Welch Says ‘Tough Love’ Personnel Policy Good for Employees, Company
Jack Welch, the recently retired chairman of General Electric Co., is preaching his “tough love” management practices and handing out tips on the global economy, the future of the Internet and other topics these days.
He brought his nationwide book tour-cum-victory lap to Southern California last week, addressing business schools at USC and UCLA, where MBA candidates and their professors listened raptly to his ideas on pushing people to higher performance in a large, diverse and global business organization.
The Welch message is one of stern competition, not touchy-feely sentiment; competition that is getting tougher as the workplace goes global.
“Too much of American business inflicts false kindness on its employees,” Welch said in an interview last week. “Managers refuse to make honest evaluations for fear of unpleasantness or having to fire somebody.”
So bland assessments go into corporate files for many years until the employee gets to be 50 years old and older.
“And then there’s an economic downturn and the poor employee is axed because he or she has been carried all the years and now is seen as deadwood,” Welch says.
“But that’s wrong,” he says. “In their 50s, employees have more burdens--second mortgages, college expenses--and less flexibility. A manager should have talked to them at age 30 and said, ‘You’re not making it here; you’d be happier elsewhere.’ ”
That’s what GE does with its nonunion staff, roughly 85,000 employees out of the company’s 313,000 worldwide. Under Welch, the firm instituted a 20-70-10 system in which the top 20% of managers and other employees get the highest pay raises and stock option grants, the middle 70% get encouraging raises and stock options too, and the bottom 10% get no raises, only lectures on how to do better and suggestions that they leave.
It’s not a one-time program but an evaluation that occurs every year, knocking out bottom rungs repeatedly. He doesn’t encourage half measures. “You can’t give out annual 2% to 3% pay raises to everybody because it sends the wrong signal,” he says, deriding a common practice in many U.S. companies.
The system at GE is demanding, Welch agrees, and for that reason it had to be introduced over time, in collaboration with other reforms. “If I had gone into GE in 1980 [when he became chief executive] with 20-70-10, it would have been a disaster. We laid the groundwork with years of performance guidelines and candid assessments,” Welch says.
That qualification is important. Managers at other companies have tried to institute Welch-like reforms too quickly and shattered morale and hurt the business. Jacques Nasser, the recently ousted chief executive of Ford Motor Co., is one who came to grief trying to shake up a traditional corporate system.
On the other hand, Welch’s GE is not alone in having “up or out” personnel policies. Microsoft requires employees to hit higher targets every year to qualify for stock options; when they reach the point that they cannot raise the bar any higher, they’re encouraged to leave.
New competition has been added as multinational firms such as GE have staffed up overseas. Today GE, at $130 billion in annual revenue, has 145,000 non-U.S. employees, 46% of its total work force.
And Welch was particularly high on India. Bureaucratic red tape and lack of infrastructure made it difficult to set up a successful business in India, Welch writes in his autobiography, “Jack: Straight from the Gut” (Warner Books), a current bestseller that he has been promoting on his nationwide book tour. But “we found terrific scientific, engineering and administrative talent in India that today serves almost every business at GE,” Welch writes.
Does that mean that American managerial and skilled employees now compete for jobs with Indian engineers and managers, whose salaries in India are one-quarter those of U.S. norms? Yes, says Welch. “Welcome to the global world.”
But Welch sees expanded opportunity for Americans. Where poorer countries lack infrastructure and capital, U.S. companies and their educated work forces are backed by “our capital markets, our system that encourages trying new things.
“Those students at Anderson [the UCLA Anderson School of Management where Welch spoke] have the whole world. They’re going to be great employees of GE and other companies.”
In retirement, Welch plans to help J.P. Morgan/Chase with development of personnel, using techniques he pioneered at GE, which he considers his greatest legacy.
The quick-witted, feisty Welch, who earned a doctorate in chemical engineering at the University of Illinois before joining GE in 1960, is renowned for having led GE’s growth for more than 20 years.
The firm’s stock price rose from the equivalent of 94 cents a share to more than $40 a share during his tenure.
GE stock is off 30% from its high point in the current recession, but Welch, who turns 66 on Monday, is confident about recovery, bullish on the Internet’s possibilities and in awe of the importance of China to the future of world business.
“If you make a pie chart of your business plan, leave half of it blank, because Chinese companies will fill that half,” Welch says.
His prescription for competing in China is to “make Chinese companies your partners not only for China but integral partners in your global enterprise.”
Welch recalls thinking that a light bulb plant would be a good investment in China. But he was overwhelmed. “I found out that almost every local mayor in China was putting up a light bulb factory. Today there are more than 2,000 light bulb factories.”
He is excited by the future of the Internet. GE sells $15 billion worth of goods and services a year and buys $13 billion online, “and that’s only a prelude,” Welch says.
Welch, the big-company manager, always disagreed with the claim that small companies create more jobs than big ones. So not surprisingly, Welch sees large, centrally managed companies such as GE ruling global business for the foreseeable future.
On other matters, Welch’s views seem dated. Welch is impatient with government. This year, he attempted to acquire Honeywell Corp. but was turned down by the European Union’s antitrust commission. In his book, he denounces the commission for being “judge and prosecutor” in the merger review.
In response to an Anderson School student who asked whether he would devote his talents to improving government efficiency, Welch said no. The procedures of government and the civil service frustrate him. “After three months in that world I’d have a gun to my head,” he quipped.
Yet government is likely to play a larger role in the policies of every corporation in the wake of Sept. 11, said former U.S. Commerce Secretary Jeffrey Garten in a recent address at the Yale School of Management, where Garten is dean.
Could be that Welch retired just as his day was passing. On the other hand, if he were still running GE, chances are he would adapt to change.
“My mother used to say ‘That’s the way it is. Face reality Jack,”’ Welch told students last week.
“Face reality” may not sound like profound counsel for management, but it’s not bad advice for any business.
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James Flanigan can be reached at jim.flanigan@latimes.com
