Human Resources Management

Group 8

14 – 10 – 2013

Case Study

10

/14

/20

13

1

What is the cause of the problems described in the case? How serious are these

problems?

In 1989 Nordstrom faced various employee grievances, union allegations and class

action suits challenging the legality of the company´s labor practices. Nordstrom was blamed for

not paying the full amount of hours an employee worked for the company. The cause of the

problems lies in the Sales per Hour (SPH) compensation system which Nordstrom applied to

calculate the salary of its sales clerks. This system measures the performance of a sales person

as follows: weekly sales divided by hours worked. Every employee has a fixed SPH target which

he/she needs to meet. Depending on whether an employee is below or above target he/she will

be indirectly punished or rewarded. Several problems can be detected when evaluating

employees´ performance solely based on the SPH ratio.

First, the success and competitive edge of Nordstrom is based on its superior customer

service. This service includes writing thank you notes to customers or retrieving desired items

from other departments. The main problem resulting from the SPH measurement is that hours

spent to maintain this service is not part of salespeople´s evaluation. In addition, the SPH ratio

discourages spending time on delivering customer service because every hour spent on that

means losing time to achieve sales. For example, a sales clerk who is very concerned with serving

a customer and thus helps to retain customers will come off badly in term of his SPH ratio

compared to a colleague who is only focusing on sales and doing badly on customer service.

Therefore, the SPH measure places single edged incentives to focus on sales numbers. But the

work of a sales clerk is a multi-tasking job which is composed by achieving sales and delivering

superior customer service. In fact, Nordstrom expects his sales clerks to fulfill both tasks but

excluding the customer service from an employees´ payment forces him/her to render these

services off-time. Consequently, the SPH ratio forces employees to make time management

decisions which are usually reserved for white collar workers who earn a lot more and therefore

are expected to work some hours off the clock. Thus, Nordstrom´s management places a lot of

responsibility and pressure in combination with fierce competition on its front line employees.

Second, when dividing the weekly sales by the number of hours worked, an employee is

always worse off when working overtime because that will lower his/her SPH ratio. This forces

employees to not report the full amount of hours they have actually worked. An additional reason

for following this practice is the fact that employees who underperform will be shifted to hours of

the day when it is harder to achieve sales and even may face termination. This punishment

causes a lot of pressure and competition between employees and results in constant work off the

clock. Finally, this dilutes the company´s value of employing team players because the system

provokes selfish and even uncooperative actions as exemplified in the case.

Thirdly, it is also necessary to mention the problem of ambiguity in definition of “selling”

and “non-selling” time. The evidence of that is the memo, issued my management. If selling time

was clearly defined, it would be easier to measure.

10

/14

/20

13

2

The problems with implementation of performance evaluation mechanism were very serious and

caused damage to the company.

Everything mentioned above resulted in increasing employee dissatisfaction. Since

Nordstrom ignored single sales clerks´ complaints about the working conditions, the labor union

attended to the employees´ problems and raised public interest taken on by the press. Finally,

the company faced various union allegations, law suits and regulatory orders. This poses a

serious problem not only to Nordstrom´s financial situation but also to its reputation. The company

had a long tradition of delivering superior customer service while having “the most helpful and

cheerful” sales clerks in the industry. This image was admired and emulated by many other

companies in the industry. But knowing about the conditions of this success modifies the shining

image of Nordstrom. In the past, Nordstrom has always been a desired place to work as Patty

Bemis remembers. Facing all the allegations and law suits decreases Nordstrom´s attractiveness

as an employer. Although there were some “Nordies” who defended the company and spread

that they are happy to work for Nordstrom this might also turn out to be a problem. Having strong

supporters and accusants within the same company will separate the workforce and change the

working atmosphere for the worse.

In a nutshell, these problems are a threat to Nordstrom´s competitive advantage and

overall success. Nordstrom´s failure to address the arising issues timely and appropriately

contributed to the fact that the accusations escalated. The company should have taken the first

complaints of employees seriously instead of turning them down.

Are Nordstrom employees pressured inappropriately by the sales-per-hour system? By

management?

The sales per hour (SPH) system aims at enforcing an entrepreneurial spirit by

encouraging competition among peers, as well as allowing employees to move up the ranks for

exceptional sales results. Nordstrom believes, according to the case study, that when people

apply to jobs they want to work hard and do well. Therefore, Nordstrom wants to facilitate freedom

for their employees to work as hard as their hearts desire. Nevertheless, this philosophy creates

major drawbacks for employees at Nordstrom.

The first drawback regards the SPH system. As the name implies an employee has to be

selling for this system to apply. Working at a retail store is a lot more than selling goods to

costumers. It entails inventory, filling up racks, employee meetings, and especially for Nordstrom,

it also includes showing exceptional customer service by delivering purchases to costumers’

homes. The hours spent on other tasks than direct selling to costumers drives down SPH. As

many employees have stated in the case study, they feel pressured to go off the clock in order to

get the best shifts and to increase their chances of being promoted and, in a worst case scenario,

to keep their jobs. Even if an employee is a so-called “All-Star” by receiving exceptional customer

feedback it is not enough to satisfy the SPH system. Without evaluating every aspect of an

10

/14

/20

13

3

employee’s skills and attributions she/he makes at Nordstrom, we believe this system is too

narrow and doesn’t comply with Nordstrom’s philosophy of treating their employees as

entrepreneurs. Basing evaluations solely on sales encourages employees to work extra hours

without additional payment, which is in fact illegal according to federal laws. Therefore, it is safe

to say that this system puts an inappropriate pressure on employees.

Secondly, the way Nordstrom was decentralized at the end of the 80’s may also have

contributed to the pressure that employees face. When Nordstrom was rapidly growing, top

management gave more freedom to department stores and regional managers. To encourage

hard work from these entities bonuses were put in place to make sure budget goals were

achieved. One could argue it’s a post hoc fallacy to state that decentralization put pressure on

regional managers and department stores, which in turn put pressure on their front line employees

for certain goals to be met. But one can’t deny the fact that regional managers are also under

pressure and rely heavily on their employees to perform according to the systems that have been

put in place for that exact reason. This decentralization makes top management lose touch of

their respective stores and employees, and one way for them to keep track is mainly through

sales figures.

We want to argue that the combination of decentralization and a rather skewed

performance measurement system is what triggered the pressure on employees. It seems like

the SPH system has been too heavily relied upon to measure success of Nordstrom stores after

the decentralization, and ultimately shedding light on many of its drawbacks. This might also

explain why SPH used to be a successful system for years before the expansion of Nordstrom,

as the top-management could more easily monitor their stores and employees first hand. Also,

Nordstrom wasn’t facing the same competition until Neimen Marcus and other department stores

started following Nordstrom’s success recipe. By expanding to win back their market share,

Nordstrom’s employees’ welfare seems to have been neglected or maybe even forgotten in

process.

The problem with performance measure also lies within management segment. It can be

deduced from a case, that management clearly encourages their subordinates not to “punch the

clock”. This might be due to the managers’ evaluation being connected with the department SPH.

Hence, managers encouraged their employees to work extra hours without remuneration.

How would you change management systems at Nordstrom?

Nordstrom Management system became seen by the public as a hiring and exploiting

“monster” of the retailing market, after the first major lawsuit in 1991, by Local 1001 clerk union.

Whether these work conditions were on purpose and part of a big management plan, in order to

enforce a exploitation of employees and obtain better sales and customer service, or whether

they were simply the result of a growing decentralized management who eventually, due to the

human ambitious and competitive nature, lead to poor social and labor conditions, we cannot say.

10

/14

/20

13

4

We can however see the negative results and conclude about the necessity for change. How so?

It can be done by identifying the measures that are being taken and, also important, the agents

behind their decision and implementation. Therefore, let’s recapitulate the situation:

As previously mentioned in this case study, Nordstrom runs its retail business through a

very professional and high-qualified sales team, whose payment plan is composed of base salary

plus a sales commission. Also, the inner competitiveness and efficiency of the customer service

is incited trough a SPH performance indicator but, at the same time, in order to maintain

Nordstrom costumer service values, the clerk loses selling time. That being said, this indicator is,

despite appearing competence-stimulating, a variable which not only does not truly represents

the actual work of the clerk but also it induces fear and emotion/job instability into the workers

because it forces them to choose between two courses of actions: exert their right to report the

extra hours dedicated to customer service, but at the cost of being discriminated when it comes

to job recognition, performance evaluation and shift schedule; or ignore the extra work they have

and basically give their much off-hours time to the company, in order to keep up with their SPH

and, if possible, achieve better schedules.

Therefore, the problem is quite identifiable – we are in the presence of a performance

measure system which is to narrow (too much heavily dependent on individual performance) allied

with a decentralized management whose store performance is independent and rewarded and

recognized based solely on goal achieving.

To solve this situation, Nordstrom upper management needs to focus on two issues:

middle management orientation and reshape the performance and compensation process.

Meaning: the lack of communication between upper and middle management is a serious

negative contributor for this situation. If Nordstrom wishes to maintain an excellent customer

support policy, it cannot loose completely the control over the enforcers of such policy – middle

management. It is true that the dimension of such company demands decentralization of decision

making in order to optimize work load and, in return, increase efficiency, however, giving only

goals to middle management and total liberty to pursue them, as it has been proven, only foments

the creation of an exploitable employee environment. Therefore, the middle management

autonomy needs to be reduced. How? One possible solution would be monthly meetings with

goal stages planning. Through this measure, the company would be giving specific goals to

middle management to achieve as well giving itself a more controlled environment for

experimenting, controlling and/or correcting certain approaches/outcomes, if the middle

management doesn’t perform adequately. It should also be included a process of 180º feedback

confidential evaluation by the employees on a diverse range of matters, such as works conditions,

management expectations, overall personal-workload balance evaluation; a process of

compensation too narrow and a vicious and cynical process of performance evaluation are the

main issues when we address the employee side of the problem. This creates an environment

where the workflow transparency leads to discrimination and worse job conditions and where the

personal time sacrifices are the remaining tools for achieving their professional expectations for

better conditions and payment. All of this a product of a flawed SPH system. Therefore, one of

10

/14

/20

13

5

the most immediate responses would be to “broaden” the performance measure. We don’t have

to be radical, but changes are necessary, in order to give more importance to cooperation and to

reduce the likeness of dysfunctional behaviors. If the goals are the same, and customer support

is to be kept as the differential point in the market for Nordstrom, innovation should be applied in

some sort of information systems which employees can freely activate when necessities, such as

home deliveries or going to the nearest tailor shop, regarding the customer support, arise. Such

system would then be integrated with the SPH performance approach, who could then be much

more realistic and actually quantify the real commitment of the clerk to the organization. Another

possibility would be the creation of a “golden schedule” – certain period of hours of the clerk

schedule that is solely applied to the satisfaction of customer needs (post sales services) and/or

logistics tasks. These hours would not be considered in to the PSH system and their existence

would allow to differentiate clearly between working hours and post-sales support hours. At the

same time, commissions should see a reduction in their significance on the employee payroll and

develop more unified goals for employees to achieve. This may promote the “free-ride” situation,

but then again, if allied with a more realistic and fair PSH system, there isn’t that much less

productivity that can be admitted from an employee.