The human side of managementHewlett addresses the need for better relationships between management and the work force.
I feel most pleased and honored to have been invited to give the third address of the Eugene B. Clark Executive Lecture Series; particularly honored when I consider the two previous speakers - J. Irwin Miller, former chairman of the board of Cummins Diesel, a man with broad background and experience; and Thomas A. Murphy, retired chairman of General Motors.
Irwin Miller spoke on the "uses of freedom." He pointed out that institutions were neither good nor bad but neutral, for it is the people behind the institutions be it business, labor, government or education who determine the character of the institution. He then discussed the unique qualities of the American democratic system with its guaranteed package of freedoms which provide a framework on which a democratic system may operate. However, such freedoms can either be used for good or may be abused.
In his "Reflections of a Retired Businessman," Thomas Murphy was stimulated by a conference held at Notre Dame University on the subject of "Can a businessman be a Christian?" His answer was an emphatic "yes." He pointed out that, although most of us start with a certain moral and religious upbringing, we are not always able to have our choice of a career. Murphy's first choice was to be a sports coach, his second a priest; but circumstances directed him into business.
Nonetheless, you carry these personal beliefs into whatever endeavor you ultimately select. This is the same point Miller made from the other side: Man makes the institutions, not the institutions the man. He went on to discuss business as a tool for social good. He pointed out that the role of management requires the exercise of tough decisions that affect the lives of many people. Temptation is often great to bend the rules, but management must stand strong in its convictions.
In continuing the themes of these two previous speakers I would like to address the subject of "The Human Side of Management." I don't want to approach it as though it were a case study, but I would like to draw on almost 43 years of direct shared-management responsibility in a company that Dave Packard and I founded in 1939 a period that saw the company grow from just two people to one that now employs about 65,000 people. I particularly want to talk about the importance we placed on the individual from the very beginning. In no way do I want to suggest that we have "all the answers" or that "this is the only way to do it." But sometimes it helps to go from the abstract to the concrete, and so with this in mind, let me tell you a little bit about the development of Hewlett-Packard Company.
As I talk about the start of the company, it is important to remember that both Dave and I were products of the Great Depression. We had observed its effects on all sides, and it could not help but influence our decisions on how a company should be run. Two thoughts were clear from the start. First, we did not want to run a hire-and-fire operation, but rather a company built on a loyal and dedicated work force. Further, we felt that this work force should be able to share to some extent in the progress of the company. Second, we wished to operate, as much as possible, on a pay-as-you-go basis, that our growth be financed by our earnings and not by debt.
In the early days, Dave and I tackled almost every job - from sweeping the floors, to keeping the books, to inventing products, and to taking care of the general management of the company. We were very small and insignificant, and we had to employ whomever we could. We had to train them and then hope that they would work out. Reflecting our belief that employees should share in the progress of the company, we initiated a production bonus plan which, in essence, said that we would pay about 30 percent of sales to the employees through a combination of wages and salaries and a bonus thereon. The same percentage was paid to the janitor as to the top manager. This program was immensely successful as there was a quick and direct correlation between output and pay.
Obviously, we were very close to our employees. We understood their jobs and shared much of their lives with them. One of the most difficult steps that I can remember occurred a few years after we had started the company. This was when we had to release our production manager. We finally had to face the fact that, despite everything we had done to improve his management skills, he was not doing the job that needed to be done. Although he was a good friend, it simply came down to a question of his job or the jobs of all the other employees. The impact of that decision is still with us, and in subsequent years has led us to make every effort to find an appropriate niche for a loyal employee. Interestingly enough, we have had good success through the years in relocating such employees within the company.
Another early experience, again related to our close association with our people, was the case of an employee who came down with tuberculosis and was required to take a leave of absence for two years. Here we had the opportunity to observe the devastating impact that it had on his family, and although we were able to provide some help, we determined that this was a problem that we must solve on a permanent basis. Consequently, we established a plan for catastrophic medical insurance to protect our employees from exactly this kind of problem. In the late 1940s this type of coverage was virtually unknown.
During the early years of the company we really had to work with the people on hand. We had to sort out employees according to their abilities, and not by their educational or training backgrounds. Many of those people, who came to us in the early years, are still with us; and a number of them occupy key positions despite the fact they never went to college. Conversely, many of these early employees were not able to live up to the opportunities that were presented to them, and they were forced to recognize that there were limits to their future progress in the company. We worked hard to deal with this problem and, almost without exception, were able to find appropriate jobs for them within the organization. Fellow employees recognized those who were performing well and those who did not measure up. They appreciated that we were trying to find the right niche for each one thus preserving our work force.
The type of close relationship that existed in the company encouraged a form of participatory management that has carried on to this day. We were all working on the same problems. We solicited and used ideas from wherever we could get them. The net result was that all felt they were members of the team.
Contrary to most companies at that time, we did not have a personnel department. We had strong convictions that one of a manager's most important jobs was to deal directly with his employees. We did not want to impose any artificial barriers to hinder direct communication.
The informal structure of the company led to what was eventually known as the "open door" policy. In a sense this said that any employee who was unhappy could come in and talk with Dave or me or any other senior executive about his problems. Although such a technique could easily be abused, it never was, and it served as an excellent safety valve for the frustrations that occur in any organization.
A real turning point for the company occurred in 1957, resulting in changes that would have a profound effect on the company in future years. Up to that time, HP was directed by the owner-founders operating in a single plant in Palo Alto, California. Most of the basic policies that directed the company were firmly in place, and we had a good team of people running the operation.
But there were signs of strain appearing. I think the principal concern Dave and I had was that, as it increased in size, the company might lose the intimacy we felt was so important to the organization. Therefore, in January 1957, Dave and I took the top 10 or 12 people of the organization on a weekend retreat to discuss the future of the company, and to decide what action might be taken to insure its continued success.
Several conclusions were reached. First, we decided to divisionalize the company along product lines. We felt that by reducing the size of the operating units and decreasing the span of control, we would provide an opportunity to recapture the personal touch that everyone felt was so important. The managers of these divisions would assume direct responsibility for the health and welfare of their charge, but they would need some guidance. Second, it seemed that this guidance could best be achieved with a simple set of policy statements. In act, these statements consisted of no more than a codification of past company policies. Coupled with this belief was the conviction that, with these guidelines, local managers could make better decisions than either Dave or me, because if for no other reason they would be closer to the problems.
Let me summarize these policy statements: The first objective related to profit and set a specific target. It went on to say that all the other things we wished to achieve rested on the success of this first objective.
The second objective dealt with and defined our product line; we should concentrate on the things we know and do best. This was designed to keep us from dissipating our limited resources on business ventures to which we brought no particular knowledge or ability.
The third objective related to our customers, and stressed "inexpensive quality."
The fourth I will read: "To provide employment opportunities for HP people that include the opportunity to share in the company's success which they make possible; further to provide for their job security based on their performance; and to provide the opportunity for personal satisfaction that comes from a sense of accomplishment in their work." This objective goes on to state that "the opportunity to share in the success of the company is evidenced by our generally above average wage and salary level, through the operation of our incentive plan, our recent retirement program and other employee benefits with which you are familiar.
"The objective of job security is shown in a number of ways. Hewlett-Packard has attempted to avoid large ups and downs in its production program because these large ups and downs would require that we hire people for a short period of time and lay them off when we do not need them. It is evidenced by the fact that we have attempted to be lenient with some of our older employees who, as we have grown, have not measured up to the standards we might have reason to expect. But in the interest of those employees who are carrying their full load and who are growing with the company, we have not felt committed to accept anything like an absolute tenure status. Nor do we feel that this policy implies that we must recognize seniority except in cases where other factors are reasonably favorable."
The fifth objective dealt with meeting the obligations of good citizenship, while the sixth spelled out our policy on growth.
These objectives are somewhat similar to the U.S. Constitution - a document expressing basic ideals subject to current interpretation and to amendment. If you look at our objectives as they exist today, you would see how little they have changed despite a hundred-fold increase in sales and a 50-fold growth in employment - and instead of a single plant operation, a company operating with over 50 management units in about 32 countries around the world.
The recommendations of our 1957 meeting were quickly implemented by divisionalization and by wide distribution of the objectives. These objectives had an important role in training and guiding the new management teams. They served to reinforce the principles of cooperative management the concept of leading, not directing. They stressed a management style that was informal, with give and take discussion, lack of private offices, casual dress and the universal use of first names.
But these were not the only changes that took place at Hewlett-Packard that year. For one, the company changed from a privately held corporation to one that was publicly traded. With our stock now on the market, we were able to reward many of our employees with stock bonuses. These bonuses went to a wide variety of officers and employees who had played important roles in the company's past performance.
We concluded the time had come to have a corporate personnel department with a clearly stated role: To support the management team. In no way was it to supplant the direct manager/employee relationship which we considered so important.
In the next three years, basic changes continued to occur. 1958 saw expansion into the European market with sales headquarters in Geneva, Switzerland. To expand our product line we made the first of several acquisitions. A stock option plan was instituted not just for the top few managers, but with the thought that a broad distribution of relatively small options (100 shares) could have real value as a formal indication of a job well done.
The pace continued in 1959 with the establishment of a second manufacturing facility, not in the U.S., as might be expected, but in West Germany. We made a second acquisition, also in the instrument field. We established an employee stock purchase plan with a 25 percent subsidy from the company. This plan, an early forerunner of the Kelso plan, was put into effect with the specific concept that employee stock ownership should give the employee a greater sense of being "part of the company."
1960 saw the establishment of a manufacturing site in Loveland, Colorado. With a multi-plant operation now in place, the former production-bonus system was no longer workable, so a cash profit-sharing plan was established. A key question was: Should the bonus be based on individual plant performance, or should the benefits be spread uniformly throughout the corporation? The answer was easy - it must be corporatewide. Otherwise, the seeds of discord could have been sown among the divisions at a time when it was absolutely essential to pull the teams together.
Thus, in four years since the establishment of a divisional organization with the concept of management by objective, the company had made considerable progress. From an operation in a single plant and a unified management structure with sale of about $20 million and about 1,200 employees, it had grown to a complex organization, with 10 divisions operating in four locations inside the U.S., and two outside the U.S., and with employees and sales each increased by approximately two-and-a-half to one.
The new management structure had been tested by acquisitions, by geographic distribution of plants in both the U.S. and abroad, and by growing size and complexity of organization. The answer was clear: It did work. The recipe was simple: 1) Have objectives; 2) explain and teach them; 3) gain agreement, with modification if necessary; 4) have everyone share in the success of achievement; and 5) be egalitarian to assure that communications are open.
Even in a place like Germany, with very different traditions and background, once understood the system worked well. We experienced greater problems with some of the older companies we had acquired in the U.S., particularly where they had operated under a more autocratic rule. Freedom suddenly granted is often hard to cope with (note the problems resulting from the deregulation of a number of U.S. industries). But in the long run it did work.
I will not burden you with a blow-by-blow discussion of the following years. Suffice to say, we greatly reduced our expansion via the acquisition route and turned more to internally generated concepts. By far, the most important of our expansions was in the computation area, first in the scientific and technical fields but, more recently, in general applications.
During the intervening years we continued to give a high priority to the development and welfare of our people. We have not been afraid to experiment with new ideas, particularly where they might fulfill a desire of our employees and have no adverse effect on the company.
Doing away with the time clock was one such step. Flextime a plan started in our German plant is now almost uniformly adopted throughout the company. Under this plan, there is a window for starting work of about two hours, say 6:30 AM to 8:30 AM. Then you simply put in your eight hours and go home. It has been a great success - the employees love it and I am convinced that we get better productivity from our people because of it. Further, it is self-policing, for cheaters are not looked upon with favor by their fellow workers.
One idea that did not prove out was a four-day, 10-hour-per-day plan. We tried it and it simply was not successful. We also made a very bad mistake in trying to make a change in the method of paying employees, one that provided only marginal benefits to the company but greatly inconvenienced our employees. More recently, we adopted a plan to combine vacation and sick leave into a single package that greatly simplifies the complex problem of sick leave accrual and should do much to solve this difficult problem.
One of the most dramatic examples of working with our employees occurred during a recession in early 1970. It became evident that we had about 10 percent more employees than we needed for the production schedule. Rather than lay off or furlough 10 percent of the work force, we simply decided that everyone in the company would take every other Friday off without pay. It worked very well. Employee after employee commented how much they appreciated the opportunity for continued employment, albeit at a reduced pay rate, when on all sides they saw people who were out of a job. After about six months, we were able to return to a full schedule. We helped our people and we preserved our work force, which was essential for continued development.
There are a great many other ways by which we try to take our employees' wishes into consideration. One is to pay heed to the area of the country in which an employee would like to work. This cannot always be achieved but, by and large, much can be done.
Many companies have a policy saying that once an employee leaves you, he will not be eligible for re-employment. We have had a number of people leave us because opportunities seemed greater elsewhere. We take the view that as long as they have not worked for a direct competitor, and if they have a good work record, they are welcome back. They know the company, need no retraining, and usually are much happier for having had an additional work experience. One of our senior executives falls into this category.
The examples I cite are things that employees remember. They comment that "management cares about us" and "we really like it here." This is infectious, because new employees sometimes come to us after a bad work experience elsewhere and start complaining about things at HP (there are always problems). But the veteran employees quickly explain the system, and in short order they become convinced that what we are trying to do is not just talk; it is fact.
But regardless of how hard you try, and how conscientious your people are, the message does not always get through to the rank and file. Certainly, the "open door" policy is a method of taking care of some of the most aggravated problems. It is a safety valve. What you would like, however, is a little more sensitive feedback. You simply cannot run an operation and assume that everything is perfect. There are many ways to achieve this feedback.
One we have tried, and which has been fairly successful, is a technique we call "communication luncheons." A senior executive will visit a division and ask to have lunch with a group of employees, 15 or 20 at most; no supervisors are invited. Other employees know in advance who will be attending, and very often they pass on their own questions or complaints.
The format is very simple. After light conversation to break down the barriers, usually an employee will ask a question about something in the company that he does not understand or with which he is unhappy. This provides an opportunity to discuss company policy or company problems. Sometimes these items are trivial, sometimes the "word" has not gotten down, sometimes the problems are strictly personal and must be treated with great care so as not to interfere with the supervisory process. Sometimes you detect a pattern of problems say, for example, inadequate supervisory training. Such problems can be dealt with on a broad company-wide basis. And in any event you always learn more about how the company actually operates. Equally important, employees have a chance to hear first-hand what is happening in the company and what management is trying to do.
A little over two and a half years ago, we tried a somewhat different approach to obtaining feedback on how our U.S. people felt about the company. We employed the services of the International Survey Research Corporation to:
One may ask how does all this relate to the human side of management? It relates this way: That the people at the top of an organization may have the best intention in the world of how they want the organization to be run. But there are a lot of layers between the top and the bottom and, in transmitting them from layer to layer, sometimes ideas inadvertently become distorted. It always amazes me at our communications lunches to find out how much some concepts had changed in the transmission process. Feedback such as this is necessary if you wish to determine what is really happening in the organization.
What I have been endeavoring to demonstrate is that there are many creative ways by which an organization can learn the needs of employees and thereby work with them to help them develop a better life style a happier work place, a more meaningful existence all at practically no added cost to the organization. The old traditional practices must be reexamined to see if they are still valid or necessary. Do they still serve a useful purpose? Or are they just a source of irritation to the employee?
The United States is rapidly discovering that it must be competitive in world markets, and that both cost and quality are factors. Productivity is the name of the game, and gains in productivity will come only when better understanding and better relationships exist between management and the work force.
We must find better solutions to the adversary relationships that have so long dominated the American labor scene. Management is in a position to take the lead in such a new relationship. Managers have traditionally developed the skills in finance, planning, marketing and production techniques. Too often the relations with their people have been assigned a secondary role. This is too important a subject not to receive first-line attention. In this regard we could learn much from the Japanese. We must reinvest in the human side of management.