Chapter 4
Leading People
NPR host Adam Davidson and his wife went furniture shopping in 2008 at the Ikea hyperstore in Brooklyn, New York. They hated it. It was an enormous, confusing labyrinth, and they couldn’t get any help finding their way around. Angry and frustrated, they vowed never to return. Five years later, the couple relented and gave Ikea a second chance. They were startled at the difference: help was readily available from pleasant, knowledgeable staff. What happened? Ikea had reframed by adopting a new approach to managing people.
Much of the business world views frontline workers as a necessary evil, a cost to be minimized by keeping head count and wages as low as possible. But retailers such as Costco, Trader Joe’s, Wegman’s, and Mercadona in Spain have found that they get much better results by investing in people. “Costco pays its workers about $21 an hour; Wal-Mart is just about $13. Yet Costco’s stock performance has thoroughly walloped Wal-Mart’s for a decade.”1
Structural thinking and leadership are powerful and vital, but by themselves they are rarely enough. Legions of managers have built a career or a business using structural thinking, only to crash into the limits of a single frame. Their career stalls, or their business goes downhill. They work even harder and do even more of what worked in the past, but they no longer get the results they seek. They wonder what’s gone wrong and why success is eluding them. Learning to understand people as well as structure would expand their leadership options and improve the odds of success.
These ideas are not new. In the early nineteenth century, a Scotsman, Robert Owen, made a fortune in the textile business by providing better wages and working conditions. He took children off the factory floor and put them in school. He was criticized as a wild radical who would harm the people he hoped to help. A century later, when Henry Ford announced in 1914 that he was going to shorten the workday to eight hours and double the wages of his blue-collar workers from $2.50 to $5.00 per day, he came under heavy criticism from the business community. The Wall Street Journal opined that he was “committing economic blunders, if not crimes.”2 The Journal got it wrong. Ford’s profits doubled over the next two years as productivity soared and employee turnover plunged. Ford later said that the $5 per day was the best cost-cutting move he ever made.3
Fast-forward another century to Jim Sinegal, cofounder and longtime CEO of retail giant Costco. He put in place many of the structural elements that fueled Costco’s growth, but insisted that treating people well was at the heart of the company’s success. Wall Street analysts sometimes complained that he cheated shareholders by charging customers too little and paying employees too much. An unfazed Sinegal replied wryly, “You have to take the shit with the sugar.”4 He could afford to stick to his beliefs—his company was more successful and profitable than competitors who hewed more closely to the analysts’ advice.
Organizations need people for their energy, effort, and talent. Individuals need organizations for the many rewards they offer. But the needs of the individual and the organization don’t always line up very well. When the fit between people and organizations is poor, one or both suffer. Individuals may feel underpaid, unappreciated, or disrespected. Organizations sputter because individuals give less than their best or work against organizational purposes. Douglas McGregor argued some fifty years ago that the central task of leadership is to ensure alignment between people and organizations so that individuals find satisfying, meaningful work, and organizations get the talent and energy they need to succeed.5
In this chapter, we contrast traditional treat-’em-like-dirt strategies with more enlightened approaches for managing people. We’ll dig into a story of a company in Brazil that dramatically demonstrates the benefits of creative and progressive strategies for managing people. Then we’ll transition to a well-known American clothing retailer, Men’s Wearhouse, to see how an enlightened approach to people management can build a remarkably successful business in a tough environment.
TREAT ‘EM LIKE DIRT
For most of management history, standard practice has been to treat employees like pawns to be moved where needed and sacrificed when necessary. As one former plant manager put it, “The way you treat people would be awful. You know, the people, they’re nothin’, they’re just a number. You move ’em in and out. If they don’t do the job, you fire ’em. If they get hurt, or complain about safety, you put a ‘bulls-eye’ on them. They’re not gonna have a job in the near future.”6
That attitude explains why so much of the public thinks of bosses as selfish, heartless tyrants. In an era of high unemployment and economic distress, elites in every sector are suspect, and the idea of sacrificing people for profits persists as a popular view of the workplace. One of America’s favorite cartoon strips is Dilbert, whose white-collar, cubicle-bound hero wanders mindlessly through an office landscape of bureaucratic inertia, corporate doublespeak, and callous, incompetent bosses. The popularity of such images tells us that organizations often manage people badly. They turn employees into sullen, undermotivated loafers or rebels who couldn’t care less about the quantity or the quality of what they produce. The human resource frame offers a much more positive and productive way to think about people.
SEMCO: INVESTING IN PEOPLE
A father-son tale from Brazil tells of a young chief executive who shifted from structural to human resource beliefs, saving his health and his company’s future in the process. The father, Curt Semler, was born in Austria in 1912 and trained as an engineer before he moved to Brazil in the 1950s. There he built Semco, a successful manufacturing business. The elder Semler ran his company like a good Austrian engineer—with a strong emphasis on efficiency, command, and control. By 1982, he faced a painful dilemma. Sales had plummeted, and the business was struggling amid a downturn in the Brazilian economy.
Semler’s dream was to leave his business to his only son, Ricardo. So he brought Ricardo into the company and put him in an adjacent office. Ricardo was smart, educated, and hard working and, to his father’s relief, had given up his dream of becoming a rock guitarist. But Ricardo was still young and rebellious, and he chafed under his father’s tight leash. The two of them fought constantly, and Ricardo finally said he’d had enough—he was going to quit Semco and go off on his own.
So what do you do if you’re the elder Semler? Do you wish your son well as he storms out the door? Or do the one thing that might convince him to stay: turn your business over to a twenty-four-year-old with little management experience who will probably take the business in some wild new directions? Faced with those painful options, Curt Semler reluctantly turned over control of the business to Ricardo, telling him: “Better make your mistakes while I’m still alive.” What followed was one of the more surprising and dramatic stories in business history.
Young, inexperienced, and fearless, Ricardo grabbed the reins with gusto. Working feverishly, he fired most of his father’s top managers, diversified into new businesses, and pulled the company out of a cash crunch. His first moves were structural. He installed elaborate information and control systems and brought in tough executives to enforce them. It worked—to a point. The business results improved, but at a personal cost: Ricardo was killing himself. His many health issues included fainting spells, gastritis, skin rashes, and a chronic sore throat. When a doctor told him that he was physically fine but his stress levels were off the charts, Ricardo decided he had to change his lifestyle.
Until then, Ricardo had retained and reinforced much of the top-down, bureaucratic approach developed on his father’s watch. Now he looked for ways to work less and delegate more. He read books, consulted peers, and experimented with assorted management fads of the time. Nothing seemed to help, but he kept looking. The company seemed to be well organized and disciplined, but he wasn’t getting the performance he wanted, and Semco did not feel like a happy place. He decided to go for broke, launching his company on a high-risk journey into the unknown. Along this new path, Ricardo and his company rediscovered and adapted many of the principles for leading people used by progressive leaders and organizations around the globe (summarized in Exhibit 4.1). Much of what he tried was not new, but few companies had gone as far—or as fast.
Exhibit 4.1. Principles for Leading People
| Human Resource Principle | Semco’s Approach |
| Develop a philosophy and values |
Experiment and learn from experience Instill values of trust, transparency, and democracy |
| Hire the right people | Know what you want Be selective |
| Keep them around | Promote from within Protect jobs Share the wealth |
| Invest in their future | Provide learning opportunities Rotate jobs |
| Sustain power to the people | Open the books Foster egalitarianism Encourage self-managing teams and business units Redesign work Make decisions democratically |
| Promote diversity | Initiate Semco’s Woman project |
Developing a Philosophy and Values
When Ricardo began his quest, he had no idea where he was going or how he would eventually get there. He embarked on a series of experiments and gradually homed in on three key values—trust, transparency, and democracy. These sound simple enough, but Semco took them to heart, with dramatic results.
Trust was a central theme when Ricardo decided to eliminate some of the most “visible signs of corporate oppression.”7 His first step was simple: ending the standard practice of searching employees as they left the plant. Managers objected: frisking workers was the only way to prevent theft. The union complained: searches were the workers’ best defense against false accusations. Despite the opposition, Ricardo replaced searches with signs politely asking workers not to exit with anything that didn’t belong to them. To Ricardo, whether theft decreased or not really didn’t matter. He wanted employees to get the message, “We trust you.”
Over time, Ricardo evolved an unorthodox philosophy of management:8
The key to management is to get rid of all the managers.
The key to getting work done on time is to stop wearing a watch.
The best way to invest corporate profits is to give them to the employees.
The purpose of work is not to make money. The purpose of work is to make the employees, whether working stiffs or top executives, feel good about life.
Hiring the Right People
In studying Semco managers who failed, Ricardo realized that they often were technically capable but lacking in leadership talent. In response, he developed a system in which subordinates rated their bosses on both technical ability and leadership. Those with low scores either improved or were fired. Ricardo applied the same approach to hiring new managers. People who would be working with a new manager made the hiring decision, using ratings of both technical qualifications and leadership. Job applicants went through multiple rounds of interviews, fully aware that their fate depended on the judgments of their prospective colleagues and subordinates. The process was grueling, but it helped ensure that new hires fit with Semco’s distinctive ways and enjoyed the support of their new colleagues.
Keeping Them
To attract the right people, progressive companies reward generously and share the business profits. To retain loyal and hardworking employees, they protect jobs and promote from within. Semco shared the wealth through an employee-driven profit-sharing system. The company put about a quarter of its profits into a profit-sharing pool, and workers hammered out a process for distribution. Each unit got a share based on its profits for the year, and everyone in the unit got the same amount.
One of Semco’s compensation experiments was “name your price,” allowing people to set their own pay. The company gave people data about what they could make elsewhere and what Semco paid for similar jobs in the company. Many observers might wonder: Why wouldn’t people ask for more than they were worth? Because at Semco, colleagues would notice, and “gougers” would price themselves out of a job.
Semco also kept retention rates high by promoting from within and protecting jobs. In some jobs and industries, turnover can run over 100 percent a year. This gets expensive because of the high cost of hiring and training replacements and because newcomers are prone to confusion and error. Semco rarely fires people, and annual turnover is less than 1 percent.9 The company posts open positions internally and gives first preference to current employees. The company searches outside only if no qualified insider applies. When it faces downturns, Semco has asked employees to look for creative alternatives to layoffs. During one sustained economic slump, workers voted to close a plant, over the management’s objections. Executives wanted to avoid layoffs, but the workers had studied the numbers and concluded that Semco couldn’t afford to keep the plant open. When Semco did lay off workers, the company had a program to help them start businesses selling goods or services to Semco or other customers. White- and blue-collar workers formed more than two dozen companies providing everything from legal services to software to contract manufacturing.
Investing in People
Organizations are sometimes reluctant to invest in developing their human capital. The costs of training are immediate and easy to measure, whereas the benefits are more elusive and long term. Semco understands that undertrained workers cause harm by delivering shoddy quality, poor service, and costly mistakes.
The company invests in employees in a variety of creative ways. One is a job rotation program in which about 20 to 25 percent of managers change jobs in any given year. Another program, called “Lost in Space,” allows young recruits to meander around the company for a year, working in any job or unit that interests them. At the end of the year, any unit can offer them a job. Another program, “Rush Hour MBA,” offered classes at 6 p.m. so that employees could take a class instead of battling the rush-hour crush. After class, they could enjoy a more relaxed drive home.
Sustaining Power to the People
Empowerment has become another management buzzword. Like many other corporate shibboleths, it’s easier to preach than practice. At Semco, empowerment is fundamental to the company’s approach to managing people. Democracy is a central theme at Semco. It began with symbolic changes—eliminating the dress code, democratizing the parking lot, closing executive dining rooms, and eliminating private offices. Secretaries and receptionists were moved to other jobs, and managers learned to make copies and answer their own phones. Gone were all the old status markers—how people dressed, how far they had to walk to their car, where they ate, or the size of their office.
Semco also embraced a philosophy known as “open-book management” that has taken root in a number of progressive companies. The books were open to all employees, and training in financial literacy helped them make sense of the numbers. This approach was another clear signal that management trusted people, and it gave employees a powerful incentive to contribute. They could see how their work affected the bottom line and how the bottom line affected them.
Over time, the company took democratic decision making to a level few companies have ever contemplated. Workers began to design production processes and products, approve or veto new businesses, set production quotas, and set their own hours and pay. They elected and evaluated their bosses. For big decisions, everyone got a vote.
The basic organizational units at Semco are small, self-managing groups of roughly six to ten people. These teams are typically grouped in business units of no more than a few hundred people. Ricardo’s theory holds that you can minimize rules and bureaucracy if you keep things small and simple. When groups face a new opportunity or challenge, they start talking about how to handle it among themselves.
Promoting Diversity
Believing that companies have a responsibility to combat discrimination, the company initiated policies and projects to promote fairness. One was “Semco Woman,” which began when the company encouraged groups of women at every level to meet and discuss shared concerns. The women started with a push for better locker rooms and office bathrooms, but then moved on to bigger issues such as day care and career opportunities.
MEN’S WEARHOUSE: GETTING IT RIGHT
Your circumstances may not be the same as Ricardo Semler’s, and not all the specifics in his playbook will be right for your situation. You’ll need to experiment and learn from experience, just as he did. But Semler’s example shows that following a broad set of principles for managing people, combined with courage and creativity, can produce extraordinary results. Ricardo is not alone. Many other leaders have built teams of talented, loyal, and free-spirited people who will go out of their way to get the job done. Such employees are less likely to make costly blunders or to jump ship as soon as someone offers them a better deal. That’s a potent edge—in sports, business, or anywhere else.
The Semco case offers a toolbox of ideas for thinking from a human resource angle. To test your ability to apply these ideas, imagine yourself in the situation of another successful business leader. Suppose that after college, you spent a few years selling men’s clothing and discovered that it was fun and you were good at it. You feel you’re ready for the next challenge—launching your own business. You’ll begin with a single store, but you hope to get larger over time. You know you’ll be entering a tough industry with slow growth and lots of competition. So how do you stand out in a crowded, competitive field? One thing you know is that your competitors’ employees typically live with low pay and mediocre management. Maybe if you treat your people better, they’ll make your customers happier.
How might you do that? You could ask yourself the questions we discussed in the Semco case:
- What philosophy and values will you follow?
- What will you look for in the people you hire?
- How will you keep people once they sign on?
- What will you do to invest in your people?
- How will you empower your people?
- How will you promote diversity?
George Zimmer developed answers to those questions that worked for him. He founded Men’s Wearhouse in 1973, when he was twenty-four years old. He began with a single store, but a quarter-century later, the company had grown to more than a thousand outlets generating close to $2 billion in revenue, even as the men’s suit business went downhill and many competitors went out of business. You’ve probably seen Zimmer in one of his many television commercials with his signature line, “You’re going to like the way you look—I guarantee it.”
Our list of key practices for leading people provides a quick guide to Zimmer’s road map for success:
- Develop a philosophy and values
Zimmer was clear and succinct about his company’s basic philosophy and values: “We’re not in the suit business, we’re in the people business . . . There has to be a democratization of everything—of effort and the fruits of those efforts. We’re always looking for ways here to share the wealth and really make it win-win.”10
- Hire the right people
Hiring at Men’s Wearhouse was more centralized than at Semco—it was a major responsibility of regional managers—but the company knew what it valued. Competitors often looked for retail experience, but Men’s Wearhouse wanted people skills and positive attitude. The company figured that changing personality is hard, but training people to sell suits is easier.
- Keep them
Turnover at Men’s Wearhouse is low by industry standards: 10 percent annually for store managers, compared to 25 percent for the industry.11 Men’s Wearhouse promotes almost entirely from within, and many of the senior executives worked their way up from the sales floor. Firing is centralized, and before letting someone go, the company typically moves the individual to another store or job to offer another chance for success. An employee stock ownership plan gives just about everyone a stake in the company, and store employees are eligible for monthly bonuses based on a store’s performance.
- Invest in them
Men’s Wearhouse emphasizes coaching and training, mostly conducted by line managers. New sales staff spend a week in California at “Suits University,” where they learn about selling, the product line, and the company’s values and mission. Executives at every level from the CEO down are expected to spend time in stores coaching and selling.
- Empower them
A central element of the Men’s Wearhouse philosophy is to hire “wardrobe consultants,” not sales clerks. The consultant’s job is not simply to sell what’s in the store but to understand what the customer is looking for, ask about his existing wardrobe, and help him meet his work and lifestyle needs. The goal is to provide a positive experience and build a long-term relationship with the customer. Managers are told that their number-one customer is the people who work for them and that their job is to provide staff with the tools and resources they need. Men’s Wearhouse also encourages self-expression and having fun; it has built a reputation for great holiday parties.
- Promote diversity
A long-term commitment to diversity has produced a workforce at Men’s Wearhouse that is about half female and more than half minority. In Fortune’s 2013 list of America’s one hundred best places to work, Men’s Wearhouse ranked seventh in terms of workforce diversity.12
In 2011, Zimmer turned the reins over to his chosen successor, Doug Ewert, but after a while the two drifted apart. Zimmer began to worry that the new leadership was departing from the people-first philosophy that made Men’s Wearhouse successful. He criticized increases in executive compensation that violated his egalitarian credo. All that set the stage for the surprising news in mid-2013 that Zimmer had been fired as both executive chairman and TV pitchman for Men’s Wearhouse. The board felt that they had a two-boss problem because Zimmer had not accepted “the fact that Men’s Wearhouse is a public company with an independent board of directors and that he [is no longer] the chief executive officer.”13 Did this embarrassing public spat mean that Men’s Wearhouse was moving away from the philosophy on which Zimmer built it? Or just that Zimmer was stronger on people leadership than political savvy? Many leaders have paid a price for just that reason.
CONCLUSION
The human resource frame expands leaders’ thinking beyond the rational nuts and bolts of narrow structural thinking to an understanding of how to create conditions that foster high levels of motivation, energy, and effort. Leaders who commit themselves to key practices of effective people leadership—developing a philosophy for managing people, hiring the right people, keeping employees and investing in their future, empowering them, and promoting diversity—have repeatedly built businesses that thrive on the strength of employee talent, energy, and creativity.
All would be well if leaders understood themselves and others. Unfortunately, that’s not always the case. In Chapter Five, we will examine the roots of interpersonal incompetence among leaders and offer ideas for how they can become better communicators.