Friday, February 15, 2008

Why pigs have wings (Importance of differentiation in people management)

The more interesting part of the title comes from 'Through the Looking -Glass' (by Lewis Carroll). The other (related !) part - importance of differentiation in people management - is something that I have often thought about. There are many issues here. Is differentiation really important in people management? What types of differentiation are relevant? What are the implications of differentiation ? Is it worth the trouble and effort?

Now, there are many types of 'differentiation' possible in people management . We can look at differentiation in terms of the parameters on which differentiation is based on (i.e. input parameters/criteria) and/or in terms of the ways in which differentiation is implemented (i.e. results/outcomes). For example, differentiation could be based on (inter alia) performance, potential, criticality/ impact of the role, job level, job family, market value of the skill set, tenure, business unit etc. or a combination of them. Again, the differentiation could be made/ implemented in terms of (inter alia) compensation, benefits, recognition, career progression, development opportunities etc. or a combination of them.

If we look at the large number of input parameters and outcomes listed above, it becomes apparent that there are a large number of combinations possible here. The relevance of a particular combination would be context specific. To keep this discussion manageable, let us classify the input parameters into three broad categories - parameters that are related most to the
(a) individual (performance, potential, tenure etc.)
(b) position (criticality/impact of the role, job family, job level, skill set)
(c) part of the organization (business unit/function/geography)

I must say that these catagories are somewhat arbitrary and there could be some amount of overlap among them also. For example 'skill set' is related to both the role and the individual. It also raises some interesting questions like 'if an employee has a skill that is in the list of 'hot skills' (as defined by the organization) and if the employee is currently in a job that does not need that skill, should the employee be given any sort of differentiated rewards? ' OK, OK, let us come back to our discussion.

Based on our classification, the question now becomes whether it makes sense to differentiate based on individual, position or organization/business unit related factors? Different business unit in a company might face different markets (both product and factor markets) - with different dynamics and market practices. Business units might also differ in terms of their performance. Hence there is a strong case for differentiation. However, too much differentiation might lead to a situation where the employees in different business units don't really feel that they are working for the same company ! Thus, the organization culture and philosophy becomes a key factor in determining the extent of differentiation. Similarly, it can be argued that some positions in the organization have a much higher impact on organization performance and that some skillsets carry a greater market a higher market value at a particular point - there by making a case for differentiated treatment. Of course, we should keep in mind the fact that the list of critical positions and the list of key skills could change - sometimes quite quickly.

Now, if we examine differentiation based on individual related parameters a similar argument holds good when it comes to individual 'performance' - higher performance merits higher rewards. The case (if any) for 'tenure' based differentiation usually has more to do with organization culture/values. The case for 'potential' based differentiation (on a stand alone basis) is more complex. Anyway, the most common practice is to use a combination of performance and potential. This also leads to interesting situations and challenges. Please see
'Paradox of potential assessment' for a detailed discussion.

Now let us leave aside all these details and examine the core of the issue. I feel that the most important factor driving differentiation related decisions should be 'contribution/value addition to the organization'. So if there are some business units/positions/individuals that create more value to the organization as compared to other business units/positions/individuals they could be given preferential treatment. By the same logic, the extent of differentiation should mainly be a factor of the variation in the 'contribution/value addition to the organization'.

While this sounds quite neat/logical, there are a few important prerequisites to make this work. For example, everyone should understand and agree upon what exactly is meant by 'contribution/value addition to the organization' at the business units/position/individual levels. In addition to this we might need to include probable 'contribution/value addition to the organization' in the future, apart from the current ''contribution/value addition to the organization' (e.g. in the case of differentiation based on 'potential'). Also, it should be possible to track/ measure/ assess this relative 'contribution/value addition to the organization' (to the satisfaction of everyone involved) at all these levels . Again, there should clear norms in staffing the positions/business units to answer the question 'how can I move to that position/unit that gets better treatment'. As we can see all this could get quite complex.

As I see it, what really matters most here is the dynamic interplay of the factors (as opposed to a particular factor per se) in a particular context. For example, it is worth it to have a 'key talent program' ( that aggressively differentiates 'high performance - high potential' employees in critical job families) if we are in a context
(a) some positions (say critical positions) have a much higher business impact as compared to other positions &
(b) in critical positions, a high performer in creates much more value as compared to an average performer &
(c) it is very important that senior positions are filled by developing talent from within (say because of the nature of work and organization culture)
In such a context, the business case for the key talent program is clear even if the program could have possible side effects in terms of annoying a large section of the employees who are not part of the program. However, if one or more of the conditions mentioned in (a), (b) and (c) above do not hold good (or if they hold good only to a limited degree/extent), the business case becomes less compelling.

While this does not negate the existence of the complexity that we were discussing earlier, it can be seen that some patterns can be found amidst the complexity that can lead to actionable inferences in the area of differentiation in people management. Also, while we are caught up in all this talk about differentiation, we should not forget the importance of 'individualization' (managing each employee as a unique individual - please see previous posts like
'Paradox of HR systems' and 'Feasibility of mass career customization')- though it is not really 'differentiation' - in the sense we are using the term here.