Employers of choice and competitive advantage: the proof of the pudding is in the eating.

Lenaghan, Janet A. ; Eisner, Alan B.

ABSTRACT

Employer of Choice (EOC) status has been touted as yielding competitive advantage in securing human resources. The attainment of Employer of Choice is believed to provide an edge to the organization in the competition for the recruitment and retention of top talent. The assumption is that such a strategy will yield a competitive advantage for the employer yet this assertion has not been subjected to the rigors of academic study. This paper discusses the issues surrounding EOC as a strategy and presents, based on existing theory, empirically testable propositions.

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EMPLOYER OF CHOICE PROGRAMS

Employer of Choice (EOC) programs are designed to aid an organization in outperforming its competition in the recruitment and retention of top talent in order to secure an exceptional workforce. It is important to note that 'top' in this definition does not refer to the place in the organizational structure, rather to the best employee or the top performer of each position in the organization.

An Employer-of-Choice is basically a self-proclaimed achievement. Although in order to have credibility in the proclamation, it helps to be named by the popular press as one of the best companies to work for. According to Fortune magazine's annual list of the best companies to work for, companies on the list yield higher returns for shareholders (Shellenbarger, 1998). The rationale for the EOC strategy can be traced to the efficiency wage theory, which suggests that an employer's compensation strategy, to provide a total compensation package that exceeds the market will serve as a productivity motivator. The increased productivity results from ease in retention of top talent, improved productivity and high retention rates (Campbell, 1993; Cappelli & Chauvin, 1991; Sullivan, 1998). An employer of choice recruits and engages talent through practices that address both tangibles and intangibles, focuses on the long term as well as the short term, and are tailored to the organization (Branham, 2005, p.57)

The demand for 'top' labor is exceeding the available supply, thus creating what Clarke refers to as a "critical labor and skill shortages in virtually all industries requiring specialized core competencies within the workforce" (Clarke, 2001). The recent changes in the unemployment rate will not resolve the shortage of 'top' talent. It is not uncommon for many organizations to simultaneously reduce staff while hiring new talent, resulting in a significant human resource challenge in terms of the effect such practice has on employee morale. The Bureau of Labor Statistics projects that over the 2000-2010 period, total employment will increase by 15 percent (BLS, 2001). In fact, many organizations have incorporated recruitment and retention goals into their written strategic plan (Ahlrichs, 2000) as a defense against these environmental concerns. According to Jamrog and Stopper (2002) "the only sustainable competitive advantage in the 21st century marketplace is the quality of the organization's people." (p.7)

Organizations had to respond to an increased demand by employees for 'need satisfaction'. Employers began offering new and more tailored benefits packages. On-site child-care centers, exercise rooms and cafeteria style benefits packages surfaced as a benchmark for top benefit plans. Even concierge service and on-site dry cleaners have become a standard in many large organizations. In a poll reported in Risk Management, over one quarter of the respondents cited work-life balance as their 'number one career dilemma in the new millennium' (Sullivan, 1999, p.8). Recent evidence further suggests that 'even employees with no direct benefit may place a positive value on work-life programs ...' (Drago et al 2001, p. 36). Anderson and Pulich posit that employees want some recognition from management that family and personal time is important (2000).

Increasingly, employees are realizing that they are interviewing prospective employers as much as they are being interviewed by them--employees have a choice in where to work. Complicating the workforce dynamics even further is the difference in the attitudes, values and needs of each generation of worker (Clarke, 2001). Too many employees witnessed their parents endure lay-offs after pledging their allegiance to one employer and vowed not to suffer the same fate. However, in a study conducted in 1998 of Generation Xers steady employment was ranked high in terms of motivation, but it was not relegated to one employer, rather to continuous employment in terms of successive moves to enhance career mobility (Montana & Lenaghan, 1999). These individuals believe the adage that security comes from being "employable not being employed." In order to succeed and sustain competitive advantage, organizations must find ways to attract and retain this new workforce.

According to Ruch (2001), the real incentive to becoming an EOC lies in the demographics of the workforce. As a result of Generation Xers' traits and perceptions of work, he suggests that employers need to implement generational marketing, learning and teaching practices in the same way they do to enhance product sales. Human Resource professionals need to market the organization as a 'best employer' to candidates and potential applicants. To attract and recruit Generation Xers, "businesses must apply brand-management and marketing thinking to the employment experience by understanding, managing and valuing young employees with the same care used in consumer marketing practices" (Ruch, 2001).

MULTINATIONALS

It is important to mention that this is not only a domestic challenge or purely a concern only in the United States. It is estimated that the largest United States organizations will have more employees working outside the US than inside in the near future (SHRM, 1999). According to SHRM, "Ford and IBM employ 54 percent and 51 percent of their workers outside the United States respectively while one-fifth to one-third of employees at AT&T, General Electric, PepsiCo and General Motors work outside US borders." Even the not so large US organizations are following suit. Similarly, foreign world leaders have also expanded and dispersed their workforce to many countries. For example, Nestle has 97% of its workforce located outside of Switzerland and Philips has over 80% of its workforce located outside of the Netherlands. As a result, the competition for top talent is even fiercer as it is no longer restricted to geographically local competitors but is now global. Through 'Electronic Immigration', organizations can employ people from virtually any country thus creating a truly global market of the best and the brightest workers.

WHERE IS THE ADVANTAGE?

So the question becomes, is the strategy to become an employer-of-choice truly yielding a competitive advantage? The answer lies in the synthesis of resource based strategy, institutional theory and human resource theory. Traditional theory asserts that a firm obtains a competitive advantage by identifying internal strengths and weaknesses while responding to environmental opportunities. Porter (1985) asserts that effective human resource management policies and practices can supply a significant contribution to the firm's competitive advantage because they provide the mechanisms to recruit and retain top talent. The latter is significant, as it is the reduction of turnover that has been posited as an important benefit enjoyed by EOCs.

Resource Perspective

Since human resources represent the knowledge, skills, abilities and competencies of the employees, this mosaic of talent becomes what Barney (1991) describes as a resource that is relatively rare and difficult to imitate. Wright and McMahan (1992) support the resource perspective but stipulate the existence of four requirements: individual performance must matter; the employee skills must be rare; the combined human capital cannot be readily duplicated, human resources cannot be vulnerable to substitutions--technological or otherwise. A firm's human resources can be used as predictors of firm performance (Hitt & Ireland 1986 and Barney 1991). Organizations that possess a resource that others are not able to easily duplicate are known as benefiting from a sustained competitive advantage. Thus, we argue that one of the underpinnings of Employer-of-Choice strategy lies in resource-based strategy. As Koch and McGrath suggest, "the way in which an organization's human resources are managed has a perceptible and significant relationship to the productivity of its employees" (1996, pg. 352). One can look at Southwest Airlines, a leader on Fortune magazine's list of the best companies to work for and realize that their business model is simple--Tom Peters characterized it "as one that any three year old can understand" (Myerson 1997, p. 38)--and yet others have failed to imitate it (O'Reilly & Pfeffer 2000) due to the competitive advantage it has in its human resources.

Positive reputations can be a source of competitive advantage. When firms market their EOC status they attempt to enhance their firm's reputation as one that values its employees. A very recent series of commercials promoting Continental Airlines demonstrates that one of their main marketing goals is to enhance the Airlines' employment brand by communicating its achievement in being named to Fortune's list of Top Companies to work for. It seems Continental's strategic architecture highlights that EOC status is a core competence and as such will provide a sustained competitive advantage. If you view the organization as a 'portfolio of skills', the rationale for Continental's strategy becomes intuitive (Prahalad & Hamel, 1990). Indeed human capital is a significant competitive resource (Lawson & Hepp 2001). Thereby, one could argue that the EOC strategy is based, in part, on the resource perspective, in which the competitiveness of the firm is believed to be related to investments in firm-specific assets. Clearly, a firm's ability to attract and retain human capital is paramount to any organizational success.

Human Resources

Based on the above, it would seem that those organizations with EOC status should have a competitive advantage. In fact, those organizations that are proactive and recognize the importance of securing labor will experience higher productivity (Koch & McGrath, 1996). The 'potential gains' for organizations lie in the effective utilization of strategic human resource management and that investments in human resources are a potential source of competitive advantage. (Huselid et al 1997). However, the literature does not specify which resources are most useful. Champion-Hughes (2001) suggests that, as a result of the great effort needed to confront the challenge of daily work-family conflict, employee efficiency and productivity will suffer. By helping employees balance work and family responsibilities, organizations will turn the employee into a valuable organizational citizen, whose behavior will influence profitability and customer satisfaction (Koys, 2001). As Rayman (2001) points out, even top management executives are realizing in the words of Randall Tobias, the former Chairmen of Eli Lilly, that employees "bring their hearts as well as their minds to work". In fact, Susan Lambert (2000) developed a model to measure workers' assessments of the usefulness of work life benefits and the measures of organizational citizenship and concluded that a positive relationship exists between these variables. Further research has supported the notion that employees' perceptions regarding work-life issues is that the supervisory support of their family/personal needs is as, or even more important than, the actual work-life program itself (Families & Work Institute, 1997, Ford Foundation, 1997 and Hochschild, 1997). The 1997 National Study of the Changing Workforce (Bond et al, 1998) found that employees will experience higher levels of satisfaction and loyalty, as well as improved well-being in supportive organizations.

Studies have shown that work-life policies do positively affect firm performance but they have been examined through the use of bundles (Perry-Smith & Blum, 2000) or a grouping such as high performance work practices (Huselid, 1995) or progressive human resource management practices (Delaney & Huselid, 1996) or in public-sector employers (Kim & Campagna, 1981). Yet, there is some evidence to suggest that perhaps the beneficial effects on "employee satisfaction with work-family balance and job satisfaction vary widely across different groups of employees" (Saltzstein, et al, 2001). It is noteworthy to mention that a recent empirical study attempted to assess individual work-life programs and their impact on profitability and concluded that "not all programs exert the same, or even a positive impact, on profits" (Meyer et al, 2001). However, a significant limitation of this study is the fact that the data was collected from Working Mother magazine's annual ranking, which does not represent diverse interests; rather it is limited to those of working mothers.

As Johnson (1993) asserts, many of the benefits of WLP are difficult constructs to quantify. One way to gather evidence, which supports the view that work-life programs have a positive impact on firm performance, is to examine organizations that have implemented such plans. Such examples include: a Xerox customer service operation site that reduced absenteeism by 30 percent as a result of allowing alternative work arrangements; a Hewlett-Packard's Financial Services Center in Colorado Springs implemented a compressed work week and improved productivity by double; Aetna reduced turnover by more than 50 percent among "high-potential professional women", who took leave for childbirth, by offering alternative work arrangements upon return to work; and lastly, First Tennessee Bank experienced a direct correlation between WLP and increased customer retention and satisfaction (Johnson, 1995 and Martinez, 1997).

Institutional Theory

The issue is whether the stated advantages of becoming an employer-of-choice are reality-based or myths. Is the concept of EOC more a norm of rationality? Institutional theory is based on the notion that formal structure is ingrained in social reality. The social reality determines elements of the formal structure such that these elements are merely manifestations of powerful institutional rules, which function as rationalized myths that are binding on organizations (Meyer & Rowan, 1977). Organizations structurally reflect or imitate socially constructed values. Perhaps this can explain the motivation of employers to enrich benefit offerings that are required for EOC lists. In other words, conceivably the 'competitive advantage' that proponents of these benefit offerings espouse is merely isomorphism (Meyer & Rowan, 1977). In a study of government agencies, the results depicted a disregard for outcome assessments of these work-life programs. Once they were offered, little was made to ascertain the work-life programs' impact on the agencies' effectiveness (Durst, 1999).

It certainly can be argued that if an employer does not offer certain benefits, that employer would forfeit recruitment effectiveness. The 'top talent' would seek employment elsewhere. However, not all benefits can have the same value-added to the employment relationship. In other words, the enhancement of benefits could be a result of mimetic isomorphism (DiMaggio & Powell, 1983). Employers may be simply responding, in an effort to maintain legitimacy, by offering benefits. They can be part and parcel of the formalized structure, which could lead employees to take them for granted in contemporary organizations (Fogarty & Dirsmith, 2001). If the organization just offers the benefits to increase its reputation as an EOC, then the value to employees is questionable. For example, research has found that often men and non-professionals cannot take advantage of work-life programs for fear of job ramifications (Konrad & Mangel, 2001). Therefore, the mere existence of these enriched plans would not result in a competitive advantage. As Fogarty and Dirsmith (2001) suggested employees will take the benefits for granted because they are an expected part of the compensation structure in contemporary organizations. The problem facing an employer may be a loss of labor competitiveness, but just providing a solution may not be the best strategy. For example, if the decision to add domestic partners as allowable dependents is made by only those who have a vested interest in that particular addition, the organization may not be utilizing scarce resources as efficiently, nor effectively, as possible.

PROPOSITIONS

An interesting aspect of the EOC strategy is the notion that to some extent employees expect certain benefits and as such their presence in the benefits package does not serve as a motivator to recruit or retain an exceptional workforce. It is conceivable that as a result of coercive isomorphism, certain benefits are not only expected, but also demanded by workers as part of their notion of base salary, such that they no longer serve as motivators for attracting and retaining top talent. Thus, employees would identify some core benefits associated with an EOC program as obvious to a basic compensation package and, therefore, it is only the absence of such benefits that would incite any behavior--and negative behavior at that.

Proposition 1: The absence of an EOC benefits program will be negatively associated with an individual's desire to become employed or remain employed by a specific employer.

Based on the widely accepted belief that Employer-of-Choice status yields higher qualified applicants and the assumption that if an organization invests in an EOC strategy that employer emphasizes strategic human resource management and as a result, will receive positive gains, organizations that achieve Employer-of-Choice status should receive greater numbers of applications per job opening (Huselid et al 1997). Moreover, if EOC is truly a strategy which will yield a competitive advantage through positive reputation (Barney, 1991), then future employees should recognize and express desire to work for such organizations.

Proposition 2: An EOC program ranking will be positively associated with the number of applicants per job opening versus non-EOC competitors controlling for recruitment expenditures.

Proposition 3: EOC program ranking will be positively associated to applicant recognition.

Proposition 4: EOC program ranking will be positively associated to applicant motivation to apply for a position at that organization.

Porter (1985) asserts that effective human resource management policies and practices can supply a significant contribution to the firm's competitive advantage because they provide the mechanisms to recruit and retain top talent. The assumption is that Employers of Choice offer exceptional benefits and as posited by the efficiency wage theory, will enjoy increased productivity as a result of recruiting the 'top' talent as well as lower turnover rates, since the existence of a higher compensation package will motivate employees to remain at the firm (Campbell, 1993, Cappelli and Chauvin, 1991). Moreover, since it has been shown that perceptions of organizational culture influence turnover (Sheridan, 1992), as well as employees' financial and psychological interests (Shaw et al, 1998), organizations that have achieved EOC recognition should benefit from lower turnover than that of their competitors.

Proposition 5: EOC program ranking will be negatively associated with the turnover rate.

Proposition 6: EOC program ranked competitors will have lower turnover rates than competitors without EOC programs.

It can be argued that the mere possession of top talent by an organization results in higher profitability. Therefore, organizations employing a strategy to achieving a ranked EOC program should be more profitable than other competitors in their industry. Moreover, there is evidence that supports a strong link between a decrease in employee turnover and an increase in sales, market value and profitability (Huselid, 1995). Therefore, assuming propositions 4 and 5 hold true, then an obvious extension is that EOCs will be more profitable.

Proposition 7: EOC program ranking will be positively associated with profitability.

CONCLUSION

This area of research is ripe with opportunities to decipher the concept of employer-of-choice as a strategy for increasing competitive advantage. Organizations are facing a deficit in the supply of top talent and most assuredly will need to develop strategies to overcome the challenge. Workforce demographics indicate that the labor pool for top talent will decrease in the next decade, while demand for professional occupations will increase the fastest of all occupations studied by the Bureau of Labor Statistics (BLS, 2001). Moreover, this is a global concern and competition for labor will intensify as more organizations join this global labor market via mechanisms like electronic immigration. Clearly, the notion of an EOC is one such strategy designed to address this organizational concern and many organizations have embraced it. However, it requires considerable resources, both in terms of financial investments and labor hours. In fact, "extensive employer-of-choice initiatives can involve the art and reach of a $50 million advertising campaign" (Walsh, 2001)

While the popular press has made significant claims to its advantages--they are only assumptions. It is imperative that these supposed competitive advantages be subjected to the rigor of academic research. Implications for organizations are considerable, as any mechanism to alter an organization's competitive advantage relies on significant allocation of resources. If done in ignorance or with untested assumptions, organizations may find themselves to have embarked on a strategy that may ultimately lead them to negative results in terms of position and performance. Like an oil tanker that takes miles to stop or change course, reversal for organizations engaged in these expensive yet unproven EOC programs may be too late.

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Janet A. Lenaghan, Hofstra University

Alan B. Eisner, Pace University