Innovative Work Practices (IWP’s)

Innovative Work Practices (IWP’s) Economics of High Performance Work Practices Teams - Definition • Team - group of workers who work at least in part together and whose work is complementary. – Assembly line - interrelated work – Committee – Team members do not have to work on exactly the same task • Gains from specialization Teams - Benefits – Members specialize but know how parts fit together • Makes use of complementarities - “the whole is greater than the sum of the parts” • Sharing difficult physical tasks • Coordination across tasks • Knowledge transfer - most valuable when – Team members have idiosyncratic information – This information is valuable to other team members Potential Gain From Teamwork Mike’s tasks Ann’s tasks Ann’s Knowledge Mike’s Knowledge Overlap of knowledge No Gain From Teamwork Mike’s tasks Mike’s Knowledge Ann’s Knowledge Ann’s tasks Overlap of knowledge Teams - Costs • Incentive dilution due to free rider effects – When rewards are shared among team members, there is the 1/N effect or line-of-sight effect. Incentives fall rapidly with the number on the team – Could reward individuals to avoid this problem •Measuring individual effort is difficult when production organized as a team •Cooperation is usually important, but often difficult to measure individually. Teams - Costs • Group decision making is inefficient – Quicker decisions made by a single person – Committee design jokes – Often much more socialization Incentives on Teams • Team bonuses – best when team size is small • Profit sharing – Unlikely to have incentive effects - therefore best viewed as risk sharing (why unions do not like it) • Norms or peer pressure – Unfortunately, teams can enforce inefficient norms as well Team Design • Team Size – larger size larger free rider problem – larger size more information sharing – Larger size less communication • Member rotation across teams – benefit of information sharing – cost if person-specific human capital is important Team Design • Competition or Cooperation across teams? – Teams will naturally be competitive with each other. – If cooperation is important, need coordinating mechanisms to mitigate a lack of cooperation •cross-team coordinating groups may be required. Worker Empowerment • Lazear’s focus – Ability to communicate – Ability to express opinions – Ability to make suggestions Worker Empowerment • Benefits – Better information about preferences •more efficient contracting over job characteristics, •nonmonetary compensation •pay – Better development of implicit contracts •Important with specifically trained workers Worker Empowerment • Benefits – Generate creativity •more important when workers have idiosyncratic information – Belief that information will not be used against them Costs Vs. Benefits of Worker Empowerment • Costs – Productivity enhancement must be traded off against the workers’ increased bargaining power • Loss of rents to workers will occur • Firms typically resist unions for this reason – Workers are likely to be able to extract rents when they work together in a long term relationship Space Between Curves is rent that goes to workers Largest total profit Total Profits Optimal for firm Optimal for Workers Power to the workers JOB DESIGN: TWO APPROACHES • Classical: ex ante optimization (Taylorism) of methods – has substantial advantages if you can figure out best practices ex ante • effective use of central knowledge (e.g., talented engineers) • all workers use best practices • strong coordination & control (e.g., consistent output) • Modern: continuous improvement – more evolutionary approach • effective use of knowledge at lower levels • requires “knowledge management” to share best practices • creates coordination & control problems When to Use Which Approach? • What does NPV of ex ante optimization depend on? – costs: how difficult is the optimization? • how complex is the process? the product? the product line? • how stable was our history? have we already figured out best methods because we’ve done the same thing for a long time? • how predictable is the environment? do things change constantly? can we foresee all contingencies & plan for them? – benefits: • how stable & predictable is our future expected to be? is our technology changing rapidly? is competition dynamic? will we have to re-optimize soon? • Emphasize ex ante optimization if environment is simple, stable & predictable; otherwise emphasize continuous improvement • Consider the Classical approach as an investment – up-front cost of optimization, amortized over future productivity gains Buzzwords: Classical v. Modern Jobs • Why the trend toward “empowerment,” “TQM,” etc.? – industrial engineering less effective now  more scope for continuous improvement • time based competition • complex product lines; frequent changes • rapid technological advances • emphasis on quality & service rather than cost – & job enrichment-type approaches tend to be more effective • information technology • cultural change? • This argument illustrates “External Fit” of HR policies w/ product, technology, & industry conditions Notes on Classical v. Modern Jobs • Not all jobs should be enriched – what can be routinized, usually should be – or even automated, computerized • Specialization & job enrichment are often balanced through job rotation • Firms generally use a mix of both centralized & decentralized approaches to process improvements – centralized tends to work better for major, one time changes (e.g., technology changes) • & improves knowledge management / transfer – decentralized tends to work better for incremental changes • & for implementation / tactics: decision management v. control – both may be needed for different types of adaptation Implementation of Modern Job Design 1. Usually, focus on multi-tasking more than multi-skilling – what kind of learning? new skills v. process & product improvements  2. Bundle complementary jobs – doing • skills, information & equipment • proximity (physical or temporal) – results: parts or processes that work closely together – examples • repeat work for same client • direct relationships with client • vertical loading (“doing” v. “controlling” or reducing decision control) – focus on providing learning opportunities 3. Modularize the process (Task Identity) Implementation 4. Decentralize (Autonomy + Feedback) – b/c workers have more specific knowledge in enriched jobs – have employees collect performance metrics & monitor themselves – teach employees to identify problems, suggest solutions, experiment • e.g., Juran on TQM (1989)  analyze symptoms  theorize causes  test theories  establish causes  simulate a remedy  test remedy under operating conditions  establish controls to hold the gain Implementation 5. Choose other policies for “Internal Fit” – teams • to achieve modularity / Task Identity • for collaborative problem solving • cross training & job rotation – career policies • careful recruitment to achieve proper “Growth Need Strength” • cross training & job rotation • training – in particular, in problem solving – culture • overall goal / mission • teamwork – incentives • may not be needed • avoid punishment to encourage airing of problems & ideas Quick Questions • Are “Happy workers productive workers”? • Do extrinsic incentives destroy intrinsic motivation? Economic (& Psychological) Ideas • Specialization • Intrinsic motivation • Taylorism – ex ante optimization v. continuous improvement • Using enriched jobs to create specific knowledge • Internal fit between HR policies • External fit of HR policies with strategy & environment Research Results on Innovative Work Practices What Works at Work? Innovative Work Practices Contrast with Traditional • Traditional work practices – tightly defined jobs with associated pay – clear lines of demarcation separating duties and rights of workers and supervisors – decision making retained by management – communication through formal chains of command Expected Returns • • • • Increased motivation Cross training reduces absenteeism costs Decentralization removes need for middle management Training in problem solving can assist in implementing new technology • Involvement in decisions can reduce grievances • Higher productivity - higher profits Costs • • • • Extra meetings Costs of HR practices Higher pay? Worker empowerment How to study? • Ideal experimental design – Internal validity • Explanations other than the current one can be ruled out •Requires random assignment of IWP’s – External validity - how closely do research sites resemble the target population? Problems • Quality of workers/management may be correlated with results (omitted variable bias) + Self-selection (best managers implement plans) - last hope(something better work or we’re tubed) • Solution is typically to use longitudinal data and allow subjects to act as their own control – requires study of adoption (diffusion) – requires study of survival of IWP’s Problems • Response bias - voluntary answering of questions typically has a very low response rate • Difficult to match results with correct unit of observation (Not all workers involved with IWP’s) • Measurement errors are probably large when categorizing IWP’s. They may not be the same from firm to firm – Are results “self-serving?” - use two responses at different levels • Bundles of practices often required - Are they substitutes (ESOP or profit sharing) or complements Results • 3/4ths of case studies report increased economic performance. This is not true for attitudes or behaviors. • Intra-industry studies in steel and auto – whole system needs change •more screening of workers •broader jobs •problem solving teams Results • Intra-industry studies in steel and auto – whole system needs change •gain sharing system •employment security – large positive effects of bundles – individual changes do not get desired effects – few companies have been willing to adopt all Why haven’t more done it? • Best in greenfield site • Limited change tried and doesn’t work so it is abandoned • Union mistrust of management plans • Management fear of worker empowerment • Resistance of people who could lose (middlemanagement) • Lack of supportive public policy