Maximizing Worker Capacity Maximizes Shareholder Value…If Done Right

by Dean Prigelmeier, President of Proactive Technologies, Inc.

To many, “maximizing shareholder value” has become synonymous with layoffs and short-term cuts that will typically have harmful effects on long-term operational capacity. An often overlooked, but more productive, goal is “maximizing worker capacity” and should be a priority for every organization – publicly traded or not. Leaders of an organization are quick to say, “our workers are our greatest asset.” Yet, efforts to maximize returns on this asset are often hard to recognize or understand.

Maximizing a worker’s capacity maximizes worker value. Collectively, maximizing each worker’s capacity maximizes an organization’s value, and that of the shareholders. It is as simple as that.

Publicly traded companies, and even some privately held companies getting ready to go public, seem preoccupied with increasing quarterly earnings per share above all else. A consistently high level of earnings per share over the long-run no longer seems adequate for some. If the market is slack, an organization might carve costs out of the company from even a lean operation rather than disappoint investors. When labor is viewed as a “cost” rather than an asset, the temptation might be to cut benefits and wages. This may prop-up numbers for the short-term, but a demoralized workforce might not produce the same levels of output and quality yield as before. Sadly, a decision might be made in following quarters to cut benefits and wages even more, followed by workers if needed to make the magic number. All the while, worker and operational capacity, along with enthusiasm and loyalty, are eroding.

How does this erosion happen? When workers are cut, the work they used to perform gets transferred to the remaining workers. If there isn’t a mechanism to quickly “transfer expertise” to the worker expected to take on the new responsibilities, capacity drops until the trainee comes up to speed. For as long as the transfer takes, one well-paid subject matter expert trainer is being paid to train the paid trainee, yet productivity improvement may be negligible. And further complicating the process, perhaps no one thought about capturing the exiting workers expertise before they left the building, so some “reinventing the wheel has to occur.” Multiply this across all affected workers and the labor and opportunity costs may wipe out any anticipated gains by cutting worker payroll.

Proactive Technologies Report has presented many articles about the value of workers, how structured on-the-job training increases the worker’s capacity  to perform more tasks to a level of mastery, the high cost of worker turnover, and more. It is a concept we feel strongly about. Yet we are continually surprised how this topic is avoided by company’s accounting departments and upper management when they feel inclined to trim costs here and there, avoiding cultivating the enormous wealth before them – waiting to be harvested. What would be the value of just a 10% increase in worker capacity, operational capacity, quality and quantity of work, and worker compliance (safety, ISO/IATF/AS, etc.) to any operation? 

Not to diminish the important role of investors, but there has been a lot written about whether maximizing shareholder value is a destructive rule that needs to be changed. Critic Steve Denning wrote in an article in Forbes published in 2011 entitled “The Dumbest Idea In The World: Maximizing Shareholder Value,” “Imagine an NFL coach,” writes Roger Martin, Dean of the Rotman School of Management at the University of Toronto, in his important new book, Fixing the Game-What Capitalism Can Learn from the NFL, “holding a press conference on Wednesday to announce that he predicts a win by 9 points on Sunday, and that bettors should recognize that the current spread of 6 points is too low. Or picture the team’s quarterback standing up in the post-game press conference and apologizing for having only won by 3 points when the final betting spread was 9 points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.” Denning continues, “Suppose also that in order to manage the expectations implicit in the point spread, the coach had to spend most of his time talking with analysts and sports writers about the prospects of the coming games and “managing” the point spread, instead of actually coaching the team. It would hardly be a surprise that the most esteemed coach in this world would be a coach who met or beat the point spread in forty-six of forty-eight games—a 96 percent hit rate. Looking at these forty-eight games, one would be tempted to conclude: “Surely those scores are being ‘managed’?”

On May 6th, 2017, Bloomberg  writer Joe Nocera told NPR’s Scott Simon in an interview entitled “The Case Against ‘Maximizing Shareholder Value”  a story of what happened when American Airlines agreed to give its employees a raise — and Wall Street complained. “The management of American Airlines recently decided to give pilots and flight attendants a small raise to match salaries at other major carriers. The airline is profitable, but the price of American stock plunged with complaints on Wall Street that workers were getting rewarded, not stockholders.” These were employees that made concessions to keep the airline flying. More and more articles and speakers are emerging citing misuse of, what has become, a standard practice for the benefit of a few stakeholders over the many.

One simple, constructive and important change to the notion of maximizing shareholder value might be: maximizing sustained shareholder value. This would cast a spotlight on current decisions that will impact an organization’s future so all shareholders can at least know what they may be trading off and adding accountability.

Short-term cuts to an already lean organization – for example, skimping on deliberate and measured structured on-the-job training or incentives for employees to continually improve and perform at their highest levels (for the sake of meeting quarterly projections) is undoubtedly detrimental to future performance. Eroded capacity erodes future performance.

Why does this counter-intuitive contradiction exist? It might have been that critics of the time were silenced with notions like “chaos is good” or “creative destruction” would yield benefits for all. Some think it is because the most influential shareholders that shape a company’s future are too impatient to wait for the development of worker capacity, focused on their own unrealistic time-lines for “cashing out.” Some say that some influential shareholders impose tighter and tighter constraints as they prepare the organization for a break-up into pieces to sell the parts. Some think this represents a belief, developed with perhaps good cause, that any past efforts such as “training workers” has been expensive with no tangible improvement to the bottom line and, therefore, expendable. All of these organizations may be doomed to a declining future no matter who ends up owning them.

Some organization’s accounting managers may be unfamiliar with the concept of worker value and have no evidence upon which to base a decision. It is a topic not covered in college accounting classes (or not covered very well). Or maybe management has never been allowed to think of the worker as an asset in need of development to extract the most returns, so they have no performance data to make these decisions. For those organizations that still have human resources managers, some may not be familiar with the concept of worker value other than when developing “talent” is a platitude to flatter workers, and not as a deliberate act to harvest. For all of these individuals there is still hope.

Perhaps through a better understanding of these leader’s predilections, biases and/or weaknesses we may one day discover how one of the organization’s most valuable assets has been the most overlooked – even with the many years of ad hoc, impromtu and unfocused efforts. And we may discover why some organizations do not recognize that they are sitting on a pile of gold just waiting to be mined. Thankfully, there is enough evidence and metrics, today, to make a persuasive argument for why this issue should be taken seriously.

The most profound anecdotal evidence that this disconnect exists is in the 40-year battle to “close the skills gap.” Employers have spent billions upon billions of dollars on classes and online training, but employers are even more vocal today about their concern nothing is improving. Billions and billions have been spent by state and local governments on providing free college classes, the latest seminars and webinars, and still employers criticize the “sad state” of workforce preparation and in the lack of improvement of the workers they send to institutions for “up-skilling.” Caught in between are the workers.

To clarify how profound this dichotomy is, in an article by Julian Alssid, Chief Workforce Strategist at College for America, that appeared in the Huffington Post on February 27, 2014. Alssid found in “a newly released Gallup poll, sponsored by the Lumina Foundation: 14 percent of Americans – and only 11 percent of business leaders – strongly agree that graduates have the necessary skills and competencies to succeed in the workplace. That’s in contrast to another recent survey, conducted by Inside Higher Ed in conjunction with Gallup, indicating that 96 percent of academic officers believe that they’re effectively preparing students for success in the workplace.”

Perhaps the focus of all these efforts was not on the underlying problem but the urgency to find a solution. It wasn’t for lack of effort, it was the willingness to grab onto the latest wave and fad for the next decade without concentrating on the problem and appropriate solution. By then, the proponents of the strategy have moved on, we have forgotten the question or we have greater priorities. The unfortunate losers are the employers who need to attract and retain skilled workers, the workers who could have sustained, meaningful careers, the economy and, ultimately, the society.

Obviously, a new worker is a blank slate even if highly educated or has work experience. In the vast majority of the cases, a new worker has not learned how to perform the tasks for which they were hired to perform; how the new employer expects them to be performed in compliance with all of this company’s engineer specifications, quality standards, safety compliance requirements and company policies. That can only be acquired if an already designated subject matter expert shows them how, supervises their practice and certifies the task has been mastered. An educational institution or training provider can only shore up the core-skill base upon which to build these task-specific masteries; the employer must develop the rest.

Task-by-task, worker-by-worker, an organization’s overall capacity rises. It can happen either deliberately and quickly, or randomly and suspiciously. That is an organization’s leadership decision. And when the job changes, the response to ensuring workers are updated to changes in processes and procedures are conveyed and that the tasks are remastered is a management decision, as well. If neither of these are a priority, capacity remains at maybe a satisfactory level, but never rises to a level of full capacity. Changes to the job (e.g. lean processes changes, technology changes, equipment changes, process improvement) meant to improve performance usually have the opposite outcome and drive capacity down further.

Sadly, this mundane level of capacity leaves the organization vulnerable to “knee-jerk” decisions to cut labor costs in an effort to maintain earnings since the value of workers, without metrics, is hard to determine. Cuts to even under-developed staff will show up in the next quarter’s performance, but that doesn’t seem to be a concern or trade-off to those who cannot tangibly evaluate the value of labor.

A far more productive, intentional and measurable approach to building and maintaining worker capacity for the highest, most sustainable return on investment is not that complicated, but does take an investment to ensure it is done right. It can be done by building an infrastructure around what already exists – just making it work better, more reliably and able to be measured and improved. This effective approach looks like this:

1. Thoroughly define the best practice task performance for each job classification with a job/task analysis;

2. Use job/task analysis data to define entry-level requirements, and remedial and related technical instruction;

3. Use job/task analysis data to build worker development tools and metrics (NOTE: this should be done immediately, rather than the time/labor-consuming efforts of manual development of days past);

4. Take inventory of the tasks incumbent workers have already mastered to find those tasks the trainee has not had a chance to master. At this time, the job/task analysis data can be used to select appropriate core skill assessments to make sure the trainee is able to master the tasks;

5. Remediate any deficient core skills and abilities.

6. Implement structured on-the-job training for the incumbent workers to close the gap, and for the new employee (starting the minute the employee is hired) – driving both to “full job mastery” through an accelerated transfer of expertise™;

7. Track progress monthly and report progress to management and the worker;

8. Continue to update and improve the worker’s capacity as the job classification changes due to technology, process improvement, modernization and changes in job assignments.

Structured on-the-job training, such as that provided by the PROTECH© system of managed human resource development provides the infrastructure to quickly develop each worker’s capacity, document it happened, manage each worker for change and provide metrics to measure and improve worker value and performance. This is not marketing fluff like many training solutions on the market may be; this is real. The accelerated transfer of expertise cuts the company’s internal costs of training while increasing worker capacity, work quality and quantity, and worker compliance (e.g. engineering specifications, quality specifications, ISO/AS/TS programs and safety mandates).

You are encouraged to learn more about this approach. It will most likely be one of the most simple and logical solutions to closing the skills gap, increasing worker capacity, cutting costs, maximizing worker potential and, yes, maximizing shareholder value you will come across. If you are still reluctant to check it out, view a 13-minute preview, then attend one of the live, online presentations and/or schedule an onsite presentation. What do you have to lose in spending in a few minutes to become familiar with an approach that may change your organization’s future?