It seems like the business community must repeatedly relearn this truth: That People and Profits go together. It’s not one or the other. It’s not Profits over People, as critics of Wall Street claim the financial community embodies. Likewise, only focusing on People, without determining how people will generate Profits does not work either.
Some recent corporate news reported in the Wall Street Journal illustrates just how important this link is between People and Profits.
- On April 11, in its Midday Report, the Journal reported that, “McDonald’s Tells Franchises ‘Service Is Broken'”. Customer surveys revealed that the top customer complaint is about rude or unprofessional employees. And 20% of complaints are about employee friendliness. In fact, McDonald’s ranks near the bottom of QSR Magazine’s annual study of service at fast-food chains.
McDonald’s reported that customers value good service almost as much as low prices! The Journal asks “Why does McDonald’s have these problems?” (It thereby claims not to know why, but does note that: “employee turnover is very high”! Hmmm?)
The story concludes with the observation that: “Despite these problems, McDonald’s is doing plenty of things well. It continues to remodel its restaurants and roll out new menu items. Also, earnings in the fourth-quarter beat expectations.”
If I were a shareholder of McDonald’s, however, that profit information and those “plenty of things” it is doing right would not make up for the bad customer survey results and employee turnover rate. In fact, in my experience, the quality of relationships with customers and employees are a far better leading indicator of future of financial results than merely current profits (or remodeled restaurants and new menu items).
- On April 15, the Journal reported in a story titled “Penny Wounded by Deep Staff Cuts” that in implementing the strategy of the recent JC Penny CEO Ron Johnson, the company dropped from about 150,000 employees to around 116,000 – a whopping 23% cut in the work force! There were so many people fired that they were told in groups rather than individually. The strategy, by the way, eliminated JC Penny’s house brands, one of which, St. John’s Bay, accounted for one billion in sales revenue. So, the Journal observed, that the huge drop in employment leaves the new (actually returning) CEO, Myron “Mike” Ullman, facing “a huge deficit in morale.” (One can only imagine how great that “deficit” is!)
While we have financial numbers to measure the decline in sales revenue, it’s another matter to measure the financial impact of decimated morale. Has JC Penny reduced employee productivity by 30%, 50% – or perhaps even more? And what will the returning CEO do to rebuild trust, loyalty and enthusiasm of JC Penny’s staff? We’ll see. Whatever he does, it will take time, both to show up in employee morale surveys and probably even longer to show up in financial results.
- Remember the heady days when executive pay (i.e., bonuses) was tied entirely to financial results? (Well, I realize that is still largely true of financial firms.)
That was also a time (in the 1990’s especially) when “re-engineering” was the prevalent management tool/fad. (For those who have forgotten or weren’t around then, re-engineering was a process for redesigning business organizations with the aim of cutting out unnecessary jobs – and thus reducing the work force.) While showing an immediate gain in profitability, thereby generating bonuses to the executives who cut back staff, it also did considerable damage to the human side of companies, which eventually showed up later in the financial numbers (after the executive bonuses had been paid out).
(Italics mine in the following paragraphs.)
On April 23, the Journal reported that “Wal-Mart Will Tie Executive Pay to Compliance Overhaul“. I include this because it’s important to see whether executive pay is entirely tied to profits or whether there are other company goals whose achievement are being rewarded financially. The Journal wrote: “Wal-Mart Stores Inc. plans to base some executive compensation this year on whether the retailer successfully overhauls its compliance operations, a process it began last year amid a federal investigation into bribery allegations in Mexico…”
“Currently,” the article continues, “Wal-Mart’s executive compensation is based on financial measures, including sales, operating income, and return on investment.” So far, this sounds pretty typical, but in continuing on, the Journal quoted from the company’s proxy statement: “a portion of executive compensation is also subject to satisfying the company’s workplace-diversity goals, such as placing ‘diverse candidates in specified positions’.”
Okay, so the company is now setting executive compensation in part on non-financial goals – 1) avoiding bribery and other compliance issues; and 2) achieving workplace diversity. All well and good – a step in the right direction most observers would say. But what about goals having to do with employee morale? If there is ever any dimension that relates directly to future productivity and profitability, morale would seem to be a leading candidate.
In all three of the recent examples above, what we see are reminders about the true driver of company success – the health and spirit of the human component. In NOBLE ENTERPRISE, I wrote about how the people side fuels success, and how to energize people to create better business performance. The book includes an inspiring example of one company and CEO who raised morale from the bottom of 500 companies surveyed by the Hay Group to the top – and raised the value of the company several-fold in just three years. I was honored when the book was chosen last year as a “Top 40 Business Book” by John Spence, a leading consultant and executive educator. (See his complete list.)
To learn more about NOBLE ENTERPRISE, click here.