An Evaluation of the “Great Places to Work” Index

Criteria Used in Judging “Great Place to Work”

 

The criteria used in judging “Great Place to Work” exist not only to help companies improve employee satisfaction and engagement, but they are also an essential ingredient in Fortune magazine’s annual ‘Best Places To Work’ list. The Great Place to Work Institute describes their criteria as being based on the day-to-day relationships that employees and managers experience, rather than a checklist of features. Their criteria are applied through these two constituents and their feedback. For the employee there are five dimensions, with one common denominator at their core, trust, which are used for the questionniare structure in the Institute’s ‘Trust Index’:

 

The key factor in common in these relationships is TRUST. From the Employee’s perspective, a great workplace is one where they: TRUST the people they work for; Have PRIDE in what they do; an ENJOY the people they work with. Trust is the defining principle of great workplaces — created through management’s credibility, the respect with which employees feel they are treated, and the extent to which employees expect to be treated fairly. The degree of pride and levels of authentic connection and camaraderie employees feel with one are additional essential components (Great Place to Work Institute, 2015).

Similarly for the manager, the Institute describes how there are nine criteria used in their ‘Culture Audit’:

Great workplaces achieve organizational goals by inspiring, speaking and listening. They have employees who give their personal best by thanking, developing and caring. And they work together as a team / family by hiring, celebrating and sharing  (Great Place to Work Institute, 2015).

 

The relationship of these standards to HR practices are clear; building trust between employees and employers improves productivity and profitability while decreasing absenteeism and turnover. The following is a citation from a research paper published by a third party HR advisory, Forum, that studied the results of Great Places To Work:

 

Great Place to Work Institute’s studies during the past ten years have showed that trust is a crucial precursor to positive employee engagement. Organisations that understand the importance of trust in leadership and invest in assessing the level of trust and developing a workplace that addresses trust and employee engagement have enjoyed the following benefits: 16% greater profit margin, 19% greater operating margin, 18% greater productivity, 2.6 times the earning-per-share growth, 12% greater customer loyalty, 50% fewer sick days by employees, 87% less likely for employees to leave the organisation (Stuckey, 2014).

 

In essence, these standards help to baseline and drive employee satisfaction. Without employee satisfaction and engagement, spending on programs such as benefits to attract and retain talent end up being the equivalent of pouring water into a leaky bucket. Without employee satisfaction and engagement, performance management becomes that much more difficult if not onerous for both the employee and manager.

According to the Great Place To Work Institute, this indicates that the lesson learned for HR strategy and practice is that no amount of spending on HRMS, communications tools, performance appraisal systems or even rewards can substitute the need to start at the foundational level of ensuring there is an existing level of trust between employee and employer. On the positive side for HR strategy, the lessons learned can be demonstrated in the financial results of firms mentioned previously: over a five year period, Fortune’s Best Places provide 2x the stock market return, while profits in these firms increase twelvefold (Great Places To Work, n.d.). This means that HR strategy can be causally linked to proven, improved operating results when evaluating and improving organizations on the criteria applied in Great Places To Work.

 

Criteria Used for “Most Admired Companies”

 

The criteria used in judging Fortune’s Most Admired Companies start with healthy financials and stock performance, but companies are ultimately evaluated on nine key attributes related to Corporate Reputation, according to Fortune (Fortune, 2015):

 

  1. Management Quality
  2. Quality of Products/Services Offered
  3. Innovativeness
  4. Value as a Long-Term Investment
  5. Soundness of Financial Position
  6. Ability to Attract, Develop, and Retain Talent
  7. Community Responsibility
  8. Wise Use of Corporate Assets
  9. Effectiveness in Conducting a Global Business

 

Fortune partners with the Hay Group each year to interview C-level executives and board members in the Fortune 1000 on those nine key attributes. The most admired companies on the list have an easier time attracting great talent and can often attract and retain that talent for less in total compensation than competitors (Fortune, 2015).

It is for this reason that a clear relationship between these criteria and HR strategy begin to emerge. Criteria such as number 6, related to Talent, and 7, related to Community, may be the most obvious in relation to HR strategy. But Management Quality is often the result of sound succession planning (Mathis et al., 2012). Effectiveness in Conducting a Global Business likewise is rooted in sound HR policy to determine organizational culture, including vetting and developing managers and employees who possess the necessary skills to manage overseas assignments. Even criteria 8, the Wise Use of Corporate Assets, has in its root the measurement of productivity, “the quantity and quality of work done, considering the cost of resources used” (Mathis et al., 2012), which is a core strategic function for HR within the business.

In terms of lessons learned from the rankings, the best example would be the downfall of companies like McDonald’s, who dropped to 46 out of 50, the lowest ranking in all of the years that the company has been on the Most Admired list. The headlines have focused on the criticism of the company and its leadership from investors, customers, franchisees, and employees in poor returns, poor customer service, and poor management (Strom, 2015). One symptom has been a potential lack of HR strategy and engagement. Given the last CEO was barely two years on the job, and left the company in one of the worst financial conditions in its history (Strom, 2015), a clear question is how well utilized was HR at a strategic level in the leadership succession plan to bring him on board. And, with mounting lawsuits for employee safety issues, one must wonder if senior management leveraged HR to ensure employees and franchisees were properly trained and compliant with OSHA and safety regulations when these issues arose over the last few years (Horovitz, 2015). But beyond symptoms, considering some of the criteria mentioned in the preceding section on Great Places, the cause should be clear: do customers, employees, and investors ultimately trust McDonald’s, given situations like those cited here?

 

HR Strategy and Practices from Fortune 500 Companies

 

HR strategy, at its essence, connects a company’s business strategy with the efforts of Human Resources to increase the competitiveness of the organization and align the top executives with the HR team (Ulrich, 2013). Relevant HR practices include areas such as: setting the HR vision and mission with respect to organizational culture; alignment of business goals, rewards, and performance management; development of succession planning programs, and talent development. Successfully executing the strategy and realizing the benefits of these practice areas ultimately requires that HR have a seat at the table with the executive management team of an organization, and this is even more critical when considering the large, hugely successful organizations (based on annual revenue) in the Fortune 500.

The Fortune 500 list in 2014 was topped by Wal-Mart, Exxon Mobil, and Chevron with J.P. Morgan Chase, Costco Wholesale, and Express Scripts rounding out the bottom of its top 20 (Fortune, 2014-a). Most interesting in comparing the 2014 list to prior years is that companies tend to shift very little – the top 3 stayed the same in exactly the same positions from 2013 to 2014 – with the notable exception of Costco, which entered top 20 in 2014. In 2013 it was 22; in 2012 it was 24. This is noteworthy as HR strategy in people management may have been a factor contributing in driving the corporate business strategy for Costco and its multiyear rise on the list, as illustrated in this quote by Costco’s founder and former CEO, Jim Sinegal:

 

Wall Street grumbles that Costco cares more about its customers and employees than its shareholders; it pays workers an average of $17 an hour and covers 90% of health-insurance costs for both full-timers and part-timers. Yet revenues have grown by 70% in the past five years, and its stock has doubled. (Hill et al., 2014)

 

Costco’s focus on employee satisfaction harkens back to the criteria described earlier in this paper regarding Great Place To Work, but its focus also goes squarely to the impact of leveraging people management to drive corporate business strategy. One the key goals of any successful business is returning value to investors, which can’t be achieved without revenue, profitability, and if the company is public, stock appreciation. Costco is achieving exactly this; since its founding in 1985 to Sinegal’s retirement in 2012, the stock’s value had increased 5000%. (Hill et al., 2014). And in terms of what’s ‘right’ in HR strategy and practices for the top or rising companies, like Costco, mentioned on the list, there are three common themes:

 

  • Senior executive representation for the Human Resources function, though not all companies have a Chief Human Resources Officer (Price, 2013)
  • For the best performing companies in the list in terms of revenue and growth, alignment of employee goals with corporate objectives (Price, 2013)
  • Strategic investment in training and development (Korn Ferry, 2006)

 

This last point on training and talent management is an important one. In a 2006 study by Korn Ferry company, Ninth House, reported that in interviewing a large, representative sample of Fortune 500 executives, 70% linked leadership development programs to business strategy, 85% cited executive sponsorship of these programs, and 100% had a defined set of leadership competencies (Korn Ferry, 2006). The importance is that for HR strategy to work, the mere execution of individual practice areas stated earlier is not sufficient for results in the case of Fortune 500 companies. A key factor is that these practice areas – goal setting, training and development, leadership staffing of the HR function – are tightly linked to the executive team that functions as a truly invested sponsor in these organizations.

 

HR Strategy and Practices from Fortune Global 100

 

In terms of HR strategy for international corporations, the Society for Human Resources Management (SHRM) offers a very useful definition in a report published on how globalization has affected HR strategy:

One of the first things to understand with regard to an HR strategy is that firms do not have just one HR strategy, they have multiple HR strategies because they have different kinds of people who bring different value to the organization (Wright, 2008).

 

A world of increasing global competition is the backdrop for both the more differentiated workforce and fewer resources to deal with it. International cultural and institutional differences will compound the need for more diverse HR strategies (Wright, 2008).

 

In essence, while the business strategy and challenges may be common – outperforming competitors, increasing efficiencies, developing talent – each country and the employees in those countries require distinctly applied HR strategies to succeed.

Why begin this section with regards to globalization for the Fortune Global 100? Take the number one company on the list in 2014, Wal-Mart, which as an american brand is like apple pie or Coca-Cola, number 224 on the list (Fortune, 2014-b). Or consider the second and third companies mentioned in the preceding section, ExxonMobil and Chevron, who are both displaced from their leading positions to 5 and 12, respectively, in the Global 100 by their overseas oil and gas competitors, Royal Dutch Shell, Sinopec Group, and China National Petroleum; moreover, for 2014, Costco drops from 20 in the US to 60 globally (Fortune, 2014-b). Ultimately, business success and fending off competitive threats is a global consideration, and it requires the application of globalized HR strategies.

In terms of HR strategy and practice for international companies on the Global 100, the themes are largely the same as those referenced previously for US companies. In the SHRM paper on globalization mentioned earlier, a specific definiton of HR strategy is urged  for use in the context of companies operating and competing at a global level:

 

For our purposes, HR strategy means a system of human resource practices for a particular job or collection of jobs aimed at the best employee performance possible to meet the firm’s ultimate goals (Wright, 2008)

On its face, the definition is very similar to the one offered in the preceding section; the important difference is the emphasis on having a system, rather than just the aggregation of the HR practices referred to earlier. This sentiment is echoed by other busines scholars:

 

It is argued that integrating HR strategy and strategic planning is fundamental to achieving business excellence….[and] achieving business excellence is more than a simple accumulation of a range of best practices (Briggs et al., 1999).

 

The system described by the author in essence links HR strategy and its practices to what skills employees have and how they feel about their work, both of which impact how employees act, which impacts customer experience and operations, both of which result in the financial outcomes and business strategy for the company (Wright, 2008). This emphasis on taking a systems-based approach is echoed by Roland Berger, management consultants, in their analysis of how successful global corporations engage in Diversity & Inclusion programs as core part of their HR strategy:

 

When management perceives the company as a viable system instead of a binary structure (HQ-subsidiary), this will help introduce the concept of processes as the way to organize and structure HQ-subsidiary relationships.  (Brunke, 2012).

 

Taken in the context of a non-US based company, Royal Dutch Shell, ranked two on Fortune’s Global 100 index in 2015, describes how it utilizes this systems approach in its annual Sustainability Report:

 

We have a culture that embraces diversity and fosters inclusion. By embedding these principles in our operations, we have a better understanding of the needs of our varied customers, partners and stakeholders throughout the world and can benefit from a wider talent pool….Each year we review the extent to which our operations, as well as our contractors and suppliers, have processes in place to prevent violations of human rights, such as the use of child or forced labour. We continue to build a systematic approach of early identification and mitigation of social impacts. In 2013, we trained 441 more employees in our social performance requirements (Shell, 2013).

While not concerning HR strategy, per se, Shell’s statement is absolutely relevant to the integrity of the company’s business strategy and how it engages its employees to also embrace responsible behavior. Fundamentally, publishing an annual Sustainability Report and communicating transparently about its business practices speaks to the culture of trust the company is building among its employees, customers, shareholders, stakeholders, and investors (Beslin et al., 2004). This use of communications as a strategic tool to engender a culture of trust will be explored further in the two remaining sections of this paper.

 

Relationship Between People Management and Business Strategy

 

In terms of how progressive HR strategy affects a firm’s competitiveness, it is worth starting with a summary of the multiple references, both trade materials and scholarly research, presented in the preceding sections of this paper. The following table summizes the eight key resources referenced earlier:

 

Author/Organization Relationship of People Management and Business Strategy Year
Briggs et al. Achieving business excellence is more than a simple accumulation of a people management best practices, it requires a systematic approach. 1999
Stuckey/Forum ‘Trust’ between employees and management is a crucial precursor to employee engagement, and employee engagement leads to enhanced operating and financial results. 2014
Hill et al. When employees are happy, they are the company’s best ambassadors to customers and other key stakeholders. 2014
Price/SAP High-performance companies align employee goals with corporate objectives and ensure there is HR representation within their executive teams. 2013
Wright/SHRM A ‘Commitment’ model of people management, where employee social identities are tied to the company and its goals, can lead to better performance and superior financial results, as with Costco. 2008
Korn Ferry Business strategy and leadership development are tightly interwoven; therefore, executive-level engagement is critical. Likewise, success increases when recruiting, selection, and succession planning are integrated with development. 2006
Brunke/Roland Berger Diverse, heterogeneous teams in inclusive company cultures are more creative, better able to solve complex problems, comprehend a wider range of customer needs, and are excited and inspired to be a part of such organizations. 2012
Beslin et al./Ivey Business School Leaders of high-performing, well-respected companies are known for transparent communications. They create a culture of trust by sharing information quickly and freely, and build relationships based on mutual respect with employees and stakeholders that enable the organization to thrive. 2004

 

The above eight references cover what companies from the Fortune 500 are doing ‘right’ in terms of HR strategy and people management linked to their business strategy. It is equally important explore two more, alternative viewpoints on what some Fortune 500s have been doing ‘wrong’ and might undermine their long-term success. Regarding what’s wrong with HR strategy for some companies in the Fortune 500, award-winning business author and scholar Steven Denning notes:

 

The continuing menial status of HR results from its support of traditional management that has been pervasive in the Fortune 500…. Studies like the Shift Index show that firms in the Fortune 500 pursuing these approaches to management are suffering from startling declines. The rate of return on assets on US firms is only a quarter of what it was in 1965. The life expectancy of firms in the Fortune 500 has declined from over 50 years over half a century ago to less than 15 years today. Only one in five workers is fully engaged in his or her work (Denning, 2011).

 

Denning argues that the long-term negative effects to business strategy some Fortune 500 companies suffer arises from utilizing regressive and tactical HR practices. He describes how Intel, a Fortune 500 firm, used regressive, almost punitive, HR practices during times of economic crisis, resulting in low trust, low morale, and high turnover, not to mention correlating to multi-year, double-digit percent declines in market value while the Dow Jones rose 28% over the same period (Denning, 2011).

In the case of Berkshire Hathaway, in the top 20 of both Fortune lists for 2014, there is at least one corporation not only does not have senior HR leadership but no central HR function at all (Sorkin, 2014). The questions this raises are: with Berkshire Hathaway’s stellar performance for its shareholders, how could one of the most successful, multibillion dollar companies go so ‘wrong’ on the HR front? Could it be that Berkshire Hathaway considers HR a purely tactical function, and that human capital is far from being a strategic asset?

Perhaps the answer comes back to the core of the people management models in the Great Place to Work program, which is based on trust, and by the SHRM and Roland Berger, which is to make trust the heart of the organization’s culture/system. In the case of Berkshire Hathway, the company utilizes the best of progressive HR practices, a system fundamentally based on trust, as shown in this citation from a Stanford study of its corporate governance structure:

 

A trust-based system allows individuals to operate without extensive control procedures and therefore avoid the time and cost of having their own actions monitored and having to monitor the actions of others. As such, a trust-based system can be more efficient than a compliance-based system, but only if self-interested behavior among employees and executives is low (Larcker et al., 2014).

 

While a system such as this on the surface may not speak to the specific people management practices of leadership development, succession planning or business strategies such as growth or gaining economies of scale, the connection is logical. Would an organization spend the time and money in developing leaders or planning successors that couldn’t be trusted? And based on the citation from the Stanford study, wouldn’t an organization prefer to spend less in governance and control, versus more on product development and making operations more efficient? The idea of investing in building a trust-based culture and assuring that “self-interested behavior among employees and executives is low” goes to the heart of the trends reviewed and recommendations offered in the next, concluding section.

 

Current Trends Relevant to Strategic Management and Leveraging Human Resources

 

Key trends have emerged in the years following the global economic crisis that are relevant to strategic management and leveraging human resources. Four that relate to the themes in this paper are:

 

  • Employee retention and engagement rates are dropping (Schwartz et al., 2014)
  • The war for talent is intensifying (Schwartz et al., 2014)
  • Employees at every level, especially in HR, must act like global leaders (Schwartz et al., 2014)
  • Trust in businesses have eroded, nearly beyond repair (Edelman, 2015)

 

The first three trends are highlighted in an annual study conducted by Deloitte on Global Human Capital Trends, which are deeply intertwined, as will be explained below. The last refererence, also deeply linked to these trends, comes on trust from an annual study performed by PR firm Edelman on corporate reputation and trust, and is precisely relevant to the themes in this paper. The Fortune indices are in fact great PR for the companies that have been successful, but great public relations should be the result of operating a great business, not a goal. Edelman’s paper describes how this loss of trust in business affects public perception:

 

In three-quarters of countries, CEOs are not viewed as credible spokespeople. They rank only above a government official or regulator, having fallen a full nine points from a high in 2011 (Edelman, 2015).

 

So if CEOs are not viewed as credible spokespeople and representatives to the public, the key question this raises is: who is viewed as credible? The answer: employees must be the credible ambassadors of the business. But for employees to be seen as trustworthy spokespeople, they must be themselves trustworthy, and they must be able to trust in the businesses they speak for as well.

This point takes us back to our earlier theme of mitigating the self-interested behavior in employees that undermines trust-based systems, and Costco presents an exemplary model. While Costco has seen incredible success relative to other companies on the Fortune 500 list, it is even more impressive when considering it has risen from 78 in 2012, to 67 in 2013, before reaching 60 last year. It is a far cry from Wal-Mart’s position in the top three Global 100 slots during that same period, but it speaks to the strength of Costco’s strategy being in the system it uses to get scale from its HR strategy. Costco emphasizes what SHRM referred to as ‘Commitment’ (versus ‘Control’, in Wal-Mart’s case) and Roland Berger describes as ‘Diversity & Inclusion’: hiring highly skilled workers, investing in extensive training, and integration of employee social identities with the company and its goals:

 

In practice, as you might expect, the Commitment strategy generally leads to the best firm performance for those using a differentiation business strategy, but the control strategy may work best for firms with a cost-business strategy. In real-life terms, the two strategies go head to head in a comparison of Costco and Wal-Mart…. (Wright, 2008).

 

…contemporary, holistic, wide-ranging D&I [Diversity & Inclusion] initiatives promise potential annual per capita HR savings of more than EUR 10,000. The results derive from modern D&I practices that frequently stimulate staff creativity, improve access to new markets and fresh capital, reduce legal disputes, and – by positioning the company as a preferred employer – attract more top talent (Brunke, 2012).

 

Perhaps more impressive than Costco’s financial performance is the fact that its retention and employee engagement rates are more than double those of its closest competitor, Wal-Mart (Hill et al., 2014), and bucks the second trend mentioned regarding those rates dropping for many global companies. And as critical indicator of a trusting culture, Costco’s shrinkage rates are the lowest in the industry (Hill et al., 2014).

It should not be considered coincidental that Costco has a system not unlike Berkshire Hathaway’s. While the names of the systems are different, they have at their core the same emphasis regarding mutual respect and trust between the employee and employer. These points lead us to a key recommendation on future actions global companies and their HR teams must take to succeed: focus the strategy and tactics on fostering a culture of mutual trust and respect. This sentiment was echoed in the first section of this paper regarding Great Place to Work, reinforced in the best practices of top companies in the Fortune lists, and demonstrated in the analyses of Costco and Berkshire Hathaway.

 

References

 

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trust. Ivey Business Journal Online, G1.

http://iveybusinessjournal.com/publication/how-leaders-can-communicate-to-build-trust

 

Briggs, S., Keogh, W. (1999). Integrating human resource strategy and strategic planning to

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http://search.proquest.com/docview/219798319/fulltext?accountid=143495

 

Brunke, B. (2012). Human Resources – How the emerging markets are changing the global

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Denning, S. (2011). How Strategic HR Wins the Keys to the C-Suite. Retrieved from:

http://www.forbes.com/sites/stevedenning/2011/04/06/how-strategic-hr-wins-the-keys-to-the-c-suite/

 

Edelman, R. (2015). Edelman Trust Barometer. Retrieved from:

http://www.edelman.com/insights/intellectual-property/2015-edelman-trust-barometer/

 

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Fortune. (2015). World’s Most Admired Companies Ranked by Key Attributes. Retrieved from:

http://fortune.com/2015/02/19/wmac-ranked-by-key-attribute/

 

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http://www.greatplacetowork.com/our-approach/what-is-a-great-workplace

 

Great Places To Work Institute. (n.d.). What Are the Benefits? Retrieved from:

http://www.greatplacetowork.net/our-approach/what-are-the-benefits-great-workplaces

 

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