Quality in Human Resources
How to integrate Quality thinking into a business’s human resources department through better hiring practices, incentive alignment, and strategic employee development initiatives.
Thoughts on Quality
This series will consist of practical applications of Quality, as defined in Thoughts on Quality. Each article will begin with this brief summary to calibrate the reader’s understanding of the term. If the reader feels sufficiently calibrated, they should feel free to skip to the next section. In that work, a definition of Quality is arrived at that is both distinct from current industry thinking and from how the term has been defined by the quality gurus of the past. This definition is:
Quality /kwŏl′ĭ-tē/ noun
Profit measured over an eternal time horizon and considering all externalities.
The maximization of human prosperity.
For those mathematically inclined, this basic formula can be extrapolated to help conceptualize it:
Graphically, this makes Quality the area under the profit curve. Read Quality is Integral to Profit for a more comprehensive breakdown, including how to consider externalities and opportunity costs.
Thoughts on Human Resources
The function of a human resources department is commonly mistaken as a resource for a business’s employees, or in other words, a form of indirect compensation. This misconception is shared by employees and human resource professionals alike, but it is rarely shared by business leaders, and it conflicts with the reality experienced by all involved, which is that all human resource departments are answerable to the leadership team and the interests of the business. In the event of a conflict with business interests, human resource departments are not on the employee’s side. This is not a bad thing; it is simply reality, but the misconception is inefficient, so the first order of business for integrating Quality into human resources is to set the record straight. In a Quality business, all functions are oriented towards the same goal: creating long-term, sustainable profitability for the business.
Another way to frame this goal is that all functions have responsibility, in some capacity, for capital creation. Capital is ultimately accumulated (i.e., generated and maintained) through Quality actions. A human resources department is responsible for the creation, maintenance, and improvement of human capital. Human capital can be measured in six (6) dimensions: trust (integrity/competence), health, skills, knowledge, personality, and relationships1. The improvement of human capital is beneficial to both the business and the employee. A business’s capacity to improve human capital through its development initiatives can be considered a form of indirect compensation, but a human resources department should be solely focused on how this improvement can be utilized to create long-term, sustainable profitability for the business.
Merit-Based Hiring
A business cannot expect Quality outcomes without Quality people. A Quality person is not a “good” person but should be understood as someone who is capable and willing to prioritize long-term, sustainable profitability of the business, someone that considers the maximization of human prosperity a valuable goal and is capable of improving it through innovation and productive action. A Quality person necessarily is someone who is capable of delaying gratification. To identify and hire Quality people, a business must ensure that its hiring practices are merit-based.
Business leaders typically rely on surrogates for merit, such as a college degree, industry experience, certifications, or any other type of credential. Credentials are low-resolution attempts at assessing an individual’s likelihood of succeeding in a job. These surrogates have historically acted as filters that facilitate the candidate selection process, but in a macroenvironment that has deviated from meritocracy, they are becoming increasingly unreliable. Merit-based hiring practices require that a business moves past the expedience and simplicity of credentialism. If it is not possible to have candidates demonstrate skills or knowledge through a project or test, credentials are a decent way of assessing if a candidate has the requisite skills or knowledge for the job, but if a business is interested in developing a Quality culture, they need to focus on hiring Quality people. Skills and knowledge are only part of that equation. The best practice for ensuring this is to avoid surrogates and evaluate the individual’s merit directly. Merit, in this context, can be qualified in three ways: general cognitive ability (IQ), personality, and economic literacy.
General Cognitive Ability (IQ): General cognitive ability, or IQ, is the single greatest indicator of performance in jobs that require knowledge work2. This is not true for all types of work. For example, it does not necessarily predict success in assembly jobs, or jobs that can be mastered and then done automatically. Increasingly, employers are expecting employees to perform some kind of knowledge work, regardless of their main job function. For example, assembly jobs often come with the expectation that employees assist with the development of process improvements. Evaluating candidate’s IQ can provide some indication of their capability to add such value.
By itself, IQ does not necessarily indicate that a person would contribute to a Quality culture. In fact, high-IQ people may be incredibly effective at pursuing short-term goals, to the detriment of the long-term profitability of the business. Cognitive ability is an incredibly important trait to hire for, but in isolation, it can often prove to be a destructive force to a Quality culture.
Personality: The Big Five personality traits, also known as the Five-Factor Model (FFM), are a widely accepted framework for understanding human personality. All humans have a combination of five (5) traits: Agreeableness, Conscientiousness, Extraversion, Neuroticism, and Openness. These traits are scored on a broad spectrum and follow a normal distribution, where most people are in the middle with decreasing numbers as the extremes are approached on either side. All the traits have strengths and weaknesses, and it is not clear what combination of personality traits make up a “good” person and what combination of personalities make up a “good” business culture. In that regard, diversity should likely be sought out. With regards to Quality, however, there are two traits that are worth evaluating: Conscientiousness and Neuroticism.
Conscientiousness – Trait Conscientiousness is the second most statistically relevant indicator of job performance3. It is much less of an indicator than IQ but significant enough to consider. In essence, this trait is a measure of person’s ability to delay gratification. It is the Quality personality trait. Without a personality that is high in Conscientiousness, a person with high IQ will likely utilize their cognitive ability to pursue short-term goals. If a business desires a Quality culture and Quality results, it should be screening for a combination of the two. Important to note, the Conscientiousness predictor only works in societies that reward merit, and this is true for businesses as well, which is why it is equally important to appropriately align incentives for employees once they are hired.
Neuroticism – On the other side of the equation, trait Neuroticism has been shown to be negatively correlated to job performance4. This correlation is statistically less relevant than the positive correlation to trait Contentiousness and substantially less of an indicator than IQ, but as the only contra-indication, it is worth considering. An employee that scores too high in trait Neuroticism is unlikely to be able to handle the stress associated with short-term negative results that are often necessary to achieve long-term profitability.
Economic Literacy: The profit motive is pro-humanity. Achieving long-term, sustainable profitability (i.e., Quality) should be the singular aim of a business. The maximization of profit, provided it is measured appropriately, should be understood as a positive thing by a business’s employees. An understanding of this economic reality and an integration with one’s moral framework is a necessity to maximize productivity. A business wouldn’t staff itself with engineers that don’t fundamentally believe in calculus but begrudgingly operate within its framework when it benefits them. It shouldn’t do the same for economics. If a prospective employee doesn’t believe that the profit motive is pro-humanity, they are not likely to contribute to the business’s desired Quality culture. A high-IQ, highly contentious, minimally neurotic person that is not oriented correctly may simply be really competent at undermining a business’s mission.
Alignment of Incentives
The single greatest incentive a business can create for its employees is the maximization of compensation. The highest paying businesses attract the candidates with the most merit. To be in a position to maximize compensation, a business must maximize its long-term profitability (i.e., Quality). In addition to putting themselves in the most competitive position, a business must also put a focus on maximizing each employee’s individual productivity. The improvement in the productivity of labor is what originally incentivized subsistence farmers to leave their land and flock to the factories during the industrial era. Increasingly, tools for improving individual productivity are being made more accessible, and the barrier to entry to labor for oneself is shrinking. It is unlikely that labor will return to subsistence farming (although not unheard of), but the incentive to sell one’s labor to a business is shrinking. Ensuring that employees are maximizing the productivity of their labor is the only way to continue to incentivize them to add their creative energy to a business and not to labor for themselves.
To maximize compensation, a business must also reduce indirect compensation that is not correlated to the long-term interests of the business. Employee overhead, made up mostly of generalized benefits packages, can exceed 30% of the employee compensation. These benefit’s packages are low resolution forms of compensation and are intended to be a lowest common denominator solution for the collective employee base. As an example, a 22-year-old college graduate simply does not need the same health insurance plan as a 65-year-old approaching retirement. A business cannot maximize compensation for its employees if it is paying for benefits (healthcare, life insurance, etc.) for employees that do not want them or would have chosen to spend their money differently.
Being known as a business that maximizes compensation, and the productivity of their employee’s labor is paramount in attracting Quality people, but one particular form of compensation excels at aligning long-term incentives for employees. All businesses are subject to private expropriation risks (i.e., internal parties putting their interest over the interests of the business). This risk can be mitigated by ensuring the long-term success of the business is tied to employee compensation, and this is increasingly important as the position, or employee, becomes more critical. The best way to incentivize Quality people to stay and develop a Quality culture is to make them shareholders. A Quality compensation package will almost always include equity grants or options.
Incentive structures should be considerate of both the positive and the negative. A business must enact the proverbial “carrot and stick” approach, as they are both important for ensuring a Quality culture. Outside of compensation, the carrot is recognition and the stick is accountability.
Personality may be normally distributed, but productivity is not. It is very difficult to evaluate someone’s productivity potential prior to hiring them (outside of low-resolution methods like past job performance and references), but very easy once they are employees. Businesses that measure productivity will find that a small minority of employees at the top of the distribution are responsible for a substantial portion of the results. It is often thought to follow the Pareto principle, where approximately the top 20% of employees are responsible for around 80% of the results, or Price’s Law, where half the total output in a domain is produced by the square root of the total number of contributors5.
Recognition (and corresponding compensation) should be cognizant of this fact, as should accountability. Ideally, the top employees are consistently rewarded, and the bottom are held accountable for poor performance. A business should be actively cycling out low performing employees and attempting to replace them with employees capable of landing in the top quintile for productivity. Yes, this means firing people and the quicker the better. Accountability regarding integrity is always assumed to be a given, but accountability regarding competence is a necessary component in creating a culture of trust, which is one of the six dimensions of human capital.
Outside of compensation, recognition, and accountability, there are two other ways to incentive employees: status and development. A business can provide its employees with status through exceptionalism. An exceptional business is one that is maximizing long-term, sustainable profitability through innovation and productivity. In other words, a business can attract Quality people by being a Quality business. The development incentive, however, is more of a nuanced situation. As stated previously, development can be a form of indirect compensation, but it must be aligned with the business’s long-term interests to be considered Quality.
Quality Development
The maximization of the productivity of labor is a requirement to properly incentivize an employee to continue to provide their labor, or creative energy, to a business. This can be accomplished through ensuring all employees consistently have opportunities to operate in the Zone of Proximal Development (ZPD)6. The ZPD refers to the range of tasks that an employee can perform with guidance or collaboration from a more knowledgeable person but cannot yet accomplish independently. The ZPD lies between what an employee can do on their own and what they cannot do, even with help. In essence, it is the “sweet spot” where learning is most effective. Tasks should be challenging enough to stretch the employee’s abilities, but not so difficult that it leads to frustration of failure. The role of the business is to help them bridge this gap and eventually master the task independently.
Related to the ZPD, it has also been shown that cognitive ability, or IQ, can be meaningfully decreased by decreasing the cognitive complexity of a person’s environment7. Obviously, if IQ is an important qualification for merit-based hiring, it is certainly important enough to ensure it is maintained. Psychologically, humans need to feel like they are being challenged and that they are progressing or moving forward. Providing opportunities for employees to be in the ZPD will ensure Quality employees continue to be engaged and are maximally productive.
On the topic of progression or upward mobility, it is important that employees see a place for them to grow into. Something is lost as businesses strive toward flat organizational structures. A healthy hierarchy is one of the most efficient organizational structures for a business, but it can easily be corrupted by anti-meritocratic hiring practices and a lack of accountability. Not only are hierarchies efficient, but a meritocratic hierarchy is an important psychological and social framework to ensure Quality people have sufficient vision to upward mobility.
Indirect compensation programs are typically low-resolution and simply reduce the maximum amount of compensation possible, but they can be Quality tools if properly oriented to the long-term interests of the business. With that in mind, exercise, nutrition, and sleep are the three best ways to improve and maintain cognitive ability. It has been shown that IQ can be measurably decreased by starving someone8 and that the best thing for maintaining brain health is exercise9. To the extent that benefits packages exist, they should be tailored to incentivizing employees to engage in wellness programs that ensure they are routinely exercising, getting proper nutrition, and sleeping adequate hours. Businesses can also address this by providing opportunities for these things at the office or during work hours. If a business is serious about Quality results and the improvement of human capital, these programs should not just be encouraged but even considered as part of the employee’s job responsibilities.
Sustainable, long-term profitability (i.e., Quality) is dependent on the accumulation of human capital and the function of a human resources department is the creation, maintenance, and improvement of this human capital. Merit-based hiring practices are key to starting a business off with a strong foundation for a Quality culture, but Quality people will be lost (or degraded) without proper alignment of incentives and development initiatives. Ultimately, it is human nature to prioritize immediate gratification. If a business desires Quality results, they must recognize this reality and put in place programs and processes designed to combat it.
Tupy, Marian L., and Gale L. Pooley. 2022. Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet. Cato Institute.
Higgins DM, Peterson JB, Pihl RO, Lee AGM. “Prefrontal cognitive ability, intelligence, Big Five personality, and the prediction of advanced academic and workplace performance.” Journal of Personality and Social Psychology. 2007 Aug;93(2):298-319.
Ibid.
Barrick MR, Mount MK. “The Big Five Personality Dimensions and Job Performance: A Meta-Analysis.” Personnel Psychology. 1991 Mar; 44(1):1-26.
O’Boyle Jr E, Aguinis H. “The Best and the Rest: Revisiting the Norm of Normality of Individual Performance.” Personnel Psychology. Dec 2011; 64(4):827-858.
Vygotsky, Lev S. Mind in Society: The Development of Higher Psychological Processes. Edited by Michael Cole, Vera John-Steiner, Sylvia Scribner, and Ellen Souberman. Cambridge, MA: Harvard University Press, 1978.
Bratsberg, B., Rogeberg, O. “Flynn effect and its reversal are both environmentally caused.” Proceedings of the National Academy of Sciences. Jun 2018; 115(26):6674–6678.
Huang, N.-F., Lin, Y.-T., Chen, H.-M., Chiu, Y.-W., & Chen, C.-Y. “Nutritional status and cognitive function in community-living older adults: The Yilan Study, Taiwan.” The American Journal of Clinical Nutrition. Dec 2016; 104(6):1634–1641.
Erickson, K. I., Voss, M. W., Prakash, R. S., Basak, C., Szabo, A., Chaddock, L., Kim, J. S., Heo, S., Alves, H., White, S. M., Wojcicki, T. R., Mailey, E., Vieira, V. J., Martin, S. A., Pence, B. D., Woods, J. A., McAuley, E., & Kramer, A. F. “Exercise training increases size of hippocampus and improves memory”. Proceedings of the National Academy of Sciences of the United States of America. Feb 2011; 108(7):3017–3022.
Good luck getting HR to do merit-based hiring, they don't even do merit-based hiring within HR.