of most of my clothes and I only have blue and gray suits.” And he said, “Because I just don’t have the time to think about what I’m going to wear anymore. And I know it’s going to look good and it’s just, it’s cognitive overload for me.” And we’ve got to do the same thing for people at work. And so, part of the nudging process is just simplifying things, which is hard to do. When you’re thinking about how to hire somebody, how to train somebody, how to pay somebody. I mean, you’re going to have a hundred things going through your head as an HR person and a bunch of different criteria and you have to sit down and really work hard using principles of design thinking to come up with something that’s simple. That is an art in and of itself. And then, figure out a way to make it useful for the person. Not just useful for you in HR.

The second part of this is, you know, most of the HR-related things we develop, we try to do things that are good for the HR program itself and we don’t think about what’s good for the person. You know, maybe instead of the two-day class, we need a one-hour video. Or maybe we do need a two-day class, but it should be offsite someplace really relaxing where people don’t have access to their computers. You know, maybe instead of giving people, you know, the common one that everyone’s read about instead of giving people 10 choices for their 401K, give them three. Or maybe give them one, where they’re pre-enrolled. In business, more and more of the research I find seems to prove that if we can simplify people’s work environment, they will get more work done. And one of the most important things leaders have to do is to decide what not to work on. And that’s a very important part of leadership. That’s something that HR professionals have to think about. And you know big companies like even GE are now saying, “You know what? This is a corporate strategy. We are going to simplify. We are going to teach people how to do less. We are going to give people the authority to skip meetings, not join a conference call if they’re busy with a client. Reduce the number of goals they have.” And that’s, you know, I think some of this is backlash to this relentless proliferation of technology we find at work. And I think that is HR’s job is to get really good at that.

TANYA OTT: A little sidenote:

Okay, this is the part in our interview where I go into a lengthy story about an employer I “might have hypothetically worked for” (wink, wink). I’m going to paraphrase to protect the innocent. But basically, remember how Josh mentioned earlier about how all of us really struggle to keep up with the hundreds of emails we get at work each day? Well, this company was no different. But one of the contributing factors is that some employees in this company really loved to hit reply-all to emails.   The “reply all” button appeared right next to the “reply” button in our email client. So some of us asked if the IT department could possibly move the “reply all” button farther away so our eager co-workers would have to pause and really think about whether that email needed to go to everyone in the company.

Suffice to say: The button didn’t move. But HR did propose scheduling an all-company required training session on email etiquette.

TANYA OTT: But I’m like WAIT! You missed the whole point! I don’t have two hours…

JOSH BERSIN: Actually, that’s a good story! That’s exactly the story! I mean I think the HR general thinking is like, “Let’s train everybody!” instead of come up with a nudge. It’s a perfect example, actually. The thing that’s fascinating and I think this is so interesting is HR people are very smart, hardworking, passionate people and they just need to think about this, think about their jobs in a different way. In some ways, this is an even more important job. Now your job is to design the employee experience in a way that works for the employees. And the core discipline of that is something called design thinking, which is sweeping across business now and changing the way HR departments think about their work. So I think this is a very fundamental shift in the way HR people need to do and how they have to think [about] their jobs.

TANYA OTT: So the last behavioral insight that I wanted to talk to about is this idea of leveraging intrinsic motivation. And that has to do with what motivates people. Is it rewards specifically to themselves, bonuses and things like that, or something else?

JOSH BERSIN: You know, that’s something that HR people do think about and probably need to do more. But, you know there’s a general belief I think amongst many business people—and it’s true in some industries, but not all—that if we pay people more, they’ll work harder. And so there’s a meritocracy formula in the back of a lot of business people’s heads that the harder somebody works, the more they produce, the more money we pay them, and that goes on forever.

TANYA OTT: And that’s not true?

JOSH BERSIN: It’s absolutely not true. In some roles, in sales, for example, it’s a very cultural, long-term tradition that the best salespeople make more money. But that only works to a point. Salespeople often quit great companies because they don’t like the environment. And there are certain industries where this is very common. But it’s a very small percentage of the workforce. The vast majority of the workforce, and I have all the data on this, is much more motivated by a feeling of belonging, a sense of being recognized and rewarded psychically for their work.   You know, we did a study on recognition. Not monetary recognition, but human recognition, and found that the companies that have high recognition cultures, that thank people, that give people improved benefits, that give them time off, have [a] 31 percent lower turnover rate than those that don’t.   So there’s a limit to how much money will produce and, ultimately, it only goes so far.   Another huge driver of employee satisfaction and engagement is career growth and learning. You know, we used to think that the reason we did training and learning is because it made people more productive. Actually, it’s still true, but it’s more of an engagement tool than anything else. Especially amongst young people and 50 percent of the workforce is millennials in the United States. Young people will change jobs, change managers, move to totally different companies based on their opportunity to learn. And so these are things that are intrinsic motivations that HR people have to be very, very aware of.

TANYA OTT: Building on this idea of intrinsic motivation, I was able to talk to Michael Norton of Harvard University who researches happiness and whether money makes people happy. And he runs a whole lot of experiments and one of the big takeaways is that people get more happiness from spending on other people rather than themselves.   In one of the experiments that he did, he had a company give its sales team a small amount of money to spend on other team members. Not a lot—you know, it might be $15 or $20—so they could take a team member out to lunch or buy a coffee or something like that. And they found that that resulted in higher sales productivity. And the thinking was that people were more personally invested in their teammates. Does that ring true to you, that idea?

JOSH BERSIN: That makes so much sense to me. You know I’ve never seen that, but that makes so much sense to me. Absolutely. Well, one of the things I have seen—we studied this—there are these tools now for employee recognition where you get a bank of points and every week you get like 100 points or maybe every month and then you can give them to other employees as a thank you. And the points accumulate and they can be redeemed for prizes, so it’s a little bit of the same thing. And it really, really makes people excited. I mean, it really gives people a sense of personal satisfaction to be able to reward somebody else for something. Obviously, when you receive a reward from somebody and you know they had the option of giving it to anyone, it’s incredibly thrilling.   I do think we as humans are fundamentally good beings. And I think we want to do the best thing. And I think what HR has to do is put in place systems that allow us to behave in our best possible way and that’s a perfect example of doing that.   So I think that’s a great example.

TANYA OTT: You know, I have taken that idea, after talking with Michael, and am trying to use it within my own organization. As I’m walking through the budget process for the next year, I’m carving out about a thousand dollars that I’m going to try distributing to various people at various levels and let them decide what purchases we need as a group for our studios, whether it’s cosmetic or a refrigerator or whatever the case may be.   And it’s not exactly a direct application of that but it sort of is.

JOSH BERSIN: It’s the same idea…

TANYA OTT: It’s the same idea, and it’s very, very different than anything this company’s ever done and so I’m still in the process of selling it up.

JOSH BERSIN: It’s part of this thing I said in the beginning that the employees are kind of in charge now. You know, if you don’t give people the authority and the empowerment and the tools to make decisions, they kind of check out. And that’s a perfect example. I bet it will work really, really well, you know, if the top people approve.

TANYA OTT: Hopefully you’ve gotten some good ideas from this podcast that you can take back to your company.   Josh Bersin has plenty more to offer in an article he co-authored with Jim Guszcza and Jeff Schwartz. It’s called HR for humans: How behavioral economics can reinvent HR and it’s at our website, DUPress.com.

While you’re there, check out the really fascinating deep dive we just did on behavioral economics. We talk to some of the biggest names in the field including Richard Thaler, the guy who wrote the book Nudge, and Michael Norton, the guy who does that happiness and money research.

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We love to hear what you think about what we’re doing. You can tweet us at @DU_press and email us at podcasts@dupress.com   I’m Tanya Ott for the Press Room. Thanks for listening and have a great day!

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