Employers’ ongoing challenges in sourcing quality talent for their organizations highlights the importance of identifying and utilizing processes that reliably attract desirable employees. In this episode of People and Strategy, host Tony Lee speaks with Peter Cappelli, George W. Taylor Professor of Management and Director of the Center for Human Resources at the University of Pennsylvania’s Wharton School, on how to determine what will and won’t work for your organization’s people strategy.
Employers’ ongoing challenges in sourcing quality talent for their organizations highlights the importance of identifying and utilizing processes that reliably attract desirable employees. In this episode of People and Strategy, host Tony Lee speaks with Peter Cappelli, George W. Taylor Professor of Management and Director of the Center for Human Resources at the University of Pennsylvania’s Wharton School, on how to determine what will and won’t work for your organization’s people strategy.
This episode of People and Strategy is sponsored by ADP.
Intro:
Business success requires thinking beyond today. That's why ADP uses data-driven insights to design HR solutions to help your business have more success tomorrow. ADP, always designing for HR, talent, time, benefits, payroll, and people.
Tony Lee:
Welcome to today's People and Strategy podcast. I'm Tony Lee, vice president of content for the Society for Human Resource Management, and the SHRM Executive Network, which is the premier network of executives and thought leaders in the field of human resources. I'm excited to speak today with Peter Cappelli, who is the George W. Taylor professor of management and director of the Center for Human Resources at the Wharton School at the University of Pennsylvania in Philadelphia. Peter has written several books on workers in the workplace, including The Future of the Office: Work from Home, Remote Work, and the Hard Choices We All Face, and a new book coming out this year, Our Least Important Asset: How the Relentless Focus on Finance and Accounting Hurts Employees and Business. Peter also was the recipient of SHRM's Michael R. Losey Excellence in Human Resource Research Award last fall. Peter, welcome to the People and Strategy podcast.
Peter Cappelli:
Thank you, Tony.
Tony Lee:
So let's start with the talent market, which has been red-hot for several years now. Just when we thought it might be cooling down with the announcements of layoffs at a bunch of tech companies, it really appears there's no slowdown in sight. What do you think employers should be focused on this year? Is it better recruiting strategies, better workforce planning?
Peter Cappelli:
Well, yeah, it's a hard question. I think workforce planning has never worked very well because workforce planning rests on plans about where the business is going to go, which rests on plans about where the economy is going to be. And if you think you're good at workforce planning, ask yourself how well you predicted the pandemic and before that, how well you predicted the great recession and all those sorts of things. So workforce planning just doesn't seem to work very well. Companies have sort of given up, I think, mainly on selection, worrying about trying to pick among the good candidates who's the best one, because we never bother to see whether what we're doing works or not. So everything seems to come down to recruiting, and that's a different kind of challenge. How do we attract the right kind of candidates to our website?
I'd say the biggest mistake that employers make in that regard is they think that filling up the funnel is the solution, and that means get as many people to apply for our jobs as we can. The reason that is probably a big mistake is that if you just get a lot of people to apply for jobs, then you're really relying on your ability to sort them out. That is the selection process so that you don't make mistakes. And making a mistake, you mean hiring somebody who is not a good fit is incredibly costly. So what should you do instead? I think what companies really ought to be doing is spending time on the recruiting side, trying to figure out how to describe their work and what they need and what they want in ways that attract the right people and scare the wrong ones away. So this goes back to the idea of the employment value proposition, which is not just here's why you should come work for us, but also here are the things about our job, which are not things that everybody would like. Some people also know some of this as realistic job previews. So thinking differently about recruiting, I'd say is the big thing to do, and trying to figure out how to attract the right people and scare away the wrong ones so that you have a better chance, and at the very least, avoiding big hiring mistakes.
Tony Lee:
Yeah, no, makes sense. There's been a lot of effort to bring HR analytics into the whole recruitment process. Going back and looking at where are our best employees? Where did they come from? How did we recruit them? Did they all come from a single place? Was there some magic trick that we used? They all came from this one school or they all had this one major. Are you seeing HR analytics being used more in that regard and across all of HR obviously?
Peter Cappelli:
Well, I would hope it would be. I don't think it is. So I run the following experiment in class, and you can do this as well with your friends at a cocktail party. It'll really excite them. You give them a couple choices about candidates, and one candidate is somebody maybe let's say the person really likes, and the other is somebody who you also like, but their scores on an algorithm that predict who's going to be a good hire are a little better. So do you go with a person that you like better, or do you go with a person who has a better score on the algorithm? And invariably people go with the person that you would like better, and they think that's kind of the smart thing to do. So in other words, they don't really trust the algorithms.
And so my advice to companies given that, if you give that test to your own folks, don't bother with fancy algorithms because if your people aren't going to use them because they really think that hiring ought to be the hiring manager's call to pick the person that she really likes. If you think that's what you're going to do, don't spend all the time and money generating fancy data science-based algorithms because you're not going to use them. So I think we sometimes believe that the big problem is just getting the right answer, but the right answer in this... I mean, the right challenge in this context is getting people to accept the right answer, and I don't see us making a lot of progress on that.
Tony Lee:
It's a challenge, there's no question. So a similar challenge, a little bit different is there's been a big debate in some C-suites about what employer should be looking for in new hires. Is it great credentials, the best degree from the best school? Is it certain skills? And an even finer point would be a great skillset versus having multiple skillsets? The example I hear is someone who's majored in ethics and AI so they can understand ethical AI, or sustainability and supply chain management so that they can come in and have a different perspective than the typical new hire might. What's your thinking on that?
Peter Cappelli:
Yeah, it gets to the question of really of what do jobs actually require and is there something different about them now. I think there's a mistake if you're leading a company to think that, okay, we as a company want to move in this direction, like sustainability, let's say. And so what we want to do is just hire lots of people in who know about sustainability. If it's not part of their job requirement, it's not going to help you. So I think the question is what is it that companies are looking for? What have they been looking for? What they have been looking for is really, can this person do the job right now without training and without ramp up time? I mean, that's been overwhelmingly the dominant logic in hiring.
And the problem for candidates has been that they might very well say, and probably might be true, "Well, I've never done exactly this before, but I've done a bunch of things which are really similar to it, and with a little ramp up, I could really do this." They don't want to hear that. They want to know, "Have you done this before?"
I think that to be honest, as an employer, you should ask yourself, to what extent do we really expect to be able to move people around? To what extent do we actually expect to be able to grow talent from within? And let's forget about the happy talk for outsiders. What do we really do internally?
And if you're not going to grow people from within, and in most organizations, training has been declining a lot over the last few decades. If you're not going to move people in advance internally, and most companies, that has not been a big priority either by some measures. Three quarters of the vacancies are filled from outside. If you're not going to do that, then don't hire people with broad skills because you're not going to use them. And don't hire people who are really capable, who you think might learn because you're not going to give them the time to do it. Just stick with the skills that are needed to do the job that you've got on the table, because otherwise you're going to frustrate these people and they won't succeed for you because you've hired them for something that you can't deliver.
Tony Lee:
Yeah. Well, and that goes to a completely different issue, but right to the heart of it, which is employee engagement. We're from the great resignation to quitting. I mean, we've seen, frankly, a disengaged workforce. I guess I'm curious, because you work with a lot of young folks who are entering the workforce. Do you think this is a generational issue? I mean, are young millennials and Gen Z having different workplace expectations or is it something else?
Peter Cappelli:
Yeah. Well, this is one of the funniest stories I think in the social sciences in general, and that is the National Academy of Sciences commissioned a study on this couple years ago. They published a report in August of 2021, and if you can look it up, I think you can download it for free. And they had a bunch of demographers and people who study this stuff, and they had testimony, and I believe me I didn't contribute much to this, but I testified as well. And the conclusion is as much of a slam dunk as you could ever get academics to say, and their conclusion is, there's nothing to any of these generational stories. There's no evidence that there are millennials, there's no evidence that they're Gen X, Gen Y, Gen Q, Gen Z. All that really is going on is you're seeing age effects. And that is younger people are different than older people, and that keeps happening because older people, as they grow up, are constantly surprised that younger people act differently than they are at different point.
And the other thing that happens is that there are episodic things. People who graduate into a strong job market feel differently than people who graduate into a weak one. And that's all that's really going on.
I think in terms of engagement, it's not clear we really know if you look at the surveys that they're looking at the same people over time. So we really don't know that engagement has declined for the same people. However, I think there is something going on as the pandemic started to recede, and that is in the beginning of the pandemic, everybody was really delighted to simply have a job. It's a little hard to remember now, but if you think back on it, we were afraid to go to work because we thought we might get sick and it could kill us, and we were afraid we were not going to have a job because everything was shut down. So the opportunity to work remotely was such a relief.
And also when we started working remotely, there was this palpable sense, so we were all in this together. Were all on Zoom, so is your boss, and you could look at her house and her dog is running around just like yours is. And the employers were asking people, "Look, we need your help and we trust you to get this done, but we got to pitch in and do it." And that was highly engaging. It's like people who are working in wartime. You're trying to help the country get back to normal. So in some ways, it's not too surprising that starts to fade. People now are not feeling like they're keeping the country going just by being able to go to work. And if they're working remotely, it's not so exciting anymore. They've been doing it for a while. So some of this I think, is regression to the mean.
And I think the other thing that also happens is that when job market gets better, people get less happy with where they are right now. You may know this statistic that the greatest job satisfaction ever reported was during the Great Depression, because if you had any kind of job at all, it was looking pretty good. But as soon as there are lots of opportunities for you elsewhere, you're not so happy with your current job. So I think that's largely what I think is going on now. I don't think there's any big structural long-term fundamental rewiring of people's heads.
Tony Lee:
Good. Good insight. So let's pivot a bit. Your new book is going to focus on why companies make human capital decisions that frankly aren't cost-effective. So can you tell us why you think that's happening?
Peter Cappelli:
Well, if you look at how people are managed, there's tons of evidence about things that work. And SHRM has done a good job in making this available to people. Teamwork works well, trying to engage people works well, investments in training payoff, all those sorts of things. When you look in practice though, those things don't seem to be winning the day. And what you see instead across employers is a lot of stuff that looks like practices which are kind of stripped down and cheap, and let's just try to do this in the least cost way. And I started seeing this over and over and over in practices from hiring, to performance management, to training and development and what's going on here. And so I started to look at how financial accounting actually works because what drives public companies for sure is what the investors think. What drives what the investors think is financial accounting data that sets the rules for how the game of business is played.
And so those of us who grew up in college with a microeconomics class and you were told profit's pretty simple, just spend as little as you can and make as much money as you can, think that anything that's profits maximizing is also efficient, but it's not true. And the reason is, if you talk to an accountant, you'll discover pretty quickly that a dollar is not a dollar. If you look at cost, for example, it all depends on where you spend it. And it is possible to maximize shareholder value and not even have any profit as Tesla discovered for a decade and as Amazon discovered before that. And underlying all of this is the fact that financial accounting, accounting in general cannot get its hands around human capital.
So in financial accounting, but all in accounting, for example, nothing can be an asset unless you own it. And that includes having very valuable employees. Even employees who are under contract to you, they're not an asset and you can't invest in something unless you own it. So training, for example, which seems to be a perfectly sensible investment, it pays off big time, and in fact, employees become more valuable the more you invest in them and simply by working. Training can't be an investment rather because you don't own the asset, which are the people. So that's very different if you talk about a piece of software. For example, if you buy a piece of software, that is an asset. It accounts against your liabilities. And you can actually upgrade your software, and that counts as an investment. But if it's people, that's not true. And you can see this in areas like employee benefits. Those are the worst costs for employers because they are liabilities that you're accruing, pensions, sick leave, vacation time, and as a result, you have to offset those with assets.
Spending on employees, on the other hand, never an asset, always a current expense. So if you think about that, it explains a lot of weird things like, why did we get this unlimited vacation craze? Where'd that come from? Well, the reason is, if you dump your current vacation plan, which are accrued vacation days, your liabilities disappear and suddenly your company becomes more valuable. If you don't employ as many people, even if you're doing it by leasing employees from somebody else, your profits per employee go up, your assets per employee go up. So there's all kinds of weird things about managing human capital which happen, do not seem to be efficient in an economic sense or even reducing costs, but nevertheless, they might make your company more valuable under financial accounting. So it turns out the accounting folks, my accounting faculty folks also understand this issue. They're more concerned about the fact that investors can't tell what's going on in companies without better information about human capital, given that human capital is so important, and they've also started complaining about this.
My complaint is that financial accounting is distorting decisions, causing us to undervalue, underinvest in employees, and do things like this crazy unlimited vacation stuff and leasing employees when you could cheaper have your own employees because the rules of financial accounting will make you appear more valuable as a result.
Tony Lee:
Wow. So the logical conclusion is the most profitable company is one with zero employees and a completely outsourced workforce.
Peter Cappelli:
Yeah, probably right, even though cost per employee-wise, it's probably a lot higher.
Tony Lee:
Yeah, no, absolutely. Well, so it's interesting because it flies a little bit in the face of what we have heard about the value of HR through the pandemic, that HR has become a strategic partner to the CEO and is spending a lot of time talking about how to maximize the staff and all aspects of benefits. But in many cases, HR reports to the CFO, so perhaps that's not going anywhere, right?
Peter Cappelli:
Well, I think HR got more important during the pandemic for the same reason that every group gains power and loses power. It's dealing with a problem that was immediately a crisis for the leaders, and that is how do we get people to get work done during a pandemic? And then during the very tight labor market period, how do we get and keep people? That was a fundamental problem. And particularly for the leadership, it was not just a problem down in the hourly ranks, it was a problem with the people that they could see, the white-collar workers around their own offices. So because HR was the place that could solve their problem, HR becomes much more important. And that's true, even given the financial accounting problem, which is a longer term structural kind of issue.
I should say that my accounting colleagues actually have proposals in front of the Security Exchange Commission right now to try to get the regulations changed to require companies to report stuff on their human capital, like turnover, like training, investments, things like that, which would probably change a lot.
Tony Lee:
Yeah. Well, all I can say to your colleagues is God speed.
Peter Cappelli:
Yes. Whoever knew accountants could be your friends, well, here you are.
Tony Lee:
There you go. Well, Peter, thank you so much for sharing your expertise with us today. You can follow the People and Strategy podcast wherever you listen to your podcast, and you can learn more about the SHERM Executive Network at sherm.org/executive. Also, listener reviews have a real impact on a podcast visibility. So if you enjoyed today's episode, please take a moment to leave a review and help others find the show. Finally, you can find all of our episodes on our website at shrm.org/podcast. Thanks for listening and have a great day.
Outro:
Business success requires thinking beyond today. That's why ADP uses data-driven insights to design HR solutions to help your business have more success tomorrow. ADP, always designing for HR, talent, time, benefits, payroll, and people.