Treating people right used to mean living up to the tacit promise of a lifetime job. But as this author explains, treating people right in today’s world calls for a clearly developed employment contract that rewards performance and encourages employees to continue to develop the skills and knowledge that the organization needs.

We have entered a new era in the relationship between organizations and their employees. The old understandings have disappeared, and we need new ones that reflect the realities of today’s very competitive global business environment. In this new era, people can be the primary source of a company’s competitive advantage, and how people are treated increasingly determines whether a company will prosper and survive.

A key part of treating people right is the establishment of a mutually beneficial employment relationship or contract. What a contract should contain, and how it can be turned into an employer brand, is the focus of this article.

The death of the loyalty contract

Throughout most of the 20th century, organizations maintained a tacit agreement with their employees that as long as they were generally productive and followed orders, their jobs and a reasonable pension plan were guaranteed. This value proposition, often referred to as the “loyalty contract,” is no longer realistic for organizations because of globalized competition, the rise of technology and the increasing demand for knowledge workers with state-of-the-art skills. In a recent survey, I found that only 16 per cent of large U.S. corporations place a strong emphasis on loyalty, and only five percent reward seniority.

Beginning in the 1980s, revered organizations such as General Electric, IBM and AT&T shattered their loyalty contracts by laying off thousands of employees. In retrospect, it is clear that these companies had no choice but to lay off workers in order to adapt to the dramatic changes in their businesses – to have done otherwise would have been fatal.

Still, the death of the loyalty contract has had enormous repercussions for business, especially on the cost, availability and attitudes of good labour. Most people, especially younger workers, understand and accept that loyalty to their organization is largely a losing proposition. They are no longer willing to be dependent on their employers, or accepting of organizational practices and decisions that are not advantageous to them. In lieu of job security, today’s employees are demanding challenging work, opportunities for learning, personal respect and substantive rewards. And when they do not get what they want, they are quick to move on to more attractive employment situations.

Ultimate goal: A virtuous spiral

Since organizations can no longer count on the loyalty of their workforce, they must continuously compete for new talent and focus on retaining their critical existing talent. This calls for approaches to management that are advantageous to both the organization and its employees, and that lead to a virtuous spiral of higher and higher levels of performance and rewards (see Figure 1).

Virtuous spirals begin when an organization takes intelligent, strategy-driven, conscious actions to attract, retain, motivate, develop and effectively organize high-performance, committed individuals. The high-performance organization that emerges is better able to reward its employees, who in turn feel more motivated and committed to their jobs. As this virtual spiral continues to grow, and the business environment becomes more challenging and rewarding, the organization becomes even more successful at attracting, retaining and developing effective employees.

To sustain a virtuous spiral, organizations need to focus on ever-increasing levels of competence and performance, as well as higher rewards. As organizations achieve these goals, a positive performance momentum develops that feeds on itself and provides a powerful competitive advantage. Virtuous spirals are actually the ultimate competitive advantage-powerful and hard-to-duplicate sources of positive momentum and higher and higher levels of performance.

Virtuous spiral organizations

Microsoft is one of the most impressive examples of a company that has profited from a virtuous spiral relationship with its people for decades. Since the early 1980s, the company has maintained an environment in which both employees and the company have done well. Microsoft employees have had challenging work and one of the most rewarding stock plans around, and, as a result, the company has attracted some of the country’s top software engineers and marketing executives. Because of its relationship with its human capital, Microsoft has been able to generate a powerful dynamic in which success begets success, which begets more success.

Procter & Gamble is a somewhat less dramatic example of a virtuous-spiral organization. The past 40 years of its existence have been marked by many forward-thinking efforts to establish a virtuous spiral relationship with its employees based on employee involvement and leadership development. (P&G was an early adopter of employee involvement practices in its manufacturing plants.) It also has a stock ownership plan that has placed over 30 per cent of company stock into the hands of employees.

Creating a value proposition

An effective strategy for developing a virtuous spiral begins with creating an employment value proposition. Organizations need to fashion a compelling platform that clearly establishes who they are, what they expect from employees, and what they offer. A value proposition is truly the beginning of treating people right, because it establishes the initial set of practices that ensures the organization will employ people who are aligned with its values and goals.

First, the value proposition must be designed to fit with the business strategy. Its purpose is to attract, motivate and retain employees–but not just anyone. It needs to focus on enticing people who have the skills, knowledge, competencies and personality to perform well and who can be motivated by the practices and programs the organization offers.

The value proposition must take into account the organizational design elements, capabilities and competencies that the firm needs in order to be successful, and the various environmental issues that might affect its ability to attract and retain the right people. It also needs to be based on a realistic assessment of what the organization can deliver.

The second key issue in creating a value proposition is making sure it includes a reward system that attracts and keeps the right people. Given that individuals are motivated by and work for rewards that matter to them, the reward system must contain a mix of rewards that the workforce will value and respond to.

Naturally, what and how much an organization can offer depends on the type of business it is in, its financial resources and size, and a variety of other factors. That said, there are certain things that most organizations can offer, such as civil treatment by managers and honest communications. Organizations do need to be creative in developing a wide range of rewards to meet the diverse needs of their employees. They can create both extrinsic and intrinsic rewards to attract and motivate people. What is important is that the organization tailor its rewards for the people whom it is trying to attract and keep.

When designing a reward system, two caveats must be kept in mind. First, many organizations make the mistake of offering rewards that are good at attracting employees but fail to motivate them to perform better. For example, if an organization’s value proposition ties rewards and promotions to seniority, it may attract and retain the type of people who want a steady long-term relationship with your company. However, it is not likely to motivate large numbers of them to perform well. Most employees will conclude that all they need to do is show up to get raises and promotions. In order to motivate performance, a value proposition must include rewards for performance that pull people toward high performance levels.

Second, a value proposition must not just attract and motivate people; it must also keep the right ones. Organizations need to avoid hiring “walking floppy disks” – employees who enter the organization, get an expensive download of training and information, and then leave for a competitor.

On the other hand, organizations may not want to encourage people to stay with the company for their entire career or, for that matter, for more than a short period of time. Because of the environmental changes that organizations must respond to, they increasingly need to employ people for short periods of time and to make frequent changes in the number and type of people who work for them. For this reason, the issue of retention needs to be considered from the start, at the attraction phase, because that is when employees develop perceptions and expectations about working for an organization. The attitudes they form when reading job postings, being interviewed, and during their first few months on the job can ultimately have a significant impact on their feelings of job satisfaction and equity, which can in turn affect their interest in staying.

Admittedly, developing a reward system that succeeds in keeping people for the “right” period of time is challenging. The traditional loyalty contract clearly is not the answer today. Using loyalty contracts to retain people locks companies into a long-term commitment that often becomes unproductive and makes it difficult for employees to leave. People know they need only continue to show up to keep their job and increase their vacation days and retirement benefits.

Loyalty contracts also make change difficult. Change often requires that the organization hire people with the skills needed to develop new core competencies and new organizational capabilities. Or it can require that the organization motivate current employees to change their behaviour, develop new skills, and adopt new technologies and new strategic directions. The loyalty contract does not motivate employees to improve their knowledge, skills and competencies, nor does it encourage them to embrace organizational change. It also does not attract or retain those who want to be part of an organization that is entrepreneurial, rapidly changing, technologically advanced or knowledge-intensive.

The loyalty contract is also dysfunctional for many individuals. In addition to not motivating employees to learn valuable new skills, it limits their chances to develop and grow because organizational stability creates few job openings. And it often hinders their ability to move to other corporations, particularly when many organizations are unwilling or unable to bring in “new blood.”

Organizations need to offer a skills-and performance-based substitute for the loyalty contract that motivates selective retention and high performance. It needs to stress that continued employment is based on performance and on provision of the right skill set for the organization’s business strategy. It also needs to stress that people are rewarded for performance and skill development. With the right combination of reward system practices, people will be motivated to excel, and those who do excel will be motivated to stay because they will be highly rewarded. This is the foundation of the virtuous spiral, in which both sides win and create success for each other.

My research shows that those organizations that link skill development with continued employment – and rewards with performance – handle change more effectively than others. In a sense, they create “mobile” human capital: people who realize that they must continue to learn, develop and perform in order to maintain their positions and careers. Today, organizations need mobile capital. Getting stuck with obsolete human capital is just as big a negative as getting stuck with outdated equipment and materials. And whereas new equipment is readily available for purchase, talented human capital is often not so easy to buy. Instead, organizations need to create a culture that motivates people to continue learning and growing as the organization and environment change.

Turning a value proposition into a brand

Creating a value proposition is an important first step. “Branding” it is the next step, especially if an organization needs to attract large numbers of job candidates. Just as with a product, branding a value proposition means creating a strong, unique image that distinguishes an organization from others. Branding essentially crystallizes an organization’s value proposition so that people have no doubt what they will gain from working there.

Many organizations have built strong brand images as employers. Think of IBM, McKinsey, Microsoft, Amazon.com, the FBI, and even the U.S. Marine Corps. Recently, a number of organizations have developed brands in order to be included on lists of “best places to work.”

The development of a strong brand calls for intelligent thinking and planning. Organizations must be willing to openly declare their value propositions and, of course, live up to them. They must maintain a clear and consistent message and treatment during any and all recruiting. This includes college job fairs, internships, open houses, career days and other venues. Whether the message is being delivered by employees in interviews with new recruits, or is being communicated by an Internet site, everyone and everything must deliver the same brand.

Branding a value proposition can be expensive. Southwest Airlines ran ads during a recent Super Bowl game that were largely aimed at attracting employees. The ads touted the freedom, flexibility and enjoyment people can receive from working for the company. With this multimillion-dollar investment in advertising, Southwest succeeded in issuing a powerful statement about the importance of its employees. Anyone who saw the ads got a clear understanding of the benefits of working for Southwest. Of course, the advertising also did a great job of publicizing to Southwest’s customers the quality of the service they can expect to receive.

Written contracts

About 25 per cent of the companies in the United States have adopted a formal written statement of their employment contract that states what they have to offer as an employer and what they expect from their employees. I believe that most organizations should have statements of their value propositions because they are effective in establishing an organization’s brand.

Written statements aid in the recruitment process by reinforcing an organization’s value proposition and contributing to a realistic job preview. And after people are hired, they establish the ground rules for performance and rewards, and serve as a touchstone for the organization and the individual throughout their relationship.

An important corollary to our discussion of contracts is the fact that, increasingly, many organizations need to have several contracts, rather than just one contract, in order to handle the diversity of their employment needs. Historically, most organizations have had two tacit employment contracts, both dysfunctional: One was for managerial and professional employees, the other for non-exempt or hourly employees. The former was the loyalty contract, quietly ensuring job security and various special benefits and perquisites such as company cars, executive dining rooms, and training and development programs, while the latter featured union membership, lay-offs, pay by the hour, strictly defined job descriptions, and seniority-driving reward systems.

What should replace them? Core employees should be covered by contracts that stress rewards for performance, effective leadership and a chance to contribute to the organization’s mission. Non-core employees should have ones that feature rewards for performance and as-needed employment. Having a clear contract for non-core employees can enable organizations to hire people with particular skills without making a long-term commitment. Such employment relationships allow an organization of ill its short-term work assignments and to respond to rapid changes in its business.

But what about individuals? Does having an employment contract that stresses performance and skills as a necessary condition for continued employment constitute treating them right? I believe it does. It provides them, first of all, with a realistic picture of what the employment situation is like. Telling them that they have a job for life sounds good, but it’s something that very few organizations can actually deliver. Thus, people need to be aware that their future employment depends on their skills and their performance. Stressing that skills are critical, and rewarding individuals for developing skills, can be particularly good for people. It can help them develop their own brand as an employee and motivate them to increase their value in the labour market. Given the strong skill-bias that exists in the labour market today, this very much constitutes treating them right.

Rewarding individuals for organizational performance is also an essential part of treating them right. It is at the core of creating a virtuous spiral organization, in which individuals have the opportunity to grow, develop and prosper when the organization prospers. Creating this type of win-win relationship is at the very core of what constitutes the right treatment of individuals by organizations in today’s highly competitive business environment. Rewarding individuals well in the absence of strong performance by the organization cannot last. Thus, treating people right in today’s world calls for a clearly developed employment contract that rewards performance and encourages employees to continue to develop the skills and knowledge that the organization needs.