While the end results of the Nordstrom and the Southwest stories are different, the differences are not as distinct as you might think when just looking at the surface level. Both companies had a “people” competitive advantage, meaning that the people and their high levels of customer services was and still is the main differentiator for the companies. And, for both Southwest and Nordstrom, there is a very high level of affective commitment—they are there because they really, really want to be there.
So, you may ask, “what happened to Nordstrom?” I believe the most succinct answer is a total systems failure. But, in the end, I believe that the system was not limited to just their compensation system, it also had to do with the management style of the company.
Specifically, the failure occurred because the following was present:
- Decentralized management—leaving the management of how an entire store operates to local and regional management is a true recipe for disaster
- Poorly defined components of the compensation system—the fact that selling and non-selling time was never properly defined lead to the abuse of middle management
- Mystery goals for management—the surprise goals for supervisors really were counterproductive. You can’t manage your people effectively if you don’t know what your goals are.
- No checks and balances—Related to the decentralized management, there were no checks and balances in the HR and payroll systems at the local or company-wide level. If senior management
- Not my problem attitude from Senior Management— Once senior management was advised of the problem, they seemed to take no action to investigate whether or not a real problem existed with respect to the compensation system. Their response was, well if there was a problem, the union would gripe about it. And, much to Nordstrom’s misfortune, the union did gripe and took them to court.
- Internal competition—while some competition among sales staff is healthy, the level of competition the compensation system created encouraged and tacitly approved (through its silence) unethical behaviors relating to “stealing” sales.
A little about the compensation system as a whole: The compensation system set up by Nordstrom really wasn’t a bad system…it just lacked the appropriate follow-through from senior management. I say that because it really does achieve its goal: highly reward high performers, encourage average performers to “step it up a notch” and marginal performers to leave.