The new deal by Peter Cappelli

1. What key changes have occurred in the labor market that warrant a fundamental
rethink of HR policies and practices?
The old employment system of secure, lifetime jobs with predictable advancement and stable pay is dead.
In the traditional model of employment, in which employees were developed inside the firm and managed
according to principles internal to the company, was designed to solve many problems for employers.
The new deal at work, where the employment relationship is now an open-ended negotiation between
employer and employee based on market power, creates fundamental challenges for management.

2. What is the psychological contract? What are the main characteristics of the old and
new psychological contracts as described by Cappelli? Are these changes inevitable or
are there plausible alternatives?
Psychological contract= voluntary agreements based on promises about the future behavior of the
parties. Psychological contracts are based on individuals’ perception of the appropriate obligations and
generally are not tied to any formal or written documents.
It is virtually impossible to manage employees through explicit contracts-- most jobs are complex enough,
especially inside organizations that it is impossible to specify in advance all of the duties and performance
levels that are required and the cooperation of employees is needed to fill in the blank.

The New Deal harsh economic realities made it necessary. However, it cost the organization in terms
of employee morale.
 Reduction in employment security
 Decline in internal development
 Implicit is that it will try to keep employees with the company as long as the economic
environment makes that possible.
 Employees are encouraged to direct their attention for career management outside the firm, to
the market, where they are frequently told that their long term prospects lie.
 The “employability” concept—we cannot offer you security with our company, but we can help
you to secure skills that will keep you employable, that will lead some security in the labor market
by helping you find other jobs.
 The relationship is no longer defined inside the company or described by internal development
policies such as training compensation, and promotion practices. It is now much closer to a
market relationship in which the governance is outside the firm, in the market.

“Employer of choice”— simply a way of saying that the employment relationship is market based, the
labor market is tight, and we have to respond—by benchmarking to learn about and then match
compensation packages, offers of training, work, and family accommodations, whatever it takes to recruit
and retain employees.

3. What are the main problems that firms, workers, and societies face under the new deal?
What solutions could you propose?
Individuals pursue the interests of their employer in part because they believe they will eventually be
rewarded for doing so. The nature of the exchange requires trust and the related concept of commitment.
In the absence of an explicit contract, employees have to trust that their efforts will be rewarded in the
longer term.
 income security- stable careers and lucrative pensions
 promotions-- reward good performance, motivating, increase in compensation

Announcing the new deal is only the beginning of a process of arriving at a new employment relationship.
Some aspects are difficult to monitor:
  “living our values”
 Some aspects may take a long time to observe, such as whether employees develop the skills
that are useful to the employer or whether they leave as soon as a good option appears.

4. Are high-performance HRM systems consistent with the requirements of the new deal?
If yes, do they guarantee success? If not, do they spell failure? To make your argument,
use Southwest as an example.
Why employees comply with the interests of the organizations?
 The concept of commitment, how employees come to see their own interests as being similar
to those of the organization.
 The concept of reciprocity is central to understanding how employment relationships foster
employee commitment. The company invest in training and orientation so it creates a sense of
obligation to reciprocate. The employees reciprocate with commitment to serve the goals of the
employer.

Employees’ expectations from their work:

1. Interesting work
2. Open communications
3. Opportunities for development
4. Secure employment
 While employers put commitment and trust as the two most important things they want from the
new deal, employees want professional development and training, investments that make it
possible for them to reduce their dependence on their current employer.

Why the new deal matters:

The real new deal eliminated many of the human resources practices, based on internal, administrative
principles, that essentially buffered both employers and employees from the pressures of the outside
labor market.
However, the central theme of the market based employment behavior and attitudes re now outside the
firm, in the labor market. And the most salient characteristic of the labor market is the balance of supply
and demand.
In both obvious and subtle ways, the managers attitudes and behavior are driven by the market—looking
inside the company when opportunities are slim but following the signal from the outside when
opportunities pick up.

Work attitudes:
For frontline workers and service employees, attitude is part of the service they provide for customers and
colleagues.
One’s attitude toward one’s job and employer is shared by the labor market. For example, job satisfaction
and the like are affected by the availability of alternative jobs. Moreover, the degree to which an employee
is committed to his employer depends on the availability of other job options.

Turnover:
Voluntary turnover, sometimes knows as the quit rate, is a very costly matter for employers. It is very
closely related to the pull of the outside labor market because virtually all employees who leave voluntarily
do so to take jobs elsewhere.
 the two most important factors driving turnover in firms are the availability of opportunities elsewhere
and the relative wage paid by the current employer.
Large organizations generally have lower turnover in part simply because employees have room to move
within the organization, seeking better matches and new opportunities as their skills develop.

Absenteeism and discipline:

If opportunities elsewhere appear better, then it is easier for employees to feel aggrieved at their current
treatment and feel the need to restore equity by reducing their performance. When opportunities
elsewhere deteriorate, the opposite happens.
The fear of being dismissed is one of the factors that maintains good performance.

Work life:
The levels of stress, health problems and employee well-being. Increase in the unemployment rate
exacerbate these problems.
Less committed workers are more affected in their well-being by the state of the labor market.

Conclusions drawn:
1. By moving to this new, more market mediated relationship, employers have lsot a substantial
amount of control and influence over the attitudes and behavior of their employees. When labor
markets tigther and outside opportunities increase, expect turnover and discipline problems to
rise, morale and attitudes to decline; when labor markets slacken, expect employee performance
to improve, the quit rate to decline, and attitudes to rebound.
a. On the other hand, bringing the labor market inside forces the company to stay current
and up to date in its employment practices.
2. The way in which the new employment contract is defined for workers, in particular how much
emphasis is given to the market, noe matters a great deal. Employees need to think about their
careers as extending beyond their current employer, on the other hand, to develop networks of
contacts outside the firm, and to benchmark their skills against the market is more than a subtle
extension of the argument.

The big 3 problems of the real deal:

The new market based deal has some real advantages for employers:
 Gives flexibility
 helps the organization respond quickly to a changing environment
 Limits their long term liabilities
 In the short run, reduced costs
Disadvantages for the employers:
 The need to retain key employees—the problem is complicated by the fact that what constitutes
key skills changes over time. By eliminating many of the arrangements that bind employees to the
firm and encouraging them to look outside, the new deal makes it easier for them to leave.
 The need for employee commitment— characteristics of internal employee development make
employees more committed to their organizations, and the dismantling of that system will make
them less so. There is evidence that more committed employees have higher performance on a
range of dimensions. For example, they have lower quit rates and lower rates of absenteeism and
tardiness.
 The need to develop employee skills— employers earn the return on their investment in training
because the value of the employee’s work rises as their skills increase, while the wage they
receive is less than the value of their work. However, employees are not fixed assets; they can
leave and take their skills with them. Employee turnover kills the incentive to provide training,
other things being equal, be reducing the period during which the employer can earn a return on
the training investment.