Another $54 Million Mistake

Remember the article about the EEOC’s affinity for catching big fish? In June it was Wal-Mart’s moment in the spotlight. This time, the “honor” belongs to Morgan Stanley. On Tuesday, July 13th, the Atlanta Journal Constitution reported that Morgan Stanley settled a gender-bias suit for a whopping $54 million. The suit was filed by the EEOC on behalf of a female bond-seller who made $1.35 million in 1998 (note: even wealthy people sue organizations). She claimed she was overlooked for a promotion, got ticked off, and eventually became the lead plaintiff in a suit that claimed her employer gave scores of promotions and better salaries to men than women. Her employer didn’t exactly “lose” the case; they just wrote out a check for $54 million. Big Does Not Equal Smarter We are not privy to all the details of the case, but it is clear evidence that ignorance of EEOC guidelines is not limited by the size of the company or intelligence of the employees. I once did some work for a very large Wall Street firm that employed very smart people. Their promotion criteria were pretty basic: male, big producer, social contacts, and sports buff. I guess that’s all anyone needs to be successful, right? Among professionals, this is called “Knowitall’s Disease.” Knowitall’s Disease was first identified by a famous psychologist, Dr. Aye Knowitall, who studied employees of large, high-profile organizations. Knowitall observed that managers, particularly managers of large well-known organizations, tended to believe that promotion and placement decisions were purely discretionary. One of the EEOC tables of litigation ( illustrates how expensive Knowitall’s Disease can be for those afflicted. Management Discretion Meets the Law There is nothing wrong with management discretion. Everyone has the same objective: skilled people placed in jobs for which they are qualified. Unfortunately, discretion goes “bad” when managers forget that subjective observations and objective facts are often two different things. Research tells us that “job performance” is 50% task skills (e.g., hard ability) and 50% contextual skills (e.g., schmoozing). That is, our personal opinion is often influenced more by subjective factors than actual skill. This leads to the well-known “promote a good producer and get a bad manager” syndrome (a primary symptom of Knowitall’s Disease). So how does one preserve management discretion and get skilled people in jobs for which they are qualified? Just follow the 1978 Uniform Guidelines on Employee Selection Procedures. It says organizations don’t have to hire, promote, place, or train anyone who is not qualified for the job. How do we determine who is “qualified” and who is not? The Guidelines explain how to do that as well: study the job to determine job requirements and business necessity; evaluate candidates based on job-relevant, trustworthy tests; and actively work to reduce any resulting adverse impact. What about a minority (or anyone else for that matter) who does not pass? Let’s see. If we knew explicitly what the job required and only used trustworthy, job-related tests, then people who fail probably could not do the job, right? Isn’t that more informed (and more legally credible) than a manager’s subjective opinion? On the other hand, a minority who passes the trials should get the job, right? The EEOC Is Not Your Enemy We all know from experience that, while every human being has value, people have a variety of unique talents. Some of us are good at selling, others at managing, and still others at counting things. How does an organization typically determine qualifications for jobs? Usually by gender, performance in a totally different job, or social connections, right? No. These are not EEOC-sanctioned criteria. The EEOC is not an evil overlord. They just want organizations to stop using the good-old-boy criteria and instead use something more objective. You know, like thoroughly understanding job requirements and using fair tests that evaluate candidate skills for the future job. They even spelled out over 25 years ago an entire best-practice process for doing it. But do managers afflicted with Knowitall’s Disease follow good-sense guidelines? Do HR departments proactively step in to advise and inform senior managers about good placement and test standards? Does HR or recruiting fully arm the members of their legal team with documentation that substantiates good faith efforts to follow the law? My experience with both big and small firms is that they either dismiss the Guidelines as unimportant or consider them too much work. Imagine that. Best practices and legal credibility are “too much work.” Money Flushing For less than the cost of one bad employee (or about one-half of one percent of the $54 million Morgan Stanley settlement), HR could have recapped its entire annual budget by shielding the organization from one bad lawsuit ó and as a “side benefit” its advice and professionalism could have helped the organization put the best people in the right jobs. But suppose an organization is never sued. What is the cost of putting the wrong people in the wrong jobs? Experts estimate an average of 20% to 40% of the average annual payroll! Installing Promotion “Gates” There are only about 15 major job families in any organization (a “job family” is a cluster of jobs with different titles that require similar competencies to perform, regardless of the technical component). We’ll talk about three families that might apply to the Morgan Stanley suit: first-line manager (one who coaches and develops job holders), middle manager (one who manages managers), and professional job holder (one who does the “grunt” work). Let’s classify the female bond-seller as a member of the “professional” family. In its simplest form, bond-sellers must be smart enough to understand the market, persuasive, technically proficient, and highly motivated. A bond-seller is a “doer,” i.e., someone who actually does the work. Now, it can get fuzzy. If the position of “managing director” (the one the plaintiff is reported to have been passed over) is still a bond-seller (but with a fancy title) then it would require the same competencies. Since a promotion would just be an ego boost, “passing over” this particular woman for promotion would be foolish. But let’s assume the job is a first-line management position requiring more planning, subordinate development, formal presentations, and so forth. In this case, past performance as a bond-seller would only confirm that she could sell bonds. The company would need more evidence that she could perform the new job skills. And there are only two ways to get it: 1) put her in the new job and hope for the best, or 2) put her in controlled situations and observe performance. This is considerably different from the choices of someone afflicted with Knowitall’s Disease. They would just “opine” on the subject (e.g., venture a personal opinion.) The same evidence criteria would apply to the “manager of managers” family. This group is usually very removed from doing the actual job. It consists of managing people who manage jobholders. This, too, would require even more evidence that she could perform the new skills. There would only be two ways to get it: 1) put her in the new job and hope for the best, or 2) put her in job-relevant circumstances and observe her behavior. When they are done well, promotion “gates” help organizations choose better performers while enhancing legal credibility. Hopefully, the reader has by now concluded:

  • Subjective opinions are more predictive of legal challenges than high job performance.
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  • Following EEOC guidelines is a best practice, not an occupational nuisance.
  • Knowitall’s Disease interferes with management decision making.
  • HR has a primary role in eradicating Knowitall’s Disease.
  • Just because someone is a manager, that does not make him or her and expert.
  • Wal-Mart and Morgan Stanley attorneys probably wished their senior management and HR department would have provided them with a little more “legal traction.”
  • Organizations don’t have to lose lawsuits to lose money.
  • Developing and designing job simulations and tests is about the best way to predict future job performance.

Our only question now is, “Who do we read about next?”