The Economics of Human Resources Management: Hiring, Firing, and Reward Systems

The Changing Emphasis of HR Decisions

Despite the widespread impression that Human Resources is distinct from the other profit generating and economic functions such as Production, Sales, Marketing, and Core Competency driven work, the HR function is indeed driven as much by concerns over hiring and retaining the best talent as well as empowering and engaging them as it is by cost concerns as well as profitability imperatives.

Indeed, one can go as far as to say that the HR function is increasingly becoming profit driven and cost conscious considering the heavy emphasis on cost cutting and increasing profits in recent times.

Further, most firms now have the HR departments as cost centers meaning that they have to account for the expenses incurred and corresponding and concomitant profits generated in the same manner in which other functions operate.

Moreover, with the emergence of the Digital Economy, the HR function too is redefining itself regarding functioning from economic incentives and profit-driven concerns.

The Economics of HR Decisions

Thus, this means that the hiring, firing, retrenchment, downsizing, employment, and reward and recognition processes are increasingly based on cost calculations and profitability concerns in addition to the traditional drivers such as hiring the best talent, retaining the performing employees, and firing the laggards.

Indeed, even the reward and recognition systems are now based on purely cost and profitability concerns, given the scarce resources that many firms have in the context of the current economic climate.

Thus, HR managers can no longer argue with the line managers and executive personnel about people driven decisions, and instead, they too must fall in line with the cost concerns and profitability driven imperatives. This means that hiring is based on how much the employee cost the respective unit and firing and retrenchment are based on how much costs can be saved.

Whom to Hire is now based on Cost and Profitability Concerns

For instance, many multinational corporations how have individual units as cost centers where the line managers and the unit heads prepare budgets for hiring decisions which are the communicated to the HR managers.

After this, the HR managers in consultation with the line managers and the unit heads draw up a budget and a plan wherein the costs of hiring are apportioned to the HR and the respective units, and the compensation and perks costs are based on how much the units can afford.

Thus, hiring is no longer an isolated or distinct activity and instead, is a holistic and systems driven approach that involve multiple levels of consultation and coordination between the HR department and the line and unit managers.

Indeed, hiring in most firms nowadays is done by first estimating the costs of the recruitment process which is in turn driven by which hiring method is the most cost-effective. Once the initial screening and sifting through the resumes is completed, the hiring process then moves on to the next stage where close coordination and consultation between the units and the HR department based on how much the potential recruit expects and how much the firms or the unit managers are willing to pay.

Poor and High Salary Employees Take Note

Similarly, retrenchment and firing now entails cost calculations wherein the unit managers and the HR managers meet to decide on whom to retrench based on which quartile or the percentile of the Bell Curve the employee belongs to and how much costs can be saved by retrenching the employee as opposed to how much costs are incurred if the employee has to be retained.

Indeed, most firms in the aftermath of the Global Economic Crisis of 2008 and the ensuing economic downturn are basing their retrenchment decisions solely on cost concerns which means that employees are no longer fired based on the percentiles they belong to and instead, the employees whose performance is bad and who cost more compared to other low performers are fired.

Thus, economics trumps other concerns meaning that employees who fare poorly and who also take up resources are more likely to be fired than just employees who are at the bottom of the performance quartile. Indeed, this trend can be described as the emerging model of Human Resources with its emphasis on cost-driven and profitability drivers of decision making.

High Performers and Economics of Reward and Recognition Systems

Apart from this, the reward and recognition systems too are being driven by cost concerns which means that at the end of the appraisal cycle, the unit managers and the HR managers sit together to finalize the bonuses and the pay hikes based both on the Bell Curve as well as the costs and economics of giving bonuses based on performance and the budgets available.

Thus, this means that once the total budget is finalized, the unit managers divide it into individual bonuses wherein the top performers are rewarded based both on the percentile they belong to as well as how much the other top performers earn in relation to each other.

Indeed, the performance bonuses are now determined based on how “valuable” the employee is to the firm and how much losses the firms would have to absorb if the employee leaves in contrast to how much the firms would gain if the employee is rewarded and stays on to scale greater heights.

Conclusion: Economics Trumps Everything Else

Thus, it would be fair to say that most HR decisions now are based on economic considerations alone and this is something that potential and current employees in any organization have to be cognizant of if they want to decide on their employment options.

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Economics of Human Resources