Welcome Aboard--For NowPublished: May 24, 1999 in Knowledge@Wharton
In the 1980s Apple Computer took an unusual step that helped reinforce its image as an iconoclastic upstart. At a time when giants like IBM seemed to provide their employees a lifetime of job security in exchange for loyalty and hard work, Apple offered a rather different deal. "We're going to give you a really neat trip while you're here," the company told new hires. "We're going to teach you stuff you couldn't learn anywhere else. In return…we expect you to work like hell, buy the vision as long as you're here…We're not interested in employing you for a lifetime, but that's not the way we are thinking about this. It's a good opportunity for both of us that is probably finite."
Today, that deal may well have become a metaphor for the way employment relationships have been transformed throughout Corporate America. Peter Cappelli, director of the Center for Human Resources at Wharton, examines this phenomenon in his new book "The New Deal at Work: Managing the Market-Driven Workforce," (Harvard Business School Press, $29.95). The old system, in which employees had stable jobs and steadily increasing paychecks as they climbed the corporate ladder, is dead. In its place has arrived a new deal that is marked by the invasion of market forces within the workplace.
The new deal has changed almost every facet of employment during the past decade. Take salaries, for instance. "The compensation for a particular job is increasingly shaped by the market wage for that job outside the firm and not by how it fits into the hierarchy of an internal compensation system," Cappelli writes. Old employment ties, which shielded workers from market swings, are "giving way to a negotiated relationship where power shifts back and forth from employer to employee based on conditions in the labor market." Perhaps the most striking aspect of the new deal is its blunt assumption of transience. "If the traditional, lifetime employment relationship was like a marriage, then the new employment relationship is like a lifetime of divorces and remarriages," notes Cappelli. It consists of "a series of close relationships governed by the expectation going in that they need to be made to work and yet will inevitably not last."
Managing large organizations at a time when the old contract is breaking down and a new one is being written poses new challenges for executives. Some firms, for example, are trying to re-build long-term commitments with their employees, but with little success. Others are introducing new incentive systemsso-called golden handcuffsto prevent rivals from stealing their best talent. A major difficulty companies face, however, is that they can no longer define their own employment relationships. As Cappelli says, "Markets have a way of breaking them down, not only by pulling out key employees but by shaping the attitudes and behavior of those who remain."
Using examples from industries ranging from paper to computers, Cappelli examines how the traditional long-term employment relationship came into being and the forces that contributed to its break-up. The traditional system, it turns out, is not so old after all. Outsourcing and contingent work practices were common during the early years of industrial development in the U.S. For instance, under the putting-out system in the 19th century, work was routinely contracted out to workers who made products in their homes. The need for more stable employment relationships emerged partly in response to the growing complexity of technology, which needed massive capital investments as well as longer planning horizons. Labor shortages during the war years also contributed to the need for companies to have a stable workforce. These factors combined to create such systems as promotion ladders within companies, which allowed employees to master the skills they needed to rise to the next level.
During the 1970s and 1980s, however, several factors emerged that undermined the stability of the old system. Global competition, for one, forced U.S. companies to restructure operations in order to protect their market share from hungry rivals. In addition, the computer revolution of the 1980s allowed companies to automate systems that previously required human administrators. In a telling example of such reengineering, Cappelli describes how new management information systems in the insurance industry eliminated the need for claims representatives, investigators and adjustors.
Information technology brought about similar changes in industries from retail to health carein the process wiping out the jobs of hundreds of thousands of middle managers. "These new systems of information technology change the employment relationship in three ways," says Cappelli. "The first is simply that they make it possible to cut jobs, especially corporate jobs that had served the function of coordinating and complying with procedures. The second is that they make it possible to unbundle companies, to push more functions outside to suppliers…Third and finally, information systems make it possible to bring information about the market inside the firm so that even the most bureaucratic and firm specific areas of the company feel a connection to the market."
Is the new deal rate fair to those whom it affects? What are its implications for society as a whole? Cappelli concludes his study by examining these issues. While the traditional, long-term employment relationship worked in favor of large, integrated companies, he argues, the new deal has "the opposite effect, facilitating start-ups and companies that hire from the outside while dragging down those that try to maintain long-term relationships." Cappelli also points out that while these changes have been good for most employers, they have been bad for many employees. Still, he recommends that people take the long view. Over time, the new deal may prove as transient as the one it has supplanted. For the present, though, as Apple might say, it could offer companies "good opportunities that are probably finite."