Trends and Issues in Managing Low Performers in an Era of Low Growth

[HR Insight November 2022 Issue]

CEO Jeon Myung-hwan

As COVID-19, which first emerged in December 2019, spread across the globe, the World Health Organization (WHO) declared it a global epidemic, that is, a pandemic. Lockdowns and travel restrictions continued in cities around the world, and with production disruptions occurring, global economic growth was forecasted to decline sharply. In response, central banks around the world lowered benchmark interest rates to cushion the impact of the recession, and as liquidity expanded in the market, a foundation for corporate growth was established. Stock prices soared to all-time highs, and companies sought aggressive growth based on their abundant capital. However, as declarations of the end of COVID-19, that is, the endemic, continue in various places, the bill for the expansionary fiscal policy that was used to respond to the pandemic is coming back. The massive capital that governments around the world injected to stimulate the economy acted as a pressure on rising prices, and as a result, central banks around the world, led by the U.S. Federal Reserve, are responding to inflation through aggressive interest rate hikes.Despite this tight monetary policy, the outbreak of the Russia-Ukraine war has thrown the global supply chain into turmoil, and inflation continues to persist. Not only are oil and grain prices unsettled due to the war between Russia, the world’s third-largest crude oil producer, and Ukraine, a major grain producer, but oil prices are also maintaining high levels because OPEC is pursuing production cuts. Accordingly, the vicious cycle of worsening the trade balance may continue, as the expansion of the trade deficit caused by rising commodity prices and the high exchange rate environment resulting from U.S. interest rate hikes could once again worsen the trade balance. In the extremely negative business environment in which overseas companies are responding to the vicious cycle of the “Four Cs” (high inflation, high interest rates, high exchange rates, and high oil prices) due to the worsening economic situation, domestic companies must respond to what measures should they take in what is expected to be a stagflation marked by inflation without growth? Major companies in the United States are choosing the simplest yet clearest approach: cutting costs by reducing labor expenses. A prime example is Netflix, the world’s largest online video service (OTT) company, which, following the layoff of about 150 full-time employees in May, laid off an additional 300 people in June. Due to the impact of the pandemic, OTT services expanded explosively and hit works like “Squid Game” emerged, making 2021 the best year yet, but with new subscribers declining after the endemic, it is interpreted as an intention to make overcoming the downturn through cost-cutting inevitable.Meanwhile, in June Tesla closed its California office and laid off 200 Autopilot staff, and also sparked a lawsuit after unannounced layoffs of 500 employees at its Nevada battery plant.Apple, the world’s number one smartphone company, also hinted at a slowdown in hiring by laying off 100 contract HR personnel in August who were in charge of recruiting new employees. Microsoft announced in July a layoff plan for about 1% of its approximately 181,000 employees.Domestic companies seeking to prepare for a harsh winter in managing low performers: It seems that domestic companies are also feeling the need to prepare for a harsh winter, given the expected deterioration in profitability. Maintaining efficiency through cost reduction is a strategy that can be applied equally to domestic companies, but it is impossible to simply adopt the method of layoffs used by American companies as is. The Labor Standards Act prohibits dismissal without just cause, and in particular regarding layoffs, it states that ▲ dismissal is unavoidable even when all efforts have been made to avoid it due to urgent business necessity, ▲ when the dismissal is unavoidable despite having established reasonable and fair dismissal standards and selecting the dismissal target accordingly, and ▲ when the dismissal is notified to the employee representative at least 50 days before the dismissal date and they are required to sincerely consult with them regarding methods to avoid dismissal and the dismissal criteria, thereby imposing strict limitations. If voluntary retirement or early retirement is used instead of layoffs, it may achieve the effect of workforce reduction in the short term, but it is expected to undermine the overall organizational atmosphere, and in a difficult economic environment, it is likely to drive away top talent (A-Players), which could be detrimental to corporate growth in the long run. Therefore, while improving the workforce structure, companies often show a need to enhance operational efficiency in workforce management by targeting only low performers. needs. However, it should be regarded that, only when faced with this crisis, the attempt to improve the workforce structure targeting only low performers should be considered as having already missed the opportunity. In the end, it becomes clear once again that management of low performers should have been carried out continuously and on an ongoing basis from a more long-term perspective.Generally, companies’ interests are focused on securing and managing key talent in the war for talent, as well as on providing differentiated treatment to outstanding employees. Many companies have established separate HR systems for key talent and provide a growth path for promising individuals with the potential to become future leaders. High-level monetary and non-monetary rewards are, of course, involved. However, while most companies recognize the need for managing low performers, few actively implement it. There are aspects of managing low performers that are difficult to institutionalize as part of a company’s personnel system, and there is concern that attempting to remove low performers could lead to legal disputes or social issues.Nevertheless, managing low performers is as important as managing key talent. As the saying goes, “Those who stay near ink become stained black,” low-performing workers can negatively affect their colleagues and worsen the team atmosphere. In advanced industries, the output generated at the organizational level may be greater than the output produced by a single employee alone. Therefore, the unity and teamwork of members within an organization are more important than ever, and low performers who foster a negative atmosphere ultimately have a harmful impact on the overall performance of the organization. Especially in companies that use collective performance bonuses, situations may arise where other team members have to bear the consequences of reduced compensation because of low performers. There is also a concern that talented personnel may leave because of low performance. This is why leaving one low-performing employee unattended is just as important as developing one key talent.

Internalization Approach: Emphasizing Skill Development and Motivation

The internalization approach maintains the employment contract relationship with low performers while actively providing educational programs for skill development or utilizing various motivational strategies. When using internalization measures, alternatives may include “high internalization, high investment” measures that utilize job redesign to recharge motivation and career development programs (CDP) for skill development, as well as “low internalization, low investment” measures that simply raise compensation levels or change working conditions. In the case of SK Hynix, the Productivity Improvement Program (PIP) for low performers has been introduced and implemented since around 2013. Based on the comprehensive personnel evaluation results, employees who have received a BE or lower rating two or more times over the past three years will be selected as growth-limited personnel, and a total of 10 weeks of capacity-building training will be provided to them starting in early March. The competency development training consists of lectures and evaluations on general topics such as leadership, communication, and job skills, and internal job training is also provided.Externalization Approach: Discharge and Support for Job Change and Reemployment. The externalization approach is an approach that uses the method of severing employment contract relationships with low performers and placing them outside the organization. While using measures such as layoffs or recommended resignation, which are forms of “externalization and low investment,” have the advantage of producing immediate effects, there is concern over the potential side effect of causing psychological shock to the remaining members of the organization. As a result, more companies are implementing various training programs to support job transitions and are increasingly using the “externalization and high investment” approach, which facilitates reemployment and entrepreneurship. In LG Electronics’ case, voluntary retirement was offered last February to long-term low-performing employees. Regardless of age or rank, employees with poor performance over several years were offered up to three years’ worth of their annual salary as voluntary retirement pay to encourage voluntary resignation and promote a virtuous cycle of workforce renewal. In addition to voluntary retirement, the company runs a career transition support program called “Barvo My Life,” which helps employees aged 50 and above who are approaching retirement plan for careers after leaving the company. Samsung Electronics has also introduced a career transition support program as part of its strategic retirement management and is currently operating a “Career Consulting Center.” Since its initial opening in 2001, it has been operating in four regions—Seoul, Suwon, Giheung, and Gumi—and has demonstrated high effectiveness, with a reemployment rate after retirement reaching 87.7%. Be cautious of legal risks arising from disadvantages to working conditions. When managing low-performing workers, various legal risks related to disadvantages to working conditions may arise, so caution is necessary. In the case of IT company P, media reports were published in February on the company intranet bulletin board regarding a list of employees removed from their positions due to poor work performance, alleging violations of the Personal Information Protection Act and defamation. Company S, known for its reputation in food manufacturing, including ramen, has also taken legal action after a complaint to the Ministry of Employment and Labor and a lawsuit seeking damages were filed last August, alleging that the low-performer system was being misused as a tool for workplace harassment. These legal issues are likely to arise when, without ongoing management of low-performing workers through systematic programs, they are carried out collectively and excessively out of temporary necessity. From a long-term perspective, in companies that manage low performers through systems, legal issues arising from restructuring rarely occur, even though there is a continuous turnover of personnel. This is possible not only because the company has secured acceptance of evaluation results through a transparent performance management system, but also because it manages employees so that those labeled as low performers from the moment they join the company are made aware that, in the worst case, they could be subject to dismissal, and this has become firmly established as part of the company culture. In a situation where an ongoing economic crisis is expected, improving and maintaining the organizational structure of workforce management through continuous and systematic management of low performers can no longer be optional but essential. 

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Source: Monthly HR Insight. See details