2
The External Environment: Social, Political, Legal, and Economic • 17
THE FIVE FACTORS
The most important question about the human resources policies of any firm is:
How well do those policies fit? HR systems are precisely that-systems--whose com­
ponents sometimes work together and sometimes clash. And they are embedded
within larger systems of relationships: the firm and its diverse stakeholders; the so­
ciety or societies the firm inhabits; and so on. Thus, the question How well do the
firms HR policies fit? can be divided into two parts. First, do the HR policies fit in
the broader context of what the firm is trying to do, where it is located, and how
it operates? Second, to what extent are the individual pieces of the HR system in­
THE EXTERNAL ENVIRONMENT:
ternally complementary or consistent?
The notion that an organization ought to craft HR policies that are internally
SOCIAL, POLITICAi:., LEGAL, AND ECONOMIC
consistent and that suit its strategy, technology, and context is hardly controver­
sial. Yet it is much harder to pull off than it sounds. Conspicuous examples of mis­
aligned and/or internally inconsistent HR practices are not hard to find, and we'll
provide numerous illustrations throughout this book. Imitation may be the sincer­
est form of flattery, but it is also one of the ways in which organizations can de­
velop human resource practices that are either misaligned with their strategy and
context or internally inconsistent with other policies and practices already in place.
One sometimes observes a frenzied and indiscriminate rush to emulate the human
resource practices of highly successful companies--for instance, emulating a com­
petitor's pay system without due regard for the delicate interplay among different
elements of an HR system or for differences in strategy, technology, and context
between your organization and your competitor's that (should) impinge on the
choice of HR practices. It is not difficult to find examples of organizations that
have embraced initiatives around total quality, empowerment, and teams--simul­
taneously producing mission and value statements that champion their commit­
ment to these endeavors--but whose HR practices regarding recruitment and se­
lection, compensation, performance management, and promotion are essentially
unchanged from an earlier era in which individual contribution, narrow jobs, and
risk aversion were the ways of the world. Another common source of HR mis­
alignment (particularly among organizations that are growing, diversifying, or glob­
alizing rapidly) is the wholesale transfer of HR practices that were well suited to
a specific line of business, geographical locale, organizational scale, or segment of
the workforce to another context to which they are distinctly mismatched.
16
In this chapter, we will describe the framework we use to assess the fit of an
HR system within the organization's broader context. Issues of internal consistency
among HR practices are taken up in Chapter 3.
When asking Does the HR system fit? in a specific situation, it helps to have a
general framework for analysis, which directs your attention to important categories
of issues and key concerns within each category. A well-known example of such
an framework, used to analyze business strategy, is Michael Porter's Five Forces. 1
We follow Porter's lead and_pr~vide a list of five categories of factors that bear on
the HR system of any orgaruzauon. The five factors are: (1) the social, political, le­
gal, and economic ~nvironment; (2) the workforce; (3) the organization's culture;
( 4) the orgaruzauon s strategy; and (5) the technology of production and organi­
zation of work.
In this chapter, we will discuss each of these features of the organizational
context. Our ~bjectives f~r now are modest. Except for technology, we'll be quite
bnef about thmgs we will be looking at within each category, making lists and
giving a few simple illustrative examples. We won't come to many conclusions in
this chapter about how these things interact With the firm's HR system; such con­
clusions will be reached throughout the course of the book.
The boundaries am~ng social, political, legal, and economic pressures on the or­
ganization are fuzzy, so we group them in a single general category. But, trying
hard to separate them mto subcategories, here are the sorts of things we have in
mind:
Social forces impinging on HRM begin with the local society's norms about
work and employment in general. What in the society lends status to individuals?
What sorts of behavior are frowned upon and what sorts are condoned? What are
viewed as the social responsibilities of the firm? What types of organizational con­
trol are (not) acceptable and legitimate?
Concerning the political environment, how do political pressures work on the
organization in terms of HR policies and practices? What do local governments ex­
pect? What support can be obtained from the political system? What impediments
are imposed by the political system? Are aspects of employment relations subject
to centralized bargaining and negotiation? Are employees and employers politically
organized and mobilized?
Moving a small step to the legal environment, what are the statutory respon­
sibilities of the organization? What rights do workers have, both individually and
collectively? What sorts of employment practices are sanctioned? What legally en­
forced distinctions must be made among workers (e.g., exempt versus nonexempt
in the United States)? What distinctions are impermissible?
As for the economic environment, what conditions exist in the local labor mar­
ket? How great is labor mobility? What economic pressures does the organization
face in other product and factor markets?
I 8 • Chapter 2: The Five Factors
AB an example of how the external environment can affect HR practices and
policies, consider how the employment systems and internal labor markets of top­
tier Japanese corporations are supported by Japanese institutions and environmental
conditions. A detailed discussion of these firms and their HR practices will be given
in Chapter 9, but for now, suffice it to say that these practices involve a lot of in­
vestment by the firm in the employee's skills and training, early in the employee's
career. These practices make sense for the firm if the firm can be relatively sure
that employees will not depart for other jobs--that is, if labor mobility is low. And,
in Japan, it is: Putting it a bit thickly, it is sometimes said (among Japanese) that
it is better to be a substitute on the championship team than to be the star of a
second-place team. Status accrues to workers at the elite firms, status that they (at
least until recently) lose if they shift jobs, especially to move to a lower status firm,
even in a higher-status position. This is complemented and enhanced by low eco­
nomic rewards for mobility. Finally, Japanese labor unions are organized on a com­
pany basis. These external social and economic factors work together to lower la­
bor mobility and thus complement the array of HR practices employed by the
Japanese elite firms. Of course, to the extent that economic and social conditions
are changing in Japan, elite Japanese companies are changing their HR policies.
And when they go overseas, these firms both adapt to the different environments
they face and consciously attempt to site their facilities in locales that foster low
labor mobility and so fit relatively better their distinctive HR practices.
Environmental factors are particularly important for multinational firms, espe­
cially those that seek (sometimes under political or legal pressure) to have a work­
force that is representative of the host country. Note, for example, the relative dif­
ficulties that Japanese firms have had in the United States in building paternalistic
relationships with workers, faced with a culture of labor-management antagonism
and legal limits on what can be discussed directly with workers.
Even the physical environment can have significant implications for HRM! When
confronted (in an international executive education session) with the case of the
United Parcel Service (UPS), with its "cradle-to-grave" employment system and
strong conformist culture, an astute participant from the Arabian Gulf asserted that
the UPS employment system would not work well in his country: Because of his
country's "itinerant" culture and oppressive climate, few workers are willing to re­
main employed there more than a few years, making it impossible for UPS to re­
coup the large front-end investment it makes in individual workers. 2
THE WORKFORCE
The key factors here are mostly demographic. How old is the workforce? How
well educated? How homogeneous or heterogeneous socially? Social homogeneity
refers to uniformity with respect to social characteristics--sex, race, age, income
group, education--and to norms of behavior derived from the society that work­
ers come from. Another important form of workforce homogeneity is partly social,
partly technical-namely, the occupational mix required in the organization. For
instance, a law partnership that specializes in business law will be much more ho-
The Organization's Culture • 19
mogeneous than a "full-service" law partnership, which in turn is much more ho­
mogeneous than, say, Unilever.
The demographic distribution of the workforce can powerfully constrain em­
ployment strategy. For example, firms with a bulge of middle-level managers hired
in anticipation of growth that fizzled out may be unable to sustain lifetime em­
ployment policies. Organizations with workers who are, on average, less well ed­
ucated, will find total quality initiatives more difficult to implement successfully
(see Chapter 9). The amount of workforce heterogeneity (e.g., in age, gender, ed­
ucation, occupation) also has implications for the degree of diversity an organiza­
tion should display in its personnel practices (recruitment, performance evaluation,
compensation, benefits, etc.). And heterogeneity can fundamentally affect basic mo­
tivational techniques. For instance, peer pressure as a motivational tool or control
device works best in general when the workforce exhibits a fairly high degree of
social homogeneity.
Especially in the United States, firms are exhorted by political forces to diver­
sify their workforces. AB we will see in Chapter 14, there can be substantial po­
tential benefits from doing so. But when we come to this discussion, we will be
especially concerned with challenges that arise generally in dealing with demo­
graphic heterogeneity.
THE ORGANIZATION'S CULTURE
~
The organization's culture refers to norms of conduct, work attitudes, and the val­
ues and assumptions about relationships that govern behavior at the organization.
Many variables enter here, including: Is the culture egalitarian or hierarchical? Is
the culture one of cooperation or competition among co-workers? Is work itself
regarded as a joy or as drudgery that provides a means to some other end? Is con­
formity important, or does the organization encourage diversity or even contention
in thought and action? Are workers regarded as mere employees--that is, is the
labor exchange largely "economic" in character?-or are workers regarded more
as family members?
Research on organizational culture suggests several important caveats and re­
minders in thinking about the topic. 3 First, please be sure to distinguish the orga­
nization's culture from the norms of the society in which the organization is
embedded. General social norms can either support or derogate a particular
organization's culture, but organizations sometimes display significantly diverse or­
ganizational cultures within a single social environment.
This raises a second caveat: Many studies of organizations and their cultures
suggest it is misleading to speak of "organizational culture,• because in fact orga­
nizations often display quite distinct subcultures, even within a single locale or or­
ganizational unit. Obviously, variations in culture, within and between organiza­
tions, are likely to have a lot to do with the kinds of work being performed (i.e.,
the core technology). For instance, we would not be surprised to observe different
value systems among those who heal the sick versus those who manufacture vac­
uum cleaners. However, technological determinism isn't likely to get us very far, be-
20 • Chapter 2: The Five Factors
cause we also observe substantial variations in norms and value systems among or­
the use of debt versus equity financing and whether its equity is widely and pub­
ganizations doing roughly the same things. Consider as examples: Ben and Jerry's
licly held versus privately and closely held.
("hippie" ice cream manufacturers in the United States) versus most of their com­
petitors; or the fun-loving culture of get-it-done cooperation among employees in
on the one hand, and HR policies on the other. Here are four examples.
various jobs at Southwest Airlines, versus the more strait-laced, bureaucratic, "I don't
do it if it isn't part of my job description" approach at most U. S. airlines. (We sum­
marize evidence in Chapter 19 regarding the very different values and assumptions
reflected in the organizational blueprints espoused by the founders of Silicon Val­
ley technology start-ups, even within the same industry.)
A final caveat concerns the manageability of organizational culture. There is
considerable debate, among both scholars and practitioners, about whether man­
agers can (or should) consciously manipulate the system of workplace norms and
values, or whether instead culture must be informal and emergent, either because
that is its nature or because that is when it is most beneficial for an organization.
We will not make strong assumptions about the ability of managers or others to
engineer cultures according to a particular blueprint they seek, but we will assume
that the HR policies and practices in effect, as well as how they are implemented,
can send powerful messages that are likely to influence organizational norms and
values as experienced by employees.
For that reason, the implications of organizational culture for HR policies (and
vice versa) can be enormous, because culture is either reinforced by or clashes with
specific practices and policies, rendering the culture more or less effective as a
means of coordinating and controlling activities. In Chapter 10, for instance, we will
see that a culture that stresses cooperation generally won't mesh well with a sys­
tem of performance evaluation (to determine raises, bonuses, or promotion) em­
ploying a strictly enforced curve to make large distinctions. Wide pay dispersion ac­
cording to rank fits well with a hierarchical culture and poorly with an egalitarian
culture. A firm that seeks to encourage individual creativity through explicit rewards
and recognition will find that this is more difficult in a culture stressing conformity
(in attire and behavior). An organization that wishes to foster a feeling of family
might structure compensation along lines that has the symbolic nature of a gift.
THE ORGANIZATION'S STRATEGY
By the organization's strategy, we mean the answers to the following questions:
What are the organization's distinctive competencies, things it can do better than
the competition (or, at least, nearly as well as the best)? On what basis does the
organization hope to achieve competitive advantage-for instance, technical inno­
vation, premium customer service, superior quality, an integrated line of products
or services, or low-cost production? On what basis will its competitive advantage
be sustained-is the company relying on financial and knowledge-based barriers
to entry, on legal protection, on a reputation for aggressive behavior in response
to challenges? What are the long-term objectives--for instance, growth, market
share, or niche penetration? What actions are being taken to get there? We also in­
clude here the firm's financial strategy, especially its financial structure; for instance,
The Organization's Strategy • 21
It is not hard to think of connections between business and financial strategy,
1. Nordstrom versus traditional retailers. A retailer whose strategy is predi­
cated on the quality of its customer service should structure its employ­
ment relationships differently than does a firm aiming to be a low-cost
provider of some good. In the United States, for example, the Nord­
strom chain of department stores has managed to differentiate itself from
the competition-and generally to make handsome profits in a period of
declining profitability within retailing-by giving unparalleled service to
the customer. The centerpiece of their strategy is the personal relation­
ship between the customer and the Nordstrom "associate." Nordstrom's
particular retailing strategy drives their recruitment, training, compensa­
tion, promotion system, job design, and other personnel practices. They
recruit highly educated and aggressive sales people, who resemble the
upscale clientele to whom they will be selling, train them incessantly so
they know all the merchandise and can therefore advise customers and
engage in cross-selling, provide long-term advancement opportunities to
cut down on turnover, and so on.
~ Conversely, much of Nordstrom's volume-oriented competition has
viewed the sales force as an unfortunate expense item required to ring
up the merchandise. These companies tend to believe that economies of
scale, skilled buyers, and shrewd financial management, rather than a
highly motivated sales force, are the key strategic weapons. Accordingly,
they rely more on harsh discipline, close supervision, and low wages for
the sales force; offer few, if any, promotion opportunities for sales per­
sonnel; and typically provide little or no training. 4
2. RF/MAX versus traditional realty firms. RE/MAX, a real estate network,
tries to attract clients by having very active and aggressive agents, whom
it attracts with a compensation system that is nonstandard in the indus­
try. Most real estate sales agents working for a large agency will keep
some fraction of their commissions, giving the rest to the agency to pay
for clerical support, advertising, office and phone services, and the like.
In some cases, agencies will pay their agents a base wage, as a buffer
against a run of bad luck or a downturn in sales in general. Agents
working for RE/MAX, however, keep 100% of their commissions, get no
base wage, and in fact must pay the agency "rent" for office space and
related overhead expenses. Accordingly, the agent who elects to work
for RE/MAX must be confident about her abilities and willing to work
hard for sales.5
3. Financial structure in the United States and japan. An organization's fi­
nancial strategy can have important implications for its HR system (and
vice versa). It is not altogether surprising, for instance, that Japanese or-
22 • Chapter 2: The Five Factors
ganizations, noted for their long-term employment relationships and
treatment of workers as strategic assets, have traditionally secured exter­
nal financing from institutions with whom they are tied through long­
term collaborative relationships. Less subject to the vagaries of an
anonymous and short-term-oriented stock market and financial commu­
nity, Japanese firms have had more latitude to pursue a high-commit­
ment approach to HRM, even during periods when it might be tempting
to do what many U.S. firms have done: downsize, renege on past
promises, impose tighter controls over workers, and the like. 6 Similarly,
many companies in the United States that display high-commitment
work systems and long-term employment relations exhibit little debt,
fund their growth internally, and retain all or most of the stock among
employees (or owners). Typically, these are companies whose competi­
tive strategies are predicated on long-term relations with customers
and/or suppliers, and therefore on long-term relations with employees,
requiring that the workforce be perceived as an investment or asset to
be nurtured and protected for the long haul, rather than an expense
item to be pruned whenever this is expedient in the short term.
4. Investment banking and market making. Some investment banks pursue
both traditional investment banking and trading and market-making ac­
tivities because of perceived synergies in these activities. But this strat­
egy can lead to difficulties in the HR domain. Because investment bank­
ing and trading are quite different tasks, appropriate incentive systems,
means of control, and so on are also likely to be quite different, which
can lead to tension between the two groups within the firm. 7 The
broader point here is that decisions about whether or not an organiza­
tion follows a strategy of product diversification and/or vertical integra­
tion will have enormous implications for HRM, including whether jobs
and career paths are defined narrowly or broadly, how performance is
evaluated and managed, and how desirable it will be for compensation
schemes to be uniform versus differentiated among parts of the organi­
zation. Conversely, it should be clear that an organization's human re­
source practices can constrain choices of business and financial strategy
in important ways.
THE TECHNOLOGY OF PRODUCTION
AND ORGANIZATION OF WORK
We assume that you were not surprised by our definitions of the political, social,
legal, and economic environment, the organization's culture, and its strategy. But
by technology of production, we mean something a bit broader than you might
think, so we will be more detailed in this section.
Under the general rubric of technology, we include factors and conditions that
bear on how labor inputs are converted to outputs. We have in mind the broad
The Technology of Production and Organization of Work • 23
picture of how tasks are organized and coordinated, not simply what kinds of ma­
chines (if any) are employed. A list of some of these factors and conditions fol­
lows, together with some examples of how each bears on important HR policy
issues.
Physical Layout, and Worker Privacy and Proximity
Is the work conducted in a single location, with workers in close proximity to one
another, or is the work conducted at isolated locations? This is potentially impor­
tant in at least two ways: First, work conducted in isolation will be harder to mon­
itor and harder to direct. Consider far-flung service-oriented companies, such as
United Parcel Service or Federal Express. It is not surprising that such companies
typically combine information technology (e.g., on-board devices that transmit data
to central mainframes) with strong inculturation of their workforce in order to en­
sure compliance with company policies and quality standards. In contrast, when
work is conducted in an environment with many (similar) workers present, peer
pressure can more readily be employed (for good or, in the case of peer-induced
output restrictions, for bad). Second, when workers are in close proximity and
technically interdependent, it also becomes harder to treat differently workers who
see themselves as similar (in social science jargon, forces of social comparison are
stronger; see Chapter 5) and worker dissent is more easily mobilized. It is hardly
a coincideq.ce that unions are more prevalent in such settings.
Required Skills
What skills are required? Are those skills acquired externally or on the job? Are
those skills firm-specific or are they transportable? When workers' skills are ac­
quired on the job, new hires are usually less productive than workers with longer
job tenures, because the new hires invest a fraction of their time learning what to
do and how. Even when skills can be acquired off the job, the firm often pays for
their acquisition (see Chapter 15). In either case, the costs of turnover can be high
and the firm will take steps to retain its already-trained workers and attract work­
ers it will want to keep. When skills are acquired on the job and skill requirements
increase with rank, promotion-from-within systems acquire substantial advantages
(see Chapters 8 and 16). When workers acquire skills on the job, they often do so
from co-workers, which has implications for how rewards are distributed. In par­
ticular, seniority-based pay and promotion systems are often employed under these
circumstances, so that senior workers are willing to share their knowledge with
their junior colleagues.
Monitoring Employee Input
For a variety of reasons, it is often important to monitor what the employee does
on the job. This can mean monitoring the employee's overall level of effort, the
quality and care taken, or how the employee allocates time among tasks. Setting
aside for now the question of why we might want to monitor the employee, the
24 • Chapter 2: The Five Factors
technological questions are, How and how well can we do it? How expensive is
it to monitor? To be sure, this is connected to matters of physical proximity and
privacy: How easy is it to observe the employee? How intrusive would direct mon­
itoring be?
In many cases, direct monitoring of activity is either too costly or too intrusive
to undertake. In such cases, indirect measures of employee contributions are sought.
Often these measures are simply the level of output achieved by the worker: How
many pieces of fabric does a fabric cutter cut? What are the unit costs achieved
by a plant (measuring the performance of the plant manager)? What profits are
achieved by the firm, and what happens to the market value of its equity (mea­
suring the performance of a corporation's CEO)? The relevant technological ques­
tions here are:
1. To what extent can the employee, by her levels of input, control these
measures of output? In almost every job, the tangible measures of output
are not completely under the control of the individual employee. Raw
materials may be bad. Uncontrollable factors may intervene, such as a
crippling natural disaster in a salesperson's or plant manager's territory.
If we measure a salesperson's output by the dollar volume of sales or
the number of units sold, we will be looking at a very noisy measure of
labor input because so many factors outside the salesperson's control
can influence a good or bad result. In contrast, if we look at the output
of a piece-rate cutter of fabric, there is a much more direct and noise­
less connection between labor input and the level of output.
2. When employee input is multifaceted, are there good (relatively noise­
free) measures of the different facets? Can we find a good summary mea­
sure of the many facets, good in the sense that it captures what is impor­
tant to the firm? For instance, fabric cutters might sacrifice quality for
speed. It is probably cheap and easy to monitor the speed with which a
fabric cutter works, but it may be very difficult or expensive to get good
contemporaneous information about the quality of his work.
As we will see in Chapter 11, these two factors play a critical role in design­
ing extrinsic incentives. When workers have little control over tangible measures
of output, it can become next-to-useless to base incentive compensation on those
measures of output. .Furthermore, when a job involves a number of tasks, only
some of which are easy for the individual to control, performance-based rewards
will often encourage a risk-averse employee to focus on those tasks over which
he or she has the greatest control. But it is often the hardest-to-measure stuff that
is most important from the organization's viewpoint. This dilemma was dramati­
cally illustrated by the trouble that Sears encountered in the early 1990s with their
automotive repair centers, in which mechanics and managers were rewarded based
on the volume of certain kinds of repairs. Perceiving that they would be evaluated
based on the quantity of repairs that they carried out, some Sears employees per­
formed unnecessary repairs and did not focus much attention on the harder-to-
The Technology of Production and Organization of Work • 25
measure dimension of the work quality (including the evaluation of what work
was needed).
There are two further technological considerations connected to the ability to
monitor worker inputs, but they are sufficiently important to warrant their own
subsections:
Task Ambiguity and Creativity
When "what to do" is reduced to a standard operating procedure, task ambiguity
is low. But some jobs score quite high on task ambiguity and requisite discretion,
such as physicians, self-directed research scientists, and high-level general man­
agers. In these jobs, it can be just as important (if not more so) to exercise good
judgment in selecting what tasks to carry out as it is to execute those tasks well.
A physician who selects the wrong procedure but performs it masterfully is of lit­
tle use to the patient! In extreme cases, creativity-finding entirely new tasks to
perform or, at least, new ways to perform old tasks--is the most important factor
in good performance.
In general, the greater the level of task ambiguity, the harder it is to control
performance by explicit incentives, because it is harder to measure performance.
At the very least, explicit incentives should be based on long-term performance,
usually defined in a broad, diffuse, and subjective manner. Reliance on intrinsic
goals or r~wards is often more effective still.
An interesting case in point concerns medicine and the impact of medical mal­
practice suits. It has been argued that in response to costly malpractice suits, med­
ical practice (at least, in the United States) has been reduced more and more to
going "by the book"-following a sequence of steps, performing batteries of tests,
and otherwise limiting the use of the physician's subjective judgment. It is clear
why defensive, by-the-book medicine is practiced-it makes it easier to refute mal­
practice after the fact-but it is far from clear that the benefits (discovering truly
incompetent physicians) outweigh the costs of overtesting and other forms of de­
fensive medicine. 8
Patterns ofWorker Interdependence and Cooperation
By worker interdependence, we mean the extent to which the product of one
worker's efforts is affected by the efforts of other workers. In some cases, each
worker's efforts stand or fall on their own; examples might include writers and
traveling salespersons (except insofar as a writer's success depends on the editor
or publisher, and a salesperson's success might depend on the quality of the prod­
uct being sold or on after-sale service given by others). In other cases, interde­
pendencies are sequential-each person depends on a sequence of "predecessors"
but not on anyone further down the chain. Sequential manufacture along an as­
sembly line or in a batch process often has this character. In still other cases, in­
terdependencies are complex and reciprocal; the results of one person's efforts de­
pend on the efforts of others, whose results depend in turn on the efforts of the
first. Many sorts of team production (e.g., hospital care) have this character.
26 • Chapter 2: The Five Factors
The greater the interdependence, the harder it is in general to untangle the
level of one worker's performance from the overall performance of the group. For
that reason, extrinsic, single-worker incentive schemes are harder to maintain, es­
pecially if they generate wide disparities in rewards. How would you like to fly
on an airplane in which the pilot and copilot were fighting over the controls, com­
peting to receive "credit" back at headquarters for landing the plane? When inter­
dependence is high, group-based incentive systems are often employed, with some
reliance on peer pressure (when feasible) to control free-riding.
When workers must cooperate extensively, there is the same kind of potential
for distortion of incentives discussed above in the case of Sears' automotive repair
centers. The extent of an employee's cooperation will often be harder to measure
and take longer to reveal itself than other aspects of that same employee's job per­
formance (such as the quantity of output, attendance, etc.). Performance evalua­
tion and reward schemes that focus too much on shorter-term and easier-to-mea­
sure outcomes can provide inadequate incentives for workers to cooperate. For
this reason, for example, the most experienced or lead workers in a piece-rate fa­
cility (such as fabric cutting), who are expected to devote some of their time to
training new workers and solving problems that arise, sometimes receive time­
based pay rather than piece-rate wages.
The impact of patterns of interdependence doesn't end with questions of mon­
itoring and incentives. There are also social ramifications; for instance, high levels
of interdependence generally involve high levels of personal interaction, which can
trigger processes of social comparison (see Chapter 5).
The Distribution of the Outcomes: Stars, Guardians, and Foot-Soldiers 9
In some jobs, such as basic researcher, one or two home runs in a lifetime make
for a successful career, and the firm is willing to try out a lot of players to find
the one home-run hitter in the crowd. In selling big-ticket items, it may take more
than one or two home runs to make a career, but a single high-margin sale is
worth a lot, and it may be worth losing a lot of potential sales to hold out for the
big win. In other jobs, it is the failures that loom large. Aircraft pilots want to get
their planes down nice and smooth, and they want to stick to the schedule when
possible. But a failure (that is, a crash) is a lot worse for an airline than sticking
to a schedule is good. In still other jobs, variations in individual performance don't
matter too much; organizational success depends on the aggregated performance
of large numbers of individuals, none of whose individual performance is decisive.
The observed distribution of outcomes reflects two sets of forces: (a) each
worker faces (uncontrollable) environmental uncertainty that makes the outcome
of his efforts somewhat random; and·(b) different workers in the same job, acting
in the same circumstances, may get different outcomes because of variations in
skill level, ability, determination, and the like. The issue here is the distribution or
range of possible outcomes of a worker's efforts on both these grounds, measured
in terms that are meaningful for the firm. 10
The Technology of Production and Organization of Work • 21.
Consider the range of possible outcomes, centered around the "average":
1. When a bad performance isn't too bad, but a good performance is very
good for the firm, we call this a star job. Jobs involving the production
of knowledge or innovation, where only the (occasional) good idea is
adopted after being thoroughly vetted, are usually star jobs.11
2. When a bad performance is a disaster, but a good performance is only
slightly better for the firm than an average performance, we will call this
a guardian job. Guardian jobs are often found when the work technol­
ogy involves a complex, interdependent system of production, and over­
all performance is determined largely by the worst individual con­
tribution. A special case of this involves workers who represent the or­
ganization to a key external constituency in settings where the organiza­
tion's reputation is a valuable asset. In this case, insofar as word of a
single screw-up will be spread among the external constituency, the or­
ganization suffers disproportionately from the single screw-up.12
3. A foot-soldier job is one in which the range is concentrated near the
average.
We ~an give two pictorial depictions of these three cases. Drawing the range of
possible outcomes gives us Figure 2-1. 13 Alternatively, we can draw the probabil­
ity distribJttion (density) of possible outcomes: In the case of a star, because the
average outcome is on the left-hand side of the range of outcomes, the odds of a
good outcome are quite low, with most outcomes in the average-to-mediocre range.
The reverse is true for a guardian; most of the time the outcome should be aver­
age to slightly above average, with small probability of a disaster. And for a foot­
soldier, the distribution of outcomes will be roughly symmetric around the aver­
age, within a fairly narrow range. Taking artistic license with the shape of the
probability distributions, we get the three distributions shown in Figure 2-2.
. . We have applied these descriptive terms to the job, by which we mean a po­
s1tio~ held by a single individual in the firm. In some cases it is more meaningful
to think of star, guardian, and foot-soldier teams, especially when production is so
interdependent that it makes little sense to try and disentangle the impact of dif­
ferent workers' contributions.
~-----~-+-~-----.,__outcome to the firm
( average outcome
Figure 2-1 Ranges of outcomes for different types of jobs.
28 • Chapter 2: The Five Factors
l outcome to the firm
average outcome
distribution for a guardian
l outcome to the firm
average outcome
distribution for a foot-aoldler
.,. outcome to the firm
<- average outcome
Figure 2-2 Distributions of outcomes for different types of
jobs.
Obviously, if the firm can affect (through job design or other choices) the types
of jobs it has, it will opt for star and against guardian jobs. Thus, for example, to­
tal quality management strives to design products and processes that are foolproof
(eliminate the possibility of bad outcomes) and to take advantage of the insights
and inspirations of individual workers (extend the range of possible good out­
comes). To the extent that it can, the organization will put redundancies in place
for guardian positions, such as an airline equipping a plane with both a pilot and
copilot or a bank requiring two signatures on very large checks. But sometimes
the firm can have only limited impact on the sorts of jobs it possesses, and then
HR policies will change depending on the qualities .of those jobs.
For example, when employees can choose between relatively risky versus risk­
free. outcomes, the organization will want to encourage "gambling" among stars
and discourage it among guardians. This can be done through compensation prac­
tices: for stars, small penalties (or none at all) for failure, and large rewards for
success; for guardians, severe penalties for any failure. This can also be achieved
APPLYING THE FIVE FACTORS: THE CASE OF IBM
through more intrinsic methods of motivation, such as culture. For foot-soldier po­
sitions, HR practices should be directed at raising the average level of performance
instead of focusing on the extremes of the distribution. Although the firm doesn't
benefit much by raising a single worker's performance, it may do quite well by
raising slightly the average performance of a large number of workers. 14
If the variation in outcomes is due (in part) to variations in employee skills,
then recruitment and training strategies will also vary among the different job types.
For a star job, the costs of a hiring error are small relative to the upside potential
Applying the Five Factors:The Case of IBM • 29
from finding an exceptional individual. Therefore, the organization will wish to
sample widely among many employees, looking for the one pearl among the peb­
bles. For guardian jobs, in contrast, the firm will be very careful to screen initial
job applicants and may require long apprenticeship periods before giving the em­
ployee responsibility, both in order to screen further and to train the individual.
And for foot-soldier positions, the firm will be relatively content to take in what­
ever applicants are willing to work at the going wage, or it may pursue some other
recruitment objectives (e.g., social homogeneity).
Of course, the three patterns in Figures 2-1 and 2-2 do not exhaust all the pos­
sibilities. In some cases, for example, the range of possible outcomes extends both
far above and far below the benchmark of average performance. For example, in
a firm that thrives on innovations, the single researcher looking for an innovative
idea is a star. But when a manager must decide which innovations to fund or to
adopt companywide, that manager can have tremendous positive and negative im­
pacts on the organization. When reputation is important and can be shaped by
both outstandingly good and appallingly bad individual performances, the em­
ployee can have a widely varying impact on the fortunes of the fum.
What are the implications of this sort of combined star-guardian pattern? Typ­
ically, workers whose jobs have this pattern are difficult to control. To guard against
disasters, failure must be severely punished and great care must be taken in se­
lection and training. Yet to get star performances, risk taking needs to be encour­
aged, and 1he organization should be open to running a lot of candidates through
the position to see who has what it takes to be ,a star. Obviously, the twin goals
of minimizing disasters and promoting risk taking to obtain stellar performances
are difficult to reconcile, and we typically find in this sort of job that more effort
goes into disaster avoidance than into encouraging risk-taking. One reason for this
is the well-documented tendency for losses to loom larger than gains--that is, em­
ployees and managers perceive a loss of K units (sales, dollars, company image,
or whatever) as hurting more than a gain of K units helps. 15 Because of the basic
inconsistency in motivating/selecting for the star and guardian aspects of a single
job, the combined star-guardian pattern should be avoided if possible. Given the
bias toward avoiding failures, when the combined pattern cannot be avoided, ex­
tra attention should paid to the "star" aspects in order to correct the balance. We
will have more to say about these issues later in this book when we discuss job
design, ·performance evaluation, and compensation issues.
The story of the rise and decline of International Business Machines (IBM) has
been told many times, in many ways. We will not go into great detail here, and
we will oversimplify, but to illustrate broadly the use of five-factor analysis, it helps
to recount the story in our terms. 16
From the perspective of 1978, IBM was one of the great success stories of
American industry. Earnings had grown at a compounded rate of 17.7% from 1950
to 1960. Over the next decade, the annual percentage growth in earnings improved
30 • Chapter 2: The Five Factors
to 19.7%. From 1970 to 1978, growth in earnings was "only" 15% per annum. Al­
though IBM had a substantial business in office products ($3 billion in revenues),
in 1978 the bulk of its business was in data processing (computers, peripheral de­
vices, and software), which contributed 81% of its revenues and 92.4% of its op­
erating income.
A brief rendition of the five factors in the early 1970s might run as follows:
• Strategy. IBM was a centrally directed, product-focused company. It devel­
oped--and then sold and serviced-the products that it decided were
needed, and it prospered because, by and large, its preeminence allowed it
to control the product agenda of the information processing industry. Espe­
cially with the 360/370 series of computers, IBM defined how data process­
ing was done-by specially trained computer staffs, working with so-called
mainframe computers and complete (and complex) large-scale systems for
information storage, manipulation, and communication. Time sharing had
moved computer control and use out of the era of punch cards and batch
processing, but computing was still largely the realm of staff specialists,
whom IBM's sales and service staffs cultivated. IBM manufactured its own
products and tried to control its product line through patents and patent-in­
fringement lawsuits. It bundled hardware with dedicated software that ap­
pealed to the computer specialist because it reinforced the power of the
specialists and appealed to their own tastes and skills; general managers
couldn't hope to cope with the highly specialized and arcane systems. Be­
cause automated information processing was quite novel, IBM put great
stress on delivering error-free products to the market; it didn't want potential
customers to be scared off by stories of bugs encountered early in a prod­
uct's life cycle. Much of IBM's growth in the 1970s came overseas, and
IBM's strategy there was to be a true multinational: IBM Japan would look
like a traditional Japanese firm; IBM France would have French top manage­
ment; to the fullest extent possible, production would take place worldwide;
and although R&D was somewhat concentrated in the United States, it was
consciously being spread overseas.
• Workforce. IBM's workforce was occupationally fairly diverse, including R&D
and product design engineers, computer assemblers, sales and service staff,
support personnel (clerical, custodial, etc.), and even a (very) few pure scien­
tists, who were largely kept hidden away in research facilities such as the
Watson Labs in Yorktown Heights, New York. But the bulk of the core work­
force (at least in the United States) consisted of career employees with an en­
gineering background, largely w~te, male, and middle to upper-middle class.
• Culture. IBM's culture was starched white shirt. This is more literal than
might be imagined; a somber blue suit with a discreet tie and an ever-so­
slightly off-white shirt was regarded as one small step away from a clown
suit. Conformity, teamwork, and dedication to Big Blue (i.e., IBM) were cen­
tral norms.
Applying the Five. Factors: The Case .of IBM • 31
• Technology. In a corporation as large and diverse as IBM, the technology of
work varies enormously and, even looking at a single job, it has many dis­
tinct and important elements. However, we want to focus on three aspects
of the core workers in the value chain.running from product development
to sales and service. First, the "big systems, mainframe, arcane technology"
approach to information processing means that teams are vital. Individuals
could and did have brilliant ideas, and disastrous screw-ups could and
sometimes did take place. But by and large, IBM's army was an infantry of
foot-soldiers, each contributing a small piece to a very large mosaic. Second,
and relatedly, individual performance was hard to measure. Performance of
the team or business unit could be better observed, but even measuring per­
formance at these levels was difficult when outcomes took time to clarify
and involved a number of factors outside of IBM's control. Third, to reduce
the chances of an imperfect product reaching the market, IBM's develop­
ment efforts involved redundancies and competitions: If, say, a subcompo­
nent system to accomplish a particular task was required, different ap­
proaches to the system would be taken by different groups, and then a
"jury" would decide which version would be adopted.
• Environment. We will not discuss IBM's multinational strategy, except to
note that it responded in part to political pressures on the corporation
(which in tum strongly colored some of IBM's multinational HR policies).
Instead, under the category of "environment," we stress: (a) substantial status
accrued, in the 1950s and 1960s, from working.for a premium employer
(such as IBM); Q>) the more specific professional norms of engineers and
scientists to some extent tied their identities more strongly to their profes­
sion than to their employer; and (c) the power that IBM had in the labor
market for information technology specialists during this period. Insofar as
IBM could and did set the product agenda for the industry (except for spe­
cialty players such as Cray), it was an attractive employer to those who
wanted to work with the best colleagues and machines, to help set the
agenda.
How did IBM's HR policies fit with these factors? Extremely well. IBM ran a
paternalistic internal labor market. (See Chapter 8 for more discussion of intemal
labor markets.) Employees had a no-layoff guarantee, premium wages, and out­
standing working conditions. Employees expected and were expected to have a
career at IBM, moving from entry-level positions through various technical and
managerial hierarchies. This promoted identification with IBM, gave workers a bet­
ter sense of the big picture, helped develop wide competencies, promoted team
play and team spirit, and gave the company longer lead times for evaluating em­
ployees. Specific compensation and bonus systems for higher-level managers re­
inforced IBM's top-down control of its product mix. The strong internal culture
helped to homogenize the different national and international units of IBM.
Recall the annual growth figures for net earnings cited earlier: 17.7% from 1950
to 1960; 19.7% during the 1960s; and 15% from 1970 to 1978. But then, from 1978
3 2 • Chapter 2: The Five Factors
to 1986, earnings grew at only 5.5% per annum. As for 1986 until today, the re­
cent hard times experienced by IBM make it difficult to make economic sense out
of earnings figures, but earnings for 1996 imply a growth rate of less than 5% per
annum for that decade. Share prices fell from a high of around $75 in the late
1980s (adjusting for splits) to around $20 in late 1993. The stunning market rally
since 1996 has vaulted IBM's share price above $185 (as of December 1998), but
this still leaves IBM's equity holders with much smaller gains in the last decade or
so than were experienced by the technology sector or the market as a whole over
that period. What happened, and how did this affect HRM?
We focus on several related changes in the five factors:
• Strategy. IBM is no longer able to adopt the attitude of, "Make it (the prod­
uct), and they (the customer) will buy." It has had to shift from a centrally
directed product focus to a much more market-driven focus. Although the
goal of error-free product introductions remains admirable, speed to market
in an increasingly competitive environment has become critical.
• Workforce. Its workforce, especially at upper, decision-making echelons,
was wedded philosophically and emotionally to the big-systems, technical­
language vision of computing. (Compare the operating systems of the PCs
to the early Macintoshes, or OS/2 to Windows.) This turned out, with
hindsight, to be the wrong strategy in software. Also, the workforce was
attuned to a world in which hardware manufacture and sale was a large
part of the value chain. But, increasingly (in the micro, workstation, and
minicomputer end of the market), profits come from software. In hard­
ware, IBM manufactures excellent products, but so do Compaq and Dell.
IBM has no true relative advantage as a manufacturer, and some of its
competitors (e.g., Sun Microsystems) do little or no manufacturing
in-house.
• Culture. Its old top-down management style slowed its rate of response to
its new environment. The white-shirt/Big Blue culture made it harder to
bring in an increasingly iconoclastic workforce. To speed response to mar­
ket, IBM began to abandon its previous system of multilevel competition in
development, but this system (and the notion of error-free new products)
·had become an ingrained cultural icon, complicating implementation of the
new development process.
• Technology. In product development, especially in software, there is rela­
tively more emphasis nowadays on star performance and relatively less on
foot-soldiery. It is too strong to say that a single individual can create on
her own a commercially successful software application, but the number of
individuals needed is relatively smaller, and the impact a single individual or
small team can have is relatively greater.
• F.xternal (economic and social) environment. IBM's labor market environ­
ment has shifted adversely. It has lost its attractiveness as the font of new
One Size Does Not Fit All • 33
technology, and in an industry in which the technology has shifted relatively
to more of a star pattern, venture-capital-fueled start-ups have raised the
stakes for what a star can expect to command. This has also affected the in­
ternal culture of IBM vis-a-vis the external professional culture of engineers:
It is harder to achieve worker identification with Big Blue, when good out­
side employment opportunities exist and mobility is high. Finally, the status
conferred generally for working for a Fortune SO firm is relatively less than
it once was.
If no layoffs and a strong internal labor market were the hallmarks of IBM's HR
policies, the changing factors given above have significantly affected how those
policies fit. IBM nowadays risks losing its best personnel to established competi­
tors and to start-ups; if it retains all that want to remain, it winds up with a dis­
proportionate number of folks from the bottom of barrel. This is especially costly
in a world that is more star-driven. In addition, it can no longer be sure that it can
supply its labor needs internally; it may have to reach outside for key employees.
Of course, IBM has officially abandoned its no-layoff policy, and it has reached
outside for talent, even to the level of its CEO. Compensation policies have had
to be adjusted. Incentives have been reformed, to decentralize decision making,
and so on.
Did IBM blow it? With hindsight, we can say that many of its strengths in
the 1960s ll>ecame relative weaknesses in the 1980s. But when climatic condi­
tions on the savanna change in a way that favors gazelles and is problematic
for elephants, we can't blame an elephant for not being a gazelle. IBM has ad­
justed to its new world with some measure of success; not surprisingly, given
the deeply ingrained culture that had developed over the years, an important
aspect of IBM's resurgence and realignment has come about through acquisi­
tions which have brought new technology, people, and values to the company.
It can't be held accountable for the fact that the new world is not as hospitable
to it (especially given the legacies of its workforce and culture) as was the world
of the 1960s and 1970s.
Another general lesson about fit can be drawn from the IBM story. If a firm's HR
system fits well with one specification of strategy, technology, workforce, culture,
and environment, then it is bound to fit some other set of factors poorly. In HRM,
there is no one size that fits every situation. IBM had a superlative HR system for
the_world it inhabited in the 1960s. It comes as no surprise, therefore, that IBM's
system was not ideally suited to the changed world of the 1980s. As you examine
an HR system and its fit with the five factors, it can often be useful to answer the
question: What does the firm's HR system preclude it from doing well? To learn what
a firm can do well, it often helps to specify what it cannot.
34 • Chapter 2: The FIYe Factors ~-JS

THREE CAVEATS ABOUTTME "FIVE FACTORS"

We hope you will find the five factors helpful when organizing your observations
about the context.of'1l·film's human resources system. But as with all frameworks
for organizing the datatfhe five factoJs, lf taken too seriously, can lead you into non­
productive or oounterproducti lntelledual straitjackets. Por one thing, you may be­
come more concerned with getting everything 10 fit neatly into one of the five slots
than with undermndlngthe impOrlantfactors and (espeda)Jy) theirinterrelatioosb
A second intellectual straitjacket that is particularly dangerous with the five..
factor approach is that it can cause•you 10 think in one direction, from the envi­
.ronment, technology, culture, workforce; and stmtegy, to the HR system of the or­
ganmtion. You might regaid the five as fixed, wil:h;HR pradices adjusting 10 fit.
Yet an organh;amm 'bas scme control over eadu,f the five factors. 'Ibis is dear­
est when itCOIJle&to•itsstrategy,·but is also somewhat true about culture, work­
force, and technology. (Indeed, management decisions that influence wodd'orce
and culture are a vital part Gf its HR stntegy.) It is e,,m true to some extent about
the environment, msofar 1111 the organization can choose where to locate its fadl..
ities. For instance, think of the Japanese auto manufacturers and where they chose
10 locate their American assembly plants: not in Detroit, but in rutal Ohio, Ken­
tucky, and Tennessee. No doubt some significant tax advantages were at work here
but, as we'll see when we return t0 this example later' in the book, a lot of. strate­
gic HRM was invom!d; as well.
'Ibis is not to say fhal management lias complete -control mer the five factors
it faces. Once a plant is sited in one location, it can be very ezpensive to move.
A technology, once fixed, is bald to change. Once a cohort of managers of a cer­
tain age is nh'ed, it ·can be hard to dispose of. A stntegy or culture, once put in
place, can be very cilfBcult to shift (for reasons.we will develop over the next few
chapters). A n d ~ ~ of iocation, technology, strategy, workforce, and envi­
ronment, even at the outset, is not unencumbered by circumstances; for instance,
when Toyota decided 10 assemble automobiles in the United States, siting the fa­
cility in, say, Honduras, was not a viable option.
So as you examine the five factors in specific cases, keep in mind mat they
aren't fixed and unalterable, but neither are they infinitely adaptable. The key is
to fit them 10 HR practices and HR p r a ~ ~ ~ the ~ _extent feasi..
ble, where the fitting goes in both directions.
· A third problem with a five..fa¢t01" list is that it can lead you to draw connec-
tions between each of the five factors.and the specific components of the organi­
zation's HR system; without paying el)OUgh attention to the key linkages among
those HR components. Por instance, you might be tempted 10 think separately 1. See Michael Porter, ComplltftWe ~ (New Yorlc Pree Press, 1980).
abont how the five factors impinge on compensatiOn, promotion, job design, re­ 2. The case of UPS will be discussed in some detail in Chapter 3.
cruiting, employee development, and so on. But thinking of compensation as sep­ 3. For a good ovemew, see Joanne Martin, Cubures m ~ Three Perspectives
arable-from promotion or how jobs are designed is fatuous. The interrelationships (New Yorlc Oxford Univetsity Press, 1992).
among these things-are at least as important as their individual attributes. Thus, 4. 11lls tendency for strategies centered on long-term, high-quality relations With cus­
we tum next to the second aspect of fit concerning stmtegic HRM, namely how tomers to favor longer-term, hlgh-commitment employment relations is also evidenced
the constituent pieces of an HR system flt together (or don't). in n:search on the HR systems of emerging technology companies (see Chapter 19).
36 • Chapter 2: The Five Factors ·Endnotes ~,,37
' <._

5. See Chapter 14 for a more detailed discussion of how the RE/MAX strategy works. wards may be doled out on more personal or political grounds: Superiors may ;turr,y
favor by rewarding and promoting their favorites, thereby creating dependencies that
6. Front-line Japanese firms also tend to be less vertically integrated than their American
solidify their power base in the organization. But we suspect these regimes may not
and European counterparts and depend instead on a tight network of suppliers. When
be stable. Individuals in foot-soldier positions may be able to exert profound negative
times are tough, the front-line firms will maintain lifetime employment by dispropor­
effects on organizations in ways that don't relate directly to the performance of their
tionately passing on the bad times 0to their suppliers, including the "loan" of workers jobs-for instance, by mobilizing opposition, creating negative publicity, instigating law­
to the suppliers, who must lay off their own workers to make room. Of course, these
suits and filing grievances, or gunning down a supervisor or co-worker. Furthermore,
time-honored features of Japanese organizations are being strained by the economic,
the performance of foot-soldiers en masse may have an appreciable impact on the firm,
social, and demographic changes occurring in present-day Japan.
even if no single foot-soldier does so. Therefore, there is still an important role for
7. See, for example, Ken Auletta, "Power, Greed, and Glory on Wall Street: The Fall of performance-based rewards and sanctions in a foot0 soldier setting. (See the discussion
Lehman Brothers," New York Times Magazine 134, Section 6 (Sunday, February 17, of Safelite Glass in Chapter 11.)
1985): 29. 15. See Daniel Kahneman.and Amos Tversky, "Prospect Theory: An Analysis of Decision
8. See Daniel Kessler and Mark McClellan, "Do Doctors Practice Defensive Medicine?," Making Under Risk," Econometrica 47 (March 1979): 263-91; and Max Bazerman, Judg­
Quarterly journal of Economics 111 (May 1996): 353-90. ment in Managerial Decision Making, 3rd edition (New York: Wiley, 1994): Chapter 3.
9. The material in this subsection is adapted from David Jacobs, "Toward a Theory of 16. For further detail, see Richard F. Vancil, Arvind Bhambri, and James Wilson, "IBM Cor­
Mobility and Behavior in Organizations: An Inquiry into the Consequences of Some poration: Background Note," Harvard Business School note 9-180-034; David B. Yoffie
Relationships Between Individual Performance and Organizational Success," American and Andrall E. Pearson, "The Transformation of IBM," Harvard Business School case
journal of Sociology 87 (November 1981): 684-707. 9-391-073; and David B. Yoffie and Jeffrey M. Cohn, "The Transformation of IBM: Sup­
10. We will not be precise concerning the units in which outcomes for the firm are mea­ plement," Harvard Business School supplement 9-792-105.
sured. But to operationalize this, we would use something like long-run impact on the
firm's profits, or impact on its growth rate, or something similar. Because this is meant
to be used to help a firm analyze and improve its own HR system, the appropriate
measure will be determined by the objectives of the firm.
11. The potential for being a star in a creative position can be attenuated, however, by
the way the organization is structured-for instance, when the creative worker faces
powerful forces within the organization that insist on conformity, or where creative ef­
forts can be defeated by others pursing a different agenda (e.g., when the legal office
squelches new product lines to reduce product-liability exposure).
12. However, in some cases a single exceptionally good performance will also attract dis­
proportionate notice among constituents, in which case the job is neither a star nor a
guardian position, but a mixed star-guardian. See below for further discussion of this
mixed case. '
13. The "size" of the range is measured in units that-are meaningful to the firm. For ex­
ample, piece-rate workers can vary widely in terms of the number of pieces completed
over the period of a day; differences in output measured in hundreds of percent are
not atypical. But if (as is usually the case) these differences have only modest finan­
cial implications for the firm, we still have a foot-soldier. Also, any employee could,
potentially, cause a disaster for the firm-the employee could, for example, suddenly
go berserk-nd any employee could, potentially, discover and reveal some astonish­
ing breakthrough that revolutionizes what the firm does. The ranges in Figure 2-1 are
meant to accommodate those outcomes that are reasonably contemplated as part of
the job.
14. Because the firm's impact through compensation and other policies on foot-soldier per­
formance is small, there is a tendency for the impact that is ·there to go unrecognized
or under-appreciated. Jacobs, op. cit., suggests that for foot-soldiers, this may mean
that meritocratic reward policies are more apt to· go by the board: The firm may set
its policies to accomplish broad political aims-for example, it may adopt seniority­
based pay systems in societies where seniority-based pay is socially acceptable. Or re-