In order to understand the various problems that the
Nordstrom’s evaluation & compensation system have, it is important to
examine first the corporate philosophy and strategy. Like any functions, the
Human Resource department has its strategy derived from the overall corporate
strategy. Nordstrom decided to follow a differentiation strategy by adopting a
customer-centric approach. As a matter of fact, the company managed to clear a
competitive advantage by providing an outstanding customer service that would
sometimes go beyond the transactional operation. In the 1980’s, Nordstrom was
seen as a model in the retail industry, realizing roughly twice more sales per
square foot than the other specialty retailers ($380 vs $194).
From an internal Human Resource perspective, this strategy
was translated by the implementation of an innovative compensation system in
the mid-1960’s including a sales-per-hour scheme along with other policies to
motivate and track the overall sales force’s performance. Among the different
incentives instruments that compose this system, the most polemical is the
sale-per-hour remuneration program. I would like to briefly explain its
principles before discussing about the problems that it causes. Basically, the
scheme is quite simple. Each sales person is given a sales-per-hour (SPH)
target to meet during a week. If a sales person exceeds the target, then he or
she will be granted a commission of 6.75% based on its weekly sales.
However, the main problem of this scheme is that an employee
ranking is maintained based on the SPH. This ranking determines the chances of
promotion or allocation to better stores and profitable time-slots. Therefore,
in order to ensure a high SPH, a sales person will tend to omit some working
hours, and he or she will only record the time spent in the stores performing
selling activities. In some other cases, non-selling activities likes stock-takes,
group meetings, inventory controls, delivery of merchandise, etc., were not
considered as part of the SPH scheme by Nordstrom.
Another problem was the decentralized system of operation.
The guidelines regarding the store and staff management were quite broad and
the supervisors had a lot of freedom to interpret them. There was a lack of
control from the corporate office, and therefore some managers would use their
authority to enforce work schedules or decide which employee deserve a
In my opinion, the company’s objectives with such scheme is
twofold. The first objective is to push the sale staff to focus on the selling
activities in order for the company to keep its impressive sales per square
foot, which is an important KPI for the shareholders. The second objective is
to create a competitive environment among the employees, where only the most
dedicated and productive staff would be given incentives and compensation that
could reach up to $80,000 per year (more than 6 times the industry average!).
On the other hand, the less performing employees will be sanctioned by being provided
with less work-hours opportunities, and their contract may be terminated if
their SPH do not improve. By eliminating the non-performing elements, Nordstrom
could be ensured that only the most motivated and dedicated employees would
work for the company.
In my opinion, the rules and measures forming the SPH scheme
were quite insidious. Even if the employees were not officially told to omit
working hours, the whole system was designed to force them to work over-time.
For example, an employee must be at the total disposition of a customer even
though he or she is no longer engaged in a selling activity. This extra
activity may take a significant amount of time. However, if this time is
recorded, the SPH will mechanically decrease and so does the employee’s
As a result, I think that a high internal competitive spirit
among the employees has emerged as part of this initiative. The SPH scheme is a
kind of forced distribution system or “rank-and-yank”. In this system,
generally 3 groups are created. The best performers compose the top 20%, the
middle group 70%, and the underperformers the bottom 10%. The latter are
actually asked to leave the company if their performance do not improve. In my
opinion, this system fostered in Nordstrom an unhealthy competition, a sense of
paranoia, encouraged back-stabbing, and destroyed the employee loyalty. This
system goes actually the team-work principle that are actually praised by
Nordstrom (to be a Nordie). On top of that, some legal complaints and class
actions were engaged at the end of 1989 by former or current Nordstrom
employees to denounce the abuse committed by the company due to the design of
its SPH system.
As we have discussed in the first part of this report, it is
clear the Nordstrom’s evaluation and compensation system had major flaws since
it created a competitive environment, and did not compensate fairly all the
employees given the blur line between selling and non-selling activities.
However, some sales staff did very well under this scheme given its generous
policy that rewarded the high-performers. So why did the workers react
differently to the SPH system? This is what we are going to analyze in the
second part of this report.
2: Why did some of
current and former workers agree with Nordstrom’s compensation system while
others disagreed and subsequently took legal action? Would you like to work for
The Nordstrom’s SPH scheme was designed to create a
competitive environment among the employees. Although it had some major flaws,
employees could turn-up the system at their own advantage. In my opinion, it
all depended on the employees’ profiles, and their willingness to work hard for
the company. As a matter of fact, the firm had designed the SPH system to
attract young, college-people educated willing to pursue their career in the
retailing industry. In return, Nordstrom would provide them with relatively
high salaries in comparison with the industry and opportunities for career
development. The firm also favorized internal promotion within, and therefore
increased the level of experience of the middle management. There was also a
certain freedom given to the department managers who would work closely with
the buyers in order to get the most appropriate apparels line-up to increase
the sales and therefore the SPH.
From my perspective Nordstrom encompasses all the traits of
a typical U.S management style. It is based on individuality, competition, the
employees are engaged in political games to become recognized, the team work is
limited, and last but not least one’s self-gratification is very important.
Therefore, individuals wishing to enter such company must be aware that facing
adversity will be required to climb the corporate ladder. Although I am
actually convinced that a reasonable level of competition among employees might
be necessary to create a dynamic environment which foster creativity and
innovation, certain rules must be respected to ensure a fair-play game. If those
rules are not respected, then some employees may decide to take on legal
actions if their basic working rights have been violated. This is actually what
happened to Nordstrom in 1989. In my opinion, the root cause of the legal
disputes and class actions that were engaged at the beginning of the 1990’s was
that people got actually upset of not having their over-time hours paid. On top
of that, and as stated previously in the first part of this report, the SPH scheme
“implicitly encouraged employees to work
off the clock”. Even after some substantial changes to the system brought
by the management, the unions estimated that the burden of keeping the records
of the working hours was still under the employees’ responsibility. The
demarcation between selling and non-selling activities was still unclear and the
staff was still encouraged to not report all their working hours. Given those
elements, I personally think that the rules of the game were biased and
therefore it is natural that some employees would disagree with the
compensation system set-up by Nordstrom. The Human Resource department should
have developed a fair competition system, and also have ensured that the law of
the land was respected. As a consequence, the compensation system cannot be
sustainable on the long run, especially when a company multiply by 6 its number
of employees in less than 9 years.
I personally would not like to work for this company within
this compensation system and this for two main reasons. The first reason is
that the system is biased by design. Why shall I play a game where I know that
the rules are in the favor of the management and my career progression is determinate
by my political abilities to defeat my colleagues? The second reason is more
personal. Even though I accept a fair amount of competition, I actually favor
the team-work and the overall employees’ cohesion. I believe that much more can
be achieved by working as a team rather than alone. It also fosters a greater
sense of satisfaction when objectives are reached as a group.
In conclusion of this second part, I can say that working
for Nordstrom could be a good choice for people willing to compete and fast
track their career. However, a company cannot only rely on those employees to
run a stable business on the long term. Some people are not interested in
competition and value more the team work. Fair rules must be dictated by the
Human Resource management to compensate all the employees and it should also
refrain from creating ambiguous remuneration rules that would inevitably lead
to legal disputes or class actions.
3: What other
incentive systems do you think Nordstrom could employ? What incentive system
would you build if you were working at this company’s HR department? If possible,
consider other elements of human resource management such as recruitment,
training, and career development, etc.
Setting-up an effective reward strategy is one of the main
goal of the Human Resource department. However, this is a difficult endeavor
since it must support the company’s interests and at the same time attracts,
retains, and motivates employees. Probably, the firm should first redefine or
reinforce its organizational values and implement a tailored reward program
that meet the needs of the firm and its employees.
I think that Nordstrom should focus on revamping its direct
and indirect financial compensation system. As we have discussed in this case,
the SPH scheme is subject to design flaws due to the demarcation made between
selling and non-selling activities. Regarding the direct compensation scheme, I
think that this demarcation should be abandoned since it does not reflect the
real performance of an employee and somehow artificially inflates the overall
performance of the company. I would therefore suggest the company to ease the
completion among the employees and implement a compensation program that is split
between individual and companywide incentive. The individual incentive portion
will account for 60% of the total reward and it will be based on attainable
sales target defined conjointly between the employee and his manager. The
remaining 40% will be calculated based upon the overall firm’s profitability.
Profit-sharing will tackle the problem of exacerbated competition among the
employees since all the work force will be dedicated in achieving a single
goal. Moreover, this initiative can be used to promote recruiting and retain
From an indirect perspective, tangible prizes can be awarded
to individual employees or to an entire team in the event that the company
decide to promote the collaborative work. Those prizes can take the form of
free movie tickets, gift cards, or extra annual leaves.
I also strongly believe that monetary rewards are not the
only solution to motivate employees to do their best. Employees will be
generally feel more motivated if long-term development schemes are implemented.
Training opportunities are a good example of perk that can be granted to
employees. For example, sales person can be awarded a special seminar on
innovative selling techniques. However, many companies are somewhat reluctant
to train their employees. There is a famous quote that describes perfectly this
situation: “CFO: What happens if we train
them and they leave? CEO: What happens if we don’t and they stay?”1 This is a dilemma that the Human Resource department should take on and answer
based on the overall company’s strategy. However, if I were part of the HR
department, I would push to promote the employee lifelong learning and
development to improve productivity and loyalty simply because a satisfied
employee is more likely to be more productive than a dissatisfied one.
In order to attract new talents, it is certain that
Nordstrom can count on its brand image. However, the Human Resource department
can also engage its current employees in the recruitment process. I believe
that an effective way to do so is to implement an employee referrals system. It
is actually one of the best method for recruiting high performing employees. As
a matter of fact, current employees would recommend only people (such as close
friends) that they think they could fit in the company and the corporate
culture. In case of successful referrals, both employees can be given a bonus.
It is also a god way to reduce the employees’ turnover rate because new joiners’
integration time is shortened thanks to the existing cultural fit.
In conclusion of this third part, I would recommend
Nordstrom to implement some changes in its current compensation and incentive
system. My main point would be to create a collaborative workplace that values
the team work spirit. Non-monetary perks can be also granted in recognition of
particular group achievements. I would also encourage the current employees to
refer their family or friends since this system offers a high probability of
cultural fit, and therefore increased the staff productivity.