Espacios. Vol. 34 (8) 2013. Pág. 1

The relation between shareholder value orientation and human resources management in Brazilian settings

La relación entre la orientación al valor de las acciones y la gestión de los recursos humanos en contextos brasileños

Roberto MARX 1 y João Paulo Reis Faleiros SOARES 2

Recibido: 10-05-2013 - Aprobado: 23-08-2013


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This article attempts to expand knowledge about the influence of an effort on generating shareholder value on human resource management practices, especially in the production environment. Initially, the paper reviews the origins and the bases of the financialization and shareholder value concepts, where the main focus is on an effort to increase the share prices. Next the interface of these concepts, with human resource management practices is analyzed, exploring their two-way nature since the human resources function is influenced by company guidelines, but is also known as one of the main ways to help disseminate them in keeping with its role as change agent. In this sense, three main elements that comprise this interface are explored more deeply: variable compensation, performance management and work autonomy. Finally, a multiple case study is presented, which attempts to verify how the financial concept of a company has in fact influenced these practices with respect to personnel management at the production level of organizations in Brazil, as well as how much they have contributed to the diffusion of generating shareholder value. The results of this study indicate that on the conceptual plane the influence of the orientation toward generating shareholder value on personnel management practices is clear, but that in practice, it is still not in place, despite the changes moving in that direction.
Key words: shareholder value, human resources management, work performance.

Este artículo trata de ampliar los conocimientos sobre la influencia de un esfuerzo en la generación de valor para los accionistas en las prácticas de gestión de recursos humanos, especialmente en el entorno de producción. Inicialmente, el trabajo revisa los orígenes y las bases de la financiarización y conceptos de valor para el accionista, en los que la atención se centra en un esfuerzo para aumentar los precios de las acciones. A continuación se analiza la interfaz de estos conceptos, con las prácticas de gestión de recursos humanos, explorando su naturaleza bidireccional ya que la función de recursos humanos se ve influida por las directrices de la empresa, sino que también es conocida como una de las principales maneras de ayudar a difundirlos en consonancia con su papel como agente de cambio. En este sentido, hay tres elementos principales que forman parte de esta interfaz se exploran más a fondo: la retribución variable, gestión del rendimiento y autonomía en el trabajo. Finalmente, un estudio de casos múltiples se presenta, que intenta comprobar cómo el concepto financiero de una empresa, de hecho, la influencia estas prácticas con respecto a la gestión de personal en el nivel de producción de las organizaciones en Brasil, así como lo mucho que han contribuido a la difusión de la generación de valor para los accionistas. Los resultados de este estudio indican que en el plano conceptual, la influencia de la orientación hacia la generación de valor para los accionistas en las prácticas de gestión de personal es evidente, pero que en la práctica, todavía no está en su lugar, a pesar de los cambios que se mueven en esa dirección.
Palabras clave: valor para los accionistas, gestión de los recursos humanos, rendimiento laboral.

1. Introduction

This study attempts to understand the influence of the logic of generating shareholder value on people management practices, focusing on understanding this phenomenon at the production level.

The logic of generating shareholder value has been gaining strength over recent decades due to several factors - the major one is the concentration of shares in the hands of institutional investors who put enormous pressure on organizational managers for a greater return on investment made in the stocks of these companies. As a consequence, a new mentality is gaining space in companies, according to which every practice should converge to increase the share price.

This scenario influences nearly every organizational management practice, including human resource management ones. According to the existing literature, the main link between the logic of generating shareholder value and people management practices is variable compensation. The basic premise governing this issue is that company’s employees will commit to the “cause” of generating shareholder value if part of the value generated is shared with them.

However, applying variable compensation does not, in itself, assure the dissemination of the logic of value creation. To do so, one learns from the relevant literature that this type of remuneration should be defined based on a preferentially individual evaluation based on objective indicators (financial, whenever possible), which identify the different levels of employee contributions to maximizing this value. Moreover, authors such as Lawler (1990) state that in order for variable compensation tied to performance evaluation to have the desired effect, it should be applied in an environment in which there is sufficient autonomy to permit striving for higher levels of performance.

In this context, an especially interesting analysis is of practices of variable compensation, performance evaluation methods and the autonomy existing in companies at the production level. Despite the fact that the application of variable remuneration at the executive levels and in commercial areas is well disseminated, in the operational areas there is a perception that adopting these practices – especially for the explicit purpose of maximizing shareholder value – is less intense. Nonetheless, the authors who advocate the mentality of creating shareholder value make clear the need to create the correct financial incentives on the factory floor (Stern et al., 2001).

One key to this discussion is the deployment of the concept of autonomy in production work. When it is realized that employees (or groups of employees) can make decisions about production, an alternative is created where performance is assessed in a differentiated manner and this results in differentiated remuneration. Despite being created for other reasons, the new forms of work organization respond well to the needs of the financial concept of companies (Zilbovicius and Dias, 2005).

Thus, the present work tries to encourage the existing conceptual discussion on these issues and, later, to understand what is happening in practice with the companies in this context, in order to make possible a critical re-reading of the concepts contained in the previously studied literature. To do so, a multiple-case study was conducted with companies included in the overall context described above. The hypothesis explored in this study is:

“Companies inserted in the context of the shareholder value and which use autonomous production designs link variable compensation practices to the achievement of financial goals, measured individually. These practices are applied to all production employees, who are delegated the autonomy necessary to make decisions that lead to value creation, disseminating this mentality at the operational level.”

2. The concept of a company devoted to generating shareholder value

Di Maggio (2001) discusses the twenty-first century company model. In characterizing this model, the central issue raised is the imposition of shareholder control on the companies. Until the 1980s, according to this author, company managers were “protected” by monopolizing information and especially because shareholder control was diffuse. However, at the beginning of the 1980s, the so-called “financial conception of the company,” according to which the company is viewed as a portfolio of assets and the major responsibility of its executives is to make this portfolio perform well in a financial matter. In this context, the relationship between managers and shareholders came to be seen as an agent for a “principal”, as described in the theory of agency (Fama, 1980).

This concept of a company gains force in the context of a change in capital markets. Useem (1996) reflects the fact that, beginning in the 1970s, shares were concentrated in the power of large institutional investors, represented by pension funds, investment fund managers and insurance companies. Share ownership was in the hands of millions of shareholders, but voting power was in the hands of a small number of institutions. From then on, these investors demanded that the focus be on profit management and later, on increasing the price of the shares they owned. To assure that managers acted in favor of their interests, investors designed executive compensation packages tied to the short term results of the companies. With the passage of time, investors begin to participate more actively on the boards of directors of companies and to influence their managers.

Feng et al (2001) go more deeply into this issue, discussing how capital markets mediate between capital saved by the United States middle class and the companies, understanding what it provides and what it demands in terms of returns. According to the authors, the pressure on companies to provide greater returns is a reflection of an increasingly “financialized” society. In that country, approximately 40% of families apply 10% of their annual income in the capital markets to provide for retirement.

This pressure does not occur only in the large corporations. Venture capital usually seeks companies in the embryonic stage, exactly because they want greater returns, despite risks also being higher. Private equity, in turn, is capital which is generally allocated to companies that are beyond the initial stage, seeking opportunities for resale or opening up the capital of these companies, at time of profit taking. Thus, support for this kind of capital for companies of various types and sizes would be another source of pressure on its managers. The authors conclude that companies with these players as major shareholders or controllers come to use financial logic as their main orientation due to the pressure they exercise.

Over the course of the 1980s however, a new financial concept of companies began to gather strength, as an alternative to it - the concept of shareholder value. This is an extension of the financialization concept, since back when companies were already focused on financial results, shareholders began to realize that the return from companies was not sufficient. “The central idea of the concept of a company devoted to generating shareholder value is that the only legitimate purpose of the company is to maximize shareholder value” (Fligstein, 2002, p. 148). Thus, the company’s share price is the main indicator used. Managers were instructed to divest non-profitable product lines, lean down their structures, invest in the company’s core business and to reorganize the structure of company capital. In the financial concept there was still space for diversification if managers sought to manage the set of assets in order to maximize profit overall. The move toward generating shareholder value favors large mergers, exactly so that there can be better focus, trying to do fewer things, but with greater effectiveness. In this sense, a relationship with the development of core competences as proposed by Hamel and Prahalad (1990) can be established.

Di Maggio (2000) and Froud et al (2000) also point out various weaknesses in the financialization logic and the generation of shareholder value, such as the excessive focus on short term results and lower investments in research and development. Adopting a management model based on shareholder value (which will be addressed further along) will be associated with products and services from consultants and will intensify the pressure investors exercise. Despite the weaknesses pointed out, all the cited authors make it clear that the logic of creating shareholder value has a force of its own strengths and thus cannot be discounted.

2.1 Value-based management models

It is in the context explained above that diverse value-based management models based arose. It is understood that the term “value” has to do with shareholder value and not with the interest of any other parties. According to Froud et al. (2000), various world-renowned consulting firms have developed their own models and metrics to measure company contributions to creating shareholder value. These models help to make the concepts explained above tangible, elucidating how the logic of creating shareholder value permeates company practices and decision making. The model with the largest repercussions is the Economic Value Added model (hereafter called EVA), which initially was an indicator created by Stern & Stewart Co., but which has become a symbol of a comprehensive management model.

Stewart (1990) argues that companies’ most important role should be to maximize their current market value. The author, one of the main EVA theoreticians, works on the need for a precise metric for companies to use as their main parameter. According to him, accounting measures such as profit, profit per share and return on liquid assets are inadequate, since they do not relate directly to share prices. The company focus should be to maximize the EVA, which is “the only measure directly linked to intrinsic market value.” Generically, the indicator is defined as “operating profit less the cost of all capital employed to produce this profit” and is represented algebraically by the following (Ehrbar, 1998):


where: NOPAT: Net Operating Profit After Taxes C%: Capital Cost in percentage TC: Total Capital

One of the most important points of this measure is the charge for the use of capital, which prior had been little used before. Thus, managing based on maximizing the EVA raises demands on the companies; once it is not enough for them that profits be positive any more. If the EVA is positive, it is said that the company generated value for the shareholder. If not, then the value has been destroyed.

In addition to calculating the EVA in itself, the authors argue that it is also necessary for companies to establish value drivers. These value drivers are elements, whether measured in financial terms or not, which will directly influence the EVA. In practice, these value drivers take on enormous importance, since they make the EVA tangible for the various levels of the organization, functioning as deployment elements of this indicator. Most of the time managers can act on the value drivers, despite never being able to lose the focus on the variation of the EVA.

For value-based models to function in companies, Stewart (1990) argues that the central fact is that they must be aligned to the incentives offered to executives. Redistributing incentives is a necessary condition to effectively implement the models in order for employees to feel and act like “owners” of the business. It is fundamental that a bonus be granted to share the value created with the executives. In order for this to happen, the EVA should be measured in the several units and lines of operation, and that it be the sole internal measure of performance. In addition, stock option plans are recommended as means of variable compensation.

In this context, Stern et al. (2001) suggest that the concept of variable remuneration be employed at all levels of the organization, including production. According to them, as in any other area of the company, the goal should be tied to the unit’s EVA, in this case the factory EVA. In order for this metric to stay close to the operators, the operational indicators that directly influence the factory EVA (that is, the value drivers) should be the metrics required and monitored, since employees can act on them. These authors do not neglect the issue of negotiating with unions, which should be done by exploiting the gains in terms of remuneration and also the transparency that this form of activity can bring to operational employees, since they receive training on the financial concepts and are in monthly communication about unit performance.

Delegation of autonomy in decision making is also seen as a precondition for the incentive system to function at the production level. Stern et al. (2001) stress the existence of a larger “reservoir” of knowledge about the production process, which can emerge and be used as a way to make an effective contribution to company results if workers participate in the EVA- based incentives.

3. Personnel management practices

To the extent that there is a deeper understanding of the financial concept of generating shareholder value, it becomes clear that a wide variety of management practices adopted by the companies end up being influenced by this new logic. In this context it is to be expected that personnel management will also undergo this transformation. Despite being influenced by this logic in this same way as other company functions, human resources plays a special role since it is expected to help promote changes in the other company areas and functions.

3.1 Variable compensation practices tied to the performance management and autonomy:

As was clear from the work of the authors who deal with value-based management (Stewart, 1990; Ehrbar, 1998; Stern et al., 2001) the main point of connection between the logic of shareholder value creation and personnel management is variable compensation. Nevertheless, for variable compensation practices to be implemented, there must be a performance management system to stipulate goals, to measure results achieved and to continuously encourage improved performance.

3.1.1 Variable compensation

According to Lawler (1990), several existing compensation systems try to represent how much an individual is worth to the organization. Thus, organizations try to align their employee compensation to their contributions, avoiding creating imbalances between the compensation structure and the practical results obtained. Historically, the main reference for compensation systems has been the job position. However, this reference makes it difficult to recognize employees differently according to their contribution to organizational objectives. Thus, other compensation systems were created to try to distinguish “delivery” by different professionals, whether as a function of the responsibility expected from their actions or the results they effectively achieved.

Based on these concepts, the author works with three large components of variable compensation - remuneration (which can be “long term” or “short term”); fixed remuneration (salary and benefits) and what is called “alternative forms of compensation” (such as promotions, access to development programs, etc.)

Variable compensation in its several forms is tied to results achieved. In addition to emphasizing a result-oriented culture, it reduces fixed costs and avails itself of fiscal incentives. This is compensation for achieving one of several organizational objectives (in the context that is being studied, an increase of the company share price). Its purpose is to make the employee a partner in the company business. According to Rothwell and Kazanas (1998) and Marras (2002) it makes sense to use this when there is a clear relationship between employee effort and the extent of the results. In cases in which it is not possible to identify this or when the employee does not control the results (such as on the assembly line), perhaps this is not appropriate.

The literature points out that variable compensation can take many forms in companies, and not all are necessarily equally effective in gaining the commitment of employees to organizational results. Wood Jr. and Picarelli Filho (1999) conceive of two large groups or types of variable compensation − profit sharing and result-based compensation. The first is based on the overall results of the company, while the second is based on goals and objectives negotiated between companies and employees. Profit sharing has a less intensive factor, since the link between individual action and compensation is not always clear. Generally this type of variable compensation distributes money in an equitable form to all employees, which emphasizes its disadvantage as a motivational factor, since it doesn’t compensate for different levels of effort. Yet remuneration for results rewards performance measured at the level of the individual, the team or the organization itself.

The literature presents several results-based compensation models. Performance-based remuneration compensates employees for achieving pre-established goals, usually aligned with company objectives. Share distribution as a means of result-based compensation means distributing company stocks instead of monetary compensation. This is an attempt to increase employee commitment to the company by making them partners. Usually it is restricted to the strategic levels of the organization. Distribution of stock options gives employees the right to buy a lot of company shares at a set price; this option must be exercised within a previously determined timeframe.

3.1.2 Systems of performance management

Most often performance evaluation serves as a pre-requisite for variable compensation, since it already provides a measure of employee or group performance to determine the values to be paid according to pre-established criteria. Nonetheless, this is a practice using completely different methods and diverse goals, which is widely used by many firms.

Marras (2002) conceives of performance evaluation as a managerial tool to measure the results obtained by an employee or a group during a certain period. It can have several dimensions such as potential, behavior analysis, determination of knowledge, professional development and finally the achievement of goals and results (Marras, 2002). In this way an attempt is made to gauge the gap existing between the expected results (whether group or individual) and those effectively achieved.

The constant search for the utilization of quantitative evaluation indicators for the goals and results is noteworthy. This leads to increasing objectivity and concreteness in the process. For Wood, Jr and Picarelli Filho (1999), the systems to measure organizational performance and the measure for group or individual performance used to determine remuneration should be strongly aligned, if they are not in fact the same. In this sense alignment, such as that emphasized by Stern et al. (2001) can be perceived when using the EVA as the main indicators and value drivers as indicators to be used in production.

For performance evaluation to reach it objectives, Marras (2002) stresses that employees must be trained to do what is required of them, that they be duly trained and have the minimum necessary structural conditions at their disposal.

3.1.3 Work autonomy

According to Useem (1996) institutional investors are assertive in stating that they “don’t want to tell (managers) how they should manage their companies; they just want a well-managed company.” That is, the logic of generating shareholder value to achieve the required returns is vested with enormous pressure for results, but accompanied by broad autonomy so that the returns demanded can be achieved. This autonomy is conferred on the executive presidents by the boards of directors, but it is the presumption of the value-based management model that it be disseminated by the company.

To achieve better comprehension of work autonomy at all levels of the organization, it is necessary to study the issue of work organization. According to Gerwin and Kolodny (1992) the autonomy of a work group depends fundamentally on the organizational context in which the group exercises its functions. With the advent of scientific administration at the beginning of the twentieth century, there was practically no autonomy of production. The division between the conception of the work method and its execution, which results in prescribed tasks and delimited scopes, as well as constant control, characterize a way of working in which little or no decision making ability is required from the worker.

However, the evolution of competitive scenarios has shown this approach to be limited. Many companies have begun to compete in new ways, needing greater flexibility in their methods of action and a growing commitment from their employees. The systems of punishment and control and for prescribing work do not respond in a satisfactory manner to this new environment.

New organizational models were tested in this context. One of the changes is based precisely on the growing autonomy in decision making by teams and individuals, which extends onto the factory floor. The idea was that with greater autonomy, production employees would react more quickly and effectively to changes outside the production process (such as the arrival of new orders or even new products) than to production problems (such as an unexpected failure of machines, lack of inputs, etc.).

One way to increase autonomy in production work is to adopt the so-called semi-autonomous groups. According to Marx (1998) and Gerwin and Kolodny (1992) this way of organizing work can respond efficiently to requirements for flexibility and other market demands. Conceived by authors from the socio-technical school of work organization in reaction to the classic model, the semi-autonomous group should take on total responsibility for producing a line of products, from exclusive operation of machines to issues related to production control, quality management, equipment maintenance, etc. Decisions about the activities to be carried out and priorities should be taken by the group. Thus as a rule, group members will be in a position to interfere in the results of defined performance indicators and which goals will be outlined.

Zilbovicius and Dias (2005) explore how new forms of work, vested with autonomy, adhere to financial logic. Decentralizing decision-making to the lowest level of the organization is important to maximize the value drivers and not just simply the volume of production (it is also stressed that value drivers assume a doctrinaire nature on the factory floor). Operators have the knowledge to deal with randomness which can no longer be prescribed, since the stability presumed by the classic school no longer exists.  Empowerment becomes even more important in a downsizing scenario, which those companies devoted to value creation naturally undergo, where poor management or low levels of supervision are reduced or eliminated. The main point stressed by the authors is that “financialization” and new forms of organization have many points in common (such as a focus on results, instead of on tasks or procedures, greater responsibility for employees, belief in instability, etc.) and thus it becomes possible to state that new forms of organization can facilitate dissemination of financial logic. Nevertheless, they make it clear that new forms of organization were not created as a response to financialization, and there is a lot of divergence among the principals of the socio-technical school, which proposes new organizational arrangements based on autonomy and financial logic.

4. Methodology and presentation of cases

To carry out a study in the intended field it is necessary to restrict the field of observation and observe companies which are really included in the context studied. Therefore, the following characteristics were adopted as criteria to select the companies to be observed:

  • To be inserted in the context of the logic of generating shareholder value. As the criteria to verify this condition, the following will be adopted:
    • Must be listed on the stock exchange, whether in Brazil or in its country of origin (in the case of multinational companies);
    • Have shareholder participation by institutional investors or financial institutions;
    • Adopt preferentially some model of value management for the shareholder (this criterion is not eliminatory);
  • To be recognized for adopting models of flexible work organization, conferring autonomy on its production professionals.

Applying these criteria to the universe of companies active in the country makes it possible to reduce the size of the sample. Nonetheless, the phenomenon researched is relatively recent, since little was found in the literature with respect to its relationship with personnel management practices, more specifically variable compensation at the level of operations . Thus, the appropriate research method is the case study.

According to Eisenhardt (1989), the study of recent phenomena in social sciences, which focuses on understanding the dynamics present in specific realities, fits the research strategy called the case study.

The author emphasizes that with respect to sample selection for case studies, selection should be theoretical and not random. The criteria used are those listed above, in addition to accessibility to the companies. Four companies were selected, considering the recommendations of the author, according to which multiple case studies should contemplate at least four and at most ten companies.

In the present study, semi-structured interviews were conducted with production managers and human resources managers from the companies studied. Union representatives were also heard since the phenomenon studies involved changes that can generate conflicts of interest between companies and unions. In these interviews an attempt was made to identify changes that are occurring with respect to pressure to create value and, at the same time, changes made to help propagate this mentality. In addition to semi-structured interviews, an attempt was made to confirm the consistency of the data provided by those interviewed, by means of observing internal and external communications materials (posters, folders, texts available on the intranet and internet, etc.) and other evidence related to the theme researched, in order to permit the triangulation of data. The results of the data collection are presented in the following.

4.1 The companies

As stated, the attempt was to obtain a set of organizations in which the context discussed in the present study makes sense. Thus, all the companies studied have their shares listed on a stock exchange in countries where the capital markets are extremely developed (all are multinationals, with open capital in their countries of origin and in the sole case where the company is not of U.S. or British origin, the company also has its shares negotiated on one of the two markets.).

The four companies chosen have direct or indirect participation by institutional investors. Over 75% of the shares of two of the four companies are in the hands of this type of investor. Another company has one of the largest insurance companies in the world as an important shareholder. The only company studied that does not have a high concentration of shares in the hands of institutional investors, does have another company as a major shareholder, and that company has almost half of its shares under the power of this type of investor. =

Moreover, all the companies studied have adopted flexible design in production for their operations in Brazil, designs which in some way are referenced in the semi-autonomous groups conceived in Simonetti and Marx (2007) and Gerwin and Kolodny (1992). This fact is a good indicator that some degree of autonomy is conferred on production workers.

Company 1, which is of British origin, has four large business units. The factory unit installed in Brazil belongs to the aeronautic motors unit and has approximately 260 employees and 100 service providers. This factory is located in the outskirts of São Paulo, provides maintenance services for this equipment and is thus described as having low-scale, order-based production.

The second company analyzed (Company 2) is active in the personal hygiene and home and professional cleaning segment. This is a joint venture signed in 1998 by a large multinational with United States capital and traditional British companies in the field. The company has two large business units – one in personal care and the other professional, which serve the institutional branch. The focus of this study is on the personal care unit, located about 25 km from São Paulo city center, which has 600 direct and 500 outsourced employees. Production at this unit is characterized by high volume and intensive use of technology.

Company 3 is active in the beauty products area and has its origins also in the U.S., where it is an open capital company. It has been in Brazil for over 40 years and employs around 4,300 employees. The factory unit analyzed is located in the city of São Paulo and has approximately 1,400 employees, with approximately 1,000 of them working on in operations.

Finally, Company 4 is of multinational origin and has three global business divisions - beauty, hygiene and food. It has open capital in its country of origin (Europe), as well as in the North American market. The company has several factory units in Brazil; the unit analyzed is located about 80 km away from São Paulo center and manufactures cleaning products.

Having presented the companies, next is a description of their realities with respect to the central points in the present study. Initially, an attempt was made to describe the evidence collected in the field research is described followed by analysis and conclusions.

4.2 The presence of the logic of generating shareholder value in the companies

Based on the interviews carried out and other data collected in the field, it can be confirmed that the logic of generating shareholder value is present at least at the management level. Company 4, for example, used formal indicators for generation of shareholder value (in this case, the company uses TSR – Total Shareholder Return- an indicator which analogously to the EVA is proposed to measure the creation of shareholder value). Beginning with a speech by the chief finance executive in February 2006, the focus on the efficient use of capital and increased margins to the detriment of market share can be clearly perceived. According to the executive, the company’s long term goal is to generate superior value for company shareholders, and to be in the upper third of companies in the sector in TSR by 2010. In the interview conducted with a company production manager, the dissemination of these guidelines was clear, since the main goals for growth in billing and company profitability were listed in the key benchmarks.

Yet in Company 2, the attempt to generate shareholder value and thinking locally, by the return on capital used in the Brazilian operation is seen as a priority. Because the American majority-owned company made a large investment in machinery upon arrival, the pressure for return on capital invested in the company is high. The main objective of the company presently is growth in sales (the only way to make the operation profitable after such an investment and in operational profit. Another piece of evidence of the focus on shareholder value is that fact that all the employees at the administrative units have the price quote for a share on the New York stock exchange as their intranet homepage. This focusing on generating shareholder value is further reinforced by adopting long term incentives in the form of stock options for company executives.

In Company 1, it is clear to all employees that an aggressive return on capital employed is expected. There is a concern with financial return which manifests as one of the four big goals of the group on the global level, which is to achieve a return on capital employed (hereafter called ROCE) of thirty percent. This goal is displayed on the factory entranceway in a very visible form, along with the other macro-objectives of the company.

Finally in Company 3, the focus on the final result is also very present, despite its being less explicit than in the other companies studied. Internally, topics such as sales growth, brand image and appearance of the products are stressed. Nonetheless, the attempt to optimize the cost structure is one of the company’s six strategic priorities. Moreover, the importance of the financial result is disseminated to all employees. All employees, including operators, are pressured to improve the financial indicators, which makes a concern with profitability end up permeating day-to-day decision-making.

It is worth stressing that at all four companies studied, the manager of production and the levels above are pressured and remunerated mainly in accord with financial indicators (to the detriment of operational indicators).

4.3 The semi-autonomous groups

As explained at the beginning of this section, the selected companies, use some kind of flexible system for work organization in production. In Company 1, the concept of self-managed teams was introduced at the beginning of 2004. In these groups, in which the members are responsible not just for production, but also for matters related to quality, human resources, budget and others, there is a monitor for each area, in addition to a group facilitator, who exercises a leadership role and is elected by the group every six months. The monitors interface with the other company areas, such as sales, finance and human resources. Company management suggests goals to the groups, for which they become responsible, reporting monthly on their status. According to the human resources manager, implementation of this kind of organization is still not at the level desired. Operators are still getting used to interacting with the other company departments and with the teams and to making decisions autonomously. Nevertheless, a clear evolution can be perceived. They made decision more quickly and communications at change of shifts were better.

In Company 2, when it was decided to invest in the high technology already mentioned, they realized that the team was not trained to use it. Thus, in 1998, an extensive training program was undertaken. Overcoming this deficiency in training, the company understands that the operation is sufficiently mature to begin implementation of semi-autonomous groups, forming units with greater responsibility, which are not limited to operating machines, but to developing maintenance operations, quality management, planning, and others.

Company 3 had already adopted semi-autonomous groups in 2003, in an attempt to improve company results at a time of strong growth by the competition. With the implementation of the groups, the role of line inspector has been eliminated, and the employees themselves began to carry out the functions of setting up and adjusting the machines, quality control and production control. Each group has a set of operational indicators for which they are responsible. It is worth stressing that the financial indicators from which the operational indicators are developed are also posted in the factory.

Nevertheless, understanding these indicators and especially how they are interrelated, is no small matter for the operators. That is the reason companies offer basic training for equipment operators, as well as Portuguese and mathematics. Another partnership was established in 2005 to help the operators work with concepts used in daily operations, among them the performance indicators.

Company 4 is also organized by using semi-autonomous groups, even though there are still supervisors. However, operators are multi-taskers, and are capable of acting at different points along the line. In addition, even with supervisors, the lines adopt leaders for functional matters, such as those which deal with the company’s Profit Sharing Program (PSP). Moreover, the lines deal with matters not just in production, but security, quality and maintenance as well.

4.4 Management tools for production personnel and the logic of generating shareholder value

Initially, it is important to note that at the level of production, the four companies studied have formal instruments to evaluate quantitative performance (based on the indicators), linked to the variable compensation instruments. The companies present different characteristics and find themselves at different levels of implementation.

Company 1 used what is called “pyramid methodology”, in order to have a concrete means of getting out the word to all company employees, about company and individual goals . The organization has a “pyramid” (which is physical and located at the factory entrance); each of its four sides lists macro-objectives (among them, the financial goal as measure by ROCE).

These objectives are developed at the departmental and, later, at the individual level. Every employee has a paper pyramid, which lists their individual goals, valid for a year, on each side. These goals were linked to PSPs, structured by the company in partnership with employee representatives and validated by the union. Previously, the amount paid under the profit sharing plan was defined by an agreement with the union and was independent of achieving any particular goals.

The goals related to variable compensation for operations employees are evaluated monthly at the factory level. Potentially, variable compensation can be up to three monthly salaries per year. Indicators such as absenteeism, hours produced, productivity and total operational expenses were considered in the remuneration model. Each indicator is linked to a specific award, which permits employees to know how much they will receive per goal attained. The amounts for each goal are publicized on a chart at the factory.

It is interesting to note that position of the trade union on this model, according to a union representative, is that variable compensation for employees based on individual contributions is highly unadvisable. The argument used has to do with “equality of importance” among all the employees, regardless of their performance. Recognition for differences in performance encourages “predatory competitiveness” which has its negative effects. Thus, the union only endorses the variable compensation model adopted by Company 1 because it doesn’t contemplate differentiation in recognition among employees.

In parallel, still at the level of operations, a performance evaluation is done, which takes into consideration employee behavior and skills. This evaluation however does have an impact on fixed remuneration for the employees and those who have better qualifications tend to have higher salaries than those less qualified. This practice constitutes remuneration for abilities approximately in the same way as discussed in the section 3.1.1 of this paper.

At Company 2, at the level of production, a PSP linked to goal fulfillment had already been implemented, after negotiations with the union. Prior to this the variable compensation was tied to union negotiations was less objective and was not linked to group or individual performance. At the beginning of every year, the goals to be met during the period are negotiated with the chemical workers union, after being internally approved by the variable compensation committee.

On the operational level, 20% of potential variable compensation is determined based on the company’s operating results (even though there are employee complaints that they have little influence over this remuneration) and the other 80% comes from the factory indicators related to safety, quality and productivity. Each goal is measured individually, making clear the contribution of each to the final result. The potential amount of variable compensation is up to one monthly salary per year, and in some cases where the goals are surpassed, can be up to 1.2 salaries. These indicators are measured monthly and results publicized on a bulletin board. The minimum evaluation unit is the group, despite the fact that what counts for variable compensation are the consolidated indicators. However, an individual performance evaluation system will be implemented based on the competencies that the company judges to be essential to the results for the individual and the company.

Company 3 also adopts a variable compensation scheme for production made up of the following − 70% comes from the financial indicators from the operation in Brazil, measured by billing and profit. Another 15% comes from the goals related to the level of service delivered to the company’s vendors. The remaining 15% comes from the goals in the manufacturing area, which include accidents, savings in production, the rate of rejection for poor quality and the efficiency of the line. Potentially payment for additional gains is one to two (monthly) salaries per year. The goals are monitored monthly.

Moreover, all the employees, including those in production, have a Performance Development Plan (PDP) by which individual and group goals and competencies are evaluated. The results of the evaluation on this plane can increase or reduce the amounts provided in the PSP. In the production area, PDP goals are some of the goals of the semi-autonomous group. Thus in practice, a group with better performance could have a higher amount of variable compensation than the members of the group with lower performance. Moreover, in the part of the plan which refers to competency evaluation, the evaluation is individual and carried out among the members of the groups. Thus the company’s personnel management practices contemplate that employees in a group can receive different remuneration than other employees in the same group as a result of their competency evaluations. This last point, however, was cited as a source of problems by the manager interviewed and is being reviewed. Since the results of the competency evaluation influence variable compensation and the evaluations are carried out by the group members, there was corporativism detected in the practice, and this can cause distortions in the evaluation results.

In Company 4, the culture of indicators has always been stronger. Some of the manufacturing indicators are used in the PSP, which is extended to all the operations. For this public, 30% of the goals refer to regional objectives for economy in production. Another 30% of the program is related to operational efficiency goals at the factory. The remaining 40% correspond to 3 or 4 goals stipulated by production managers with the employee committees which are measured at the level of the units. Each manager has autonomy to negotiate with its units which indicators will be used in the program.

With respect to variable compensation, the unit is the minimum point of analysis, since the indicators for the units are considered, with weighted importance in deciding the amounts to be distributed. The company did not consider adopting an individual analysis of production. The intention is always to encourage group work in production.

4.5 The dissemination of shareholder value logic in production

At Company 1, the work focus for employees has not been explicitly to maximize shareholder value. However, company management has worked intensely to increase productivity and employee commitment. In addition to adopting self-managed groups, variable compensation and performance evaluation practices, the company has undertaken activities to promote a greater sense of belonging to the company and commitment to its objectives.

In Company 2, management has tried to make it clear to operators that 80% of their potential or variable compensation depends totally on them and if they make the effort to produce better results, they will benefit. However, the managers interviewed make it clear that a large number of employees still do not know how to work with this model. Many of them still do not feel responsible for these results, judging remuneration for them to be an “extra.” It is clear, therefore, that the commitment to goals based on offering variable compensation is still not widespread in the company.

One problem the managers interviewed mentioned with this kind of incentive is the annual payment form. Employees end up being less committed to achieving the goals because they don’t receive payment in the short term.

With respect to autonomy, those interviewed made it clear that employees perceive that they can influence the results of the company, but they are still unclear about how they can contribute. Company management has made an effort to disseminate the practice of accompanying indicators, but it cannot be seen that the employees are motivated to consistently pursue higher performance levels.

According to the managers interviewed at Company 3, the search to surpass production goals is part of the company culture. People are included in this context from the moment they are admitted to the company. Communication is worked on intensely as is employee involvement, encouraging the continuous engagement of all. Incentives, over and above the PSP, are offered all the time to support this mentality. Cash awards in lesser amounts (from US$5 to US$25) are offered to groups that show outstanding performance. Company products or gifts are also provided as a form of recognition.

Even though a PSP has existed for over 5 years at Company 4, there is the impression that employee engagement with the results of the unit, factory and company is still not at the desirable level. According to the manager interviewed, despite communication and many having accompanied the progress of the program, there are employees who only recall this at payment time, and who do not pay attention to the goals during the year. Again the idea is observed among employees that variable compensation, tied to achieving goals is just “something extra,” and this does not encourage the constant search for better results.

5. Comparative analysis of cases

Based on the presentation of cases, it becomes possible to carry out some important analyses to arrive at conclusions in the present study. To what extent does the mentality of generating shareholder value reach production employees at the companies studied? What works in favor and what makes it more difficult to disseminate this mentality throughout the companies? Does adopting flexible organizational designs for production work de facto aid in making employees more responsible and consequently more pro-active in achieving organizational goals with respect to value creation? These are central questions related to the basic hypotheses of this study which will be explored in the following.

Despite significant evidence of the importance of the issue of generating shareholder value in the four companies studied (although to differing degrees), in none of them was this issue formally approached with production personnel, although the production manager was clearly pressured by financial objectives. Apparently these managers do not pass these objectives on to production in a clear way. It seems that the logical route from their efforts to achieving operational goals and achieving the organization’s profitability goals is not made clear to production personnel.

Nevertheless, the move toward adopting personnel management tools presented in this study as vectors for disseminating the mentality of generating shareholder value is well known. The four companies studied implemented evaluation instruments and goals for remuneration based on indicators which are most often quantitative as the authors cited in section 3.1.2 suggest. They view this as an important step in encouraging employees to seek better performance and improved operational indicators.

However, despite this evident movement, there are points of implementation in these instruments which diverge from what is proposed in the literature. The first, and perhaps largest, divergence in implementing personnel management practices is that practically no company researched recognizes personnel on the individual level. As shown in Figure 5.1, only Company 3 differentiates performance and recognizes it on the individual level, and only in an indirect way (by means of the competency evaluation contemplated in the Performance Development Plan which influences the amounts to be distributed by the PSP). Moreover, it is curious that even though all the companies studied having adopted work groups, only Companies 3 and 4 adopted group indicators for recognition – Companies 1 and 2 adopted the factory as the minimum unit of analysis.

Differentiation in recognition

Company 1

Company 2

Company 3

Company 4
















Figure 1 - Level of Financial Recognition, based on Performance
among Production Employees. (Developed by the authors).

Despite the difficulties of arriving at individual evaluations, it is important to emphasize the initiative of the two companies (Companies 1and 2) in seeking individual performance evaluations. While these evaluations are based more in qualitative issues, focused on employee development and do not affect variable compensation, the companies view the issue as an important incentive to training for future improvements in performance.

Another divergence with respect to the literature studied resides in the fact that financial indicators at the production level have been little explored. Moreover, when they are used, they refer to the company overall, and not the results from the factory or the unit (Figure 5.2). Even if financial indicators from production are not used due to the difficulty in measuring them, at the very least it will be necessary to explore with employees the connection between the operational indicators, which they themselves have a chance to influence and the financial results.

Type of Indicator


Company 1

Company 2

Company 3

Company 4


Company / Division










Group / Unit











Company / Division










Group / Unit










Figure 2 – Composition (by type of indicator) of the Variable Compensation
Models for Production at the Companies Studied. (Developed by the authors)

With respect to implementing personnel management tools that aid in the process of creating value, it is worth citing another problem, which was raised at Companies 2 and 4 – the annual form of payment. Thus, like the problem of measuring the indicators at a very macro level, recognition at some time very distant from when the activity is occurring also causes operators to fail to feel intensely the connection with the work they are presently doing and any recognition that they might receive in the future, if the goals are met.

Another fundamental issue is the adoption of semi-autonomous groups. In practice, they seem to be helpful for discussing, adopting and evaluating indicators. However, the main point that relates the new flexible work models to the creation of value, which is work autonomy, appears not yet mature in practice. Apparently, this is the most difficult point in implementing the groups. At Companies 1 and 2 the managers were explicit in saying employees still have difficulty in feeling like “owners” of the processes. At Company 4, the role of supervisor still has not been replaced.

Employee ambition is another issue on the subject of difficulty in behavioral change. The fundamental issue for this company’s employees is still job stability and maintaining their employment, and not constant self-improvement.

6. Conclusions

The present study attempts to elucidate the influences of generating shareholder value on personnel management practices at the level of production. Some conclusions can be posited based on a review of the relevant literature and on field work.

As a first conclusion of this study, it can be said that, despite the clear movement in the companies studied toward the use of personnel management tools that help to disseminate the mentality of creating shareholder value, this mentality still has not arrived in a consistent way at the production area, at least in these companies. As shown in the case analysis, pressure for better financial results is concretely exercised on the production mangers. However, this pressure cannot be observed in a clearer form in the production area. The fact is that the personnel management models implemented at the companies studied, in theory do encourage greater productivity and financial recognition for employees when the objectives outlined are achieved. However, the pressure put on them still translates essentially into operational terms. For production, it seems that there have been no significant changes in mentality with respect to the period of the dominance of production logic, according to Froud et al. (2000). It can be seen that not just the pressure, but also raising awareness about the companies’ financial results, are still restricted to the level of the production managers.

We can point to some possible causes for this finding. The first is related to the nature of the companies chosen for the study. In this study, traditional manufacturing companies were selected, those whose Brazilian operations adopt flexible work designs for production. The aim of this choice was to try to observe in practice the relationship between organizational designs that confer greater autonomy on production employees and the diffusion of the culture of shareholder value as explored by Zilbovicius and Dias (2005). Nevertheless, it is possible that this relationship is still premature, given that the mentality of generating shareholder value in the companies analyzed does not seem sufficiently intense to generate a change in the behavior of production employees. Thus, this becomes a rich opportunity for future studies of companies which do not necessarily adopt more flexible organizational designs in production, but which are more intensely inserted in the context of shareholder value, such as companies whose capital comes from venture capital or private equity, as explored at the beginning of this study.

Another possible reason for production employees to fail to commit to generating shareholder value is the fact that production managers have not transmitted the issues of financial return to their subordinates. Ehrbar (1998) stresses that all employees should be informed about company results, and also receive training that explains the composition this result and how each employee can influence it. Nevertheless, these points could not be observed consistently at the companies studied. A first hypothesis regarding this is that managers have neglected the “social” dimension of this kind of change. Since none of the employees researched “was born” in the period of financial logic as explored by Froud et al. (2000), they have to fit into this new order and this takes place through large organizational change processes. According to Selfridge and Sokolik (1975), in order to be effective a change process like the one being studied should contemplate behavioral, as well as technical, aspects. The human resources area, which in theory could aid in dealing with the social dimension of the change process, still performs this role timidly. The impression is that production managers see HR professionals as having little to contribute. Perhaps that is the reason for the lack of coherence with the mentality of generating shareholder value, perceived in the diverse human resources processes, as explored in Section 3.2.

Another hypothesis that could explain the fact that managers have not explored the logic of generating shareholder value is simpler, but no less important or improbable for that reason. It is possible that mangers believe that production employees wouldn’t be able to understand it. Despite not having collected evidence to this effect from the interviews, this point is treated in the literature, where the need to work against this mentality is emphasized.

With respect to the difficulty of instilling the logic of generating shareholder value into production, a conceptual problem in implementing personnel management models which in theory contribute to disseminating this rationale should be recalled. Contrary to what is suggested in the literature, the indicators used are most often measured at the factory level, making it difficult for production workers to perceive their individual contributions to the results achieved. . Apparently this is a conscious decision. In addition to union resistance to individual recognition tied to performance, in some of the interviews with the managers there was a discourse that “group work should be prioritized, recognizing the results achieved by the team,” an idea which is consistent with the proposals of the socio-technical school of work organization.

It is interesting to note that the failure to disseminate the mentality of generating shareholder value, corroborates a study done by Ramires (2005). Despite having adopted a different focus in its research on the influence of financialization on the mode of organization and management of manufacturing, the author arrives at conclusions very similar to those of the present study. Ramires’ study (2005) also point to changes in the system of technical production management due to the logic of generating shareholder value, but with little focus on behavioral changes in operational employees. At the company studied by this other author, only the managers received training and, as at the companies studied for this research project, “literacy training in finance did not take place” for factory workers.

It is also worth stressing that the evidence collected during the field work contradicts the supposition found in all the literature on generating shareholder value, according to which all company employees mobilize around the “cause” of generating value if they perceive that they are also recognized financially for their contribution. The cases of Companies 2 and 4 raise the possibility that at least in the production area, a large part of the labor force might not have the same ambition for higher earnings or financial recognition for the results they help to reach. The fact of being able to get “something more” for achieving goals, could fail to mobilize the employees of these companies.

To conclude, it is perceived that the basic hypothesis of this study cannot be entirely proven. Although changes were observed in management practice for production personnel at the selected companies, in order to present models for variable compensation applicable to all operational employees based on objective indicators, measuring and recognizing these results is not done in an individual manner. For this and for other reasons mentioned in this section, the dissemination of the logic of generating shareholder value to the operational level cannot be demonstrated.

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1 Polytechnic School – USP Department of Production Engineering. Brasil. Email:
2 Polytechnic School – USP Department of Production Engineering. Brasil. Email:

Vol. 34 (8) 2013

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