EHRM Day4 Report

Nordstrom: Dissension in the Ranks? (1) What problems does Nordstrom’s evaluation/compensation system have? Think about this question while considering the objectives of the company’s evaluation/compensation system, what measures it took, and what happened as a result. A. Nordstrom was renowned for its superior customer service that was the result of the exceptional customer service efforts (or “heroics”) put by their salespeople. So in order to retain their competitive advantage of superior customer service in the highly competitive retailing market, they designed a evaluation/compensation system that had the following objectives: (1) To support its high-service strategy, and (2) To motivate its sales employees. They tried to evaluate and compensate based on sales performance measured by SPH (Sales Per Hour) ratio, to motivate their employees to put efforts into providing better customer service/satisfaction and increase customer loyalty. However, the time the employees used for customer service/satisfaction or attend internal meetings (that did not account for any sales) negatively impacted their SPH ratio. So the employees were encouraged not to record those times in order to keep their sales performance high. This might have demotivated the employees who also developed dissatisfaction towards the company. Employees who could not tolerate left the company and employees who remained in the company were squeezed to work without pay for unrecorded hours. The problems that Nordstrom’s evaluation/compensation system has are: (1) SPH mechanism for performance evaluation/compensation (2) Poor differentiation of “Selling” and “Non-Selling” time (3) No evaluation/compensation of work time related to customer service/satisfaction (1) SPH mechanism for performance evaluation/compensation Nordstrom’s evaluation/compensation system was driven by sales per hour (SPH) mechanism in which the each sales employee were given a target SPH ratio based on their base hourly wage and store department and were compensated based on if the actual SPH ((sales – merchandise returned by customers) / # of hours worked) could meet the target SPH or not. If the actual SPH exceeded target SPH, the employee received 6.75% to 10% commission on net sales, depending on the department. In addition, they would also be assigned more working hours during peak sales hours and have a better chance of getting promoted to a department manager job. On the other hand, if the actual SPH missed the target SPH, the employee is not compensated and only received the amount based on the base hourly wage. On the 1/6

bitter side, they would be assigned less working hours (not during peak sales hours) or even terminated. So we see that the SPH mechanism is either rewarding or punishing. There is no in between compensation or chance to improve the performance. The good performers are given the opportunities to become better performers while the bad performers are deprived of opportunities to become good performers. In my opinion, if employees are having difficulties in meeting their target SPH then they should be given more working hours, not less. It is impossible to improve their SPH if they are working the off-peak shopping hours and working much less than employees with higher SPH. The SPH mechanism thus resulted into the following issues: (a) Employees were compelled to perform essentially expected functions, such as merchandise preparation, writing “thank you” notes, participation in mandatory meetings, etc. on “off the clock” time, because they were coerced by the existing performance evaluation system to keep their SPH ratio high. (b) Sales clerks felt persistent pressure to not record their hours while performing so-called “heroics”, which were essential for customer satisfaction, but detrimental for their personal paychecks, and working conditions in general. (c) The competitive sales forced Nordstrom employees into a cutthroat type of atmosphere discouraging team-oriented environments. Because the SPH ratios were so important, employees would do what they could to steal customers from other associates. They would also avoid helping their associates to keep them from getting the good SPH ratios. This created a culture of cutthroat competition. (2) Poor differentiation of “Selling” and “Non-Selling” time There was a lack of clear differentiation of “Selling” and “Non-Selling” time. Employees were not clear about recording time spent in activities such as hand deliveries, merchandise preparation, sales promotion and customer correspondence, etc. as “Selling” or “Non-Selling” time. If they recorded it as “Non-Selling” work time, they were entitled to the guaranteed base wage with no effect in their SPH. However, if they recorded it as “Selling” work time, their SPH would be low. The evidence of this ambiguity in defining the “Selling” and “Non-Selling” time is presented by the fact that the Nordstrom family had to issue the Internal Memo Differentiating “Selling” vs. “Non-Selling” Time amidst the labor disputes crisis in mid-1989. (3) No evaluation/compensation service/satisfaction

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There was no evaluation/compensation of work time related to activities for improving customer service/satisfaction such as home deliveries, calling up valued customers 2/6

informing them of newly arriving merchandises, helping customers with their sales, writing “thank you” notes, etc. So the system lacked in providing motivation for employees to perform such activities and also did not compensate the employees performing such activities fairly. Nordstrom’s evaluation/compensation system, combined with other systemic issues such as a decentralized management system and a lack of clear guidance for middle managers eventually manifested as various problems in employees attitudes and behaviors. The decentralized management and lack of clear guidance for middle managers created inconsistencies in the system and abuses such as managers creating, in the salespeople, a sense that they needed to work “off the clock” to get their SPH up. Performance evaluation and compensation of sales employees and mid-level managers were in conflict, instead of being supplementary to achieving the company’s goals, and supporting individual interests of the employees. Given the relative autonomy of mid-level managers in making many decisions, this conflict of interests implicitly encouraged managers to bend the rules to their own benefit. Even though the cause of this managerial pressure is not directly identified in the case, it can be reasonably inferred that the performance evaluation system of mid-managers was also a part of the problem. It is obvious from the actions of the managers that they were evaluated, at least in part, based on the SPH of their subordinates, just like the sales people were evaluated based on their personal SPH. This seems to be reasonable explanation why the managers would go sometimes to extreme lengths in their attempts to discourage the sales subordinates from recording all their working hours. This behavior of the mid-level managers was also partially supported by the fact that the “Selling” and “Non-Selling” time was not very clearly differentiated in the company’s policies. The Nordstrom system seemed to have attempted to give equal emphasis to the oft-conflicting goals of service, profitability and middle management autonomy, which manifested in these various undesirable attitudes and behaviors in the employees. All these seemingly minor issues by themselves, when left unaddressed for a length of time, came to a collision and eventually erupted in multiple labor disputes, class action suits, and cost the company millions of dollars in settlements, as well as partial loss of reputation.

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(2) Why did some of current and former workers agree with Nordstrom’s compensation system while others disagreed and subsequently took legal action? Would you like to work for the company? A. Some of current and former workers agreed with Nordstrom’s compensation system, may be because of the following reasons: (1) The employees who agreed with Nordstrom’s compensation system might have been the high performers who had high SPH and were earning more commissions on the net sales. (2) With the compensation system, industrious workers at Nordstrom could earn over $80,000 a year, while an average worker could earn $20,000 to $24,000, which was pretty high compared to the national average for all retail sales workers of $12,000 a year. So they might have agreed with the compensation system because of the high earnings despite sacrificing a few. (3) As mentioned by Patty Bemis in the first page of the case “We’d all heard Nordstrom was the place to work”, we can say that Nordstrom was a preferable place to work by all, may be due to its relatively high salary and financial success. There must be intense competition to get a job at Nordstrom. So they might have agreed with the compensation system because they wanted to have the job and not leave it for being taken by others. No, I would not like to work for the company. This is because of the following reasons: (1) I prefer to work in an environment where I am motivated and enjoy doing my work. However, the fact that I need to sacrifice my working hours to keep my SPH up and avoid the consequences, will definitely not be motivating for me. I would not enjoy my work and so my life as well. (2) I prefer to work in a team-oriented environment and like to work together with my associates helping and complementing one another. But the cutthroat type of atmosphere with intense competition among salespeople and discouraging team-oriented environment at Nordstrom due to the SPH based incentive system, would not suit me and is not much attractive to me. (3) I believe in giving opportunities to low performers to improve their performance before punishing them for their low performance. But at Nordstrom, the middle managers used to deprive opportunities from low performers by assigning them less working hours and that also not during peak sales hours, further lowering their SPH and finally terminated them. So I would not be able to deal with this kind of attitude from middle managers who are not fair in giving a chance to the low performers to improve their SPH. Though it is a fact that you could earn more at Nordstrom than the national average for retail sales worker, it can solely not persuade me to work for the company. Working environment, attitude of high level people and fair evaluation/compensation system are equally important for me. 4/6

(3) What other incentive systems do you think Nordstrom could employ? What incentive system would you build if you were working in this company’s HR department? If possible, consider other elements of human resource management such as recruitment, training and career development, etc. A. Other incentive systems that Nordstrom could employ are: (1) SPW (Sales Per Week) Incentives instead of SPH (Sales Per Hour) Incentives Nordstrom could base their rewards policy on sales per week instead of sales per hour. Each employee could be expected to only work a minimum of forty hours per week. If each individual had the same amount of time designated to sales and non-sales tasks then they could be equally rewarded for sales efforts. This would encourage salespeople to record all their working hours without impacting their sales ratio. (2) Non-Sales based Incentives The sales performance indicator should be balanced by other non-sales factors such as customer service/satisfaction, internal communication/participation, etc. in actual work compensation. The employees should be compensated separately for the time spent in essentially expected functions, such as hand deliveries, merchandise preparation, sales promotion and customer correspondence such as writing “thank you” notes, participation in mandatory meetings, etc. (3) Team Performance based incentives In order to avoid the intense competition among the salespeople and build a team-oriented environment, Nordstrom could form a team of salespeople for each different product category, set the sales target for the team and compensate them on meeting or exceeding the target. Since the entire team would be compensated, there will be improved communication and cooperation within the salespeople to meet the team target, thus forming a team-oriented environment. In addition to employing the above incentive systems, the top-level management should communicate about the incentive systems to all employees clearly. The middle managers should be given training on evaluation of the employees so that there is uniformity and fairness in the evaluation. If I were working in this company’s HR system, I would like to make the following changes in the personnel systems: Recruitment Recruit as salaried employees instead of hourly-based employees so that there are no issues as such related to SPH ratio evaluation. Make them clear about the jobs and performance that are expected from them, the evaluation/incentive systems and the career development. 5/6

Training Provide a 3-month on-the-job training to the new employees to get mixed into the company culture and become familiar with the working environment and working process. Placement Implement promotion from within policy to be fair to the potential performers. Place super performers in positions where they could use their expertise to achieve company’s objectives and also create or identify more super performers. Career Development Define a clear career development path from regular employee to section manager to middle-level manager to top-level manager with clearly defined criteria for the transition. This would motivate passionate and hard-working employees looking for a career in retailing. Evaluation Put an MBO System in place with setting SMART objectives for employee based on the company’s strategies and objectives in the mutual involvement of the employee and the store manager. Since the employees themselves set the objectives, they are motivated to achieve those objectives thereby improving their skillsets and capabilities. In addition, store managers will be given guidelines and trained to assess the employees so that the evaluation is uniform and fair across the entire company. Also perform a 360-degree evaluation annually with focus on building a team-oriented environment and improved customer service. Compensation/Incentives (1) Sales Performance based incentives Set sales target for each employees based on their abilities and pay commission on net sales on achieving the targets. (2) Non-Sales based Incentives Provide bonus incentives to employees with outstanding contribution to improve the customer service and helping the company to retain its competitive advantage. (3) Recognition/Award Give recognition/award to employees for their remarkable contribution in activities besides sales and customer service such as team building, etc. (4) Stock-Option Plan for Super Performers Provide stock-option plan to the super performers to retain them by giving them the sense of ownership of the company. 6/6