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Human Resource at AES Corporation

Case Analysis

HR101: 2013-14

Prof Pulak Das

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Company Business and History

• AES (Applied Energy Services) operated Electric Power Plants.

• Current Manpower strength: 25000• Geographical Spread: US, England, Northern Ireland,

Argentina, China, Singapore and Pakistan;• History and founder: The company was originally started

as an Engineering consulting company providing services to energy industry in 1981 in Houston, Texas. It started its first power plant in 1986 and went public in 1991. It grew very first and by 1995 was operating power plants in US, England, Northern Ireland, Argentina, and China. Roger Sant and Dennis Bakke were the founders of the company.

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Key Learning Objective from the case

• How a big Multinational Energy company with as many as many as 14 plants operating in six different countries but had no staff function to manage its 25,000 employees?

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Questions for discussion• What was AES strategy for manpower acquisition?• What potential employee market segmentation AES used for

recruitment?• What goal was used by AES during their employee selection?• Company used certain compensation and benefits for their

employees. What strategic advantage they tried to gain by using such policy?

• What kind of employee development AES followed and what strategic goal they pursued through this policy?

• Why there was no attempt to form trade union in AES corporation?• Based on the policy followed by AES for managing their employees,

comment whether the system relation between HR and business process in AES was “Linear” or “Concurrent” one.

• Key question: Will AES succeed in keeping its identity separate from others as it goes to many other countries?

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Background of the founders and its influence on company business practice

• Dennis Bakke was 1970 MBA of Harvard Business School and worked in various Government departments e.g. Department of Health, education and welfare and Office of Management and Budget before moving to Mellon Institute Energy Productivity Center in Washington , DC.

• In Mellon Institute he met Roger Sant another HBS Graduate and together wrote a book titled “Creating Abundance: America’s Least-Cost Energy Strategy”.

• Source of Business Idea: While working on their book and on energy policy of the Ford and Carter administration they decided to try their luck in independent energy business.

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Founder’s value• The Core values of the company were• Integrity:

– Ethical concerns, stakeholder’s interest and societal needs. Company would strive to meet all these three together.

• Fairness:– AES believes every employee is unique and accordingly everyone will be

treated justly in corporate and organizational matters.• Social Responsibility:

– Company exist to meet the needs of the society. It must carefully manage capital, employee and intellect to meet societal needs. In order to meet these goals company follows a number of processes e.g. every plant should be operated in clean, reliable, safe and cost effective manner.

• Fun: – Establishing an environment in which people can use their gifts and skills to

make a difference in society without fear of being accused of as a noise maker.• Observation: Company held to its values so strongly that when it applied to

SEC for going public, SEC asked it to list its strong value as a potential risk factor.

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Company core assumptions about people they hire and work with

• All employees – Were creative and thinking individual- Capable of

learning and making decision, like to control their work environment and can be trusted.

– were responsible-can be held accountable;– Were fallible;– Had desire to make positive contributions to society,

associate with a winner and a cause, like a challenge.– Were unique persons, deserving respect, not

numbers or machines.

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How AES operationalized its values?

• Converting company values into action• Most plants operated without any shift supervisor. Project subsidiaries were

responsible for all major facility-specific business functions, including financing and capital expenditures….. Every AES person were encouraged to participate in strategic planning and new plant design for the company. Company usually engaged multi-skilled teams to develop projects.

• Examples of Decentralized Organizational Practice:– AES project teams handled project financing and raised funds from banks and

other lenders. Though, the company had a CFO but his direct involvement in fund raising activities were minimal.

– Another example was building of a $40million plant in Maryland done by a team of just ten persons. A project of this size required doing many jobs with considerable expertise in regulation, procurement and technical matters. With two exceptions all were less than 40 years old and have had very little prior experience of doing such complex jobs.

• These illustrated AES core concept that all its employee should try doing new things and they could do that.

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Four measures for AES Plant performance

• Shared values: How did we do in having an organization that was fun, that was fair, that acted with integrity, and was socially responsible?

• Plant operations: How safe, clean, reliable, and cost effective were our facilities?

• Assets: What changes occurred in our assets, including AES people, during the year? This was a measure of project development and construction progress and an indicator of future earning potential.

• Sales Backlog: What happened to our backlog of contract revenues during the year? This was indicator of success in business development activities.

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The Thames, Connecticut Plant

• Thames, Connecticut plant operation was typical of AES plants.• The plant was located close to neighboring houses. It cost $260 Millions to

construct and generates 181 megawatt power which is sold to Connecticut light and Power and up to 100,000 pounds of steam per hour to a Paper recycling plant nearby.

• The plant employed 59 people including five in administration, seven area superintendents, nine in maintenance, five in material handling and processing 8 in instrument and electrical repair and 20 in operational technicians.

• The hiring process gave very little importance to formal academic credentials. Only 20% of the employees had college degree. Most of them worked either in Navy or in General Dynamics at nearby, Connecticut Shipyard.

• In total AES there were only 20 or 30 MBAs. As a policy company does not hire at senior level. Neither does it engage headhunters for staffing at any level.

• AES never experienced much employee turnover problem. Why?

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Work practice

• The plant organization had three levels: Plant Manager, seven area superintendent, and front line staff.

• Because the plant operated continuously, there was shift duty. One would work three 12 hours shift and then three days off. Rotation between night and day shift is used to ease the stress of working in odd hours. The day shift was from 6:30 in the morning till 6:30 in the evening. The night shift was from 6:30 in the evening to 6:30 in the morning.

• Maintenance was standard 40 hours week but individual could be called any time.

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Low Employee Turnover

• People were attracted to AES because they felt it was a special place to work;

• People around AES plant considered it as a socially responsible company;

• Wall Street Journal and many other publications made beeline to visit the plant and write about it.

• People moved from one plant to another. That gave them a feeling that they were not trapped in any particular place.

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Hiring• AES hiring was done by plant personnel without any support of any human resource

professionals. • Based on resume, a candidate was first interviewed over phone. All persons in the

plant had the right to gather information over phone. This interview used structured format, though any one could go outside this structure.

• Phone interview was followed by one to one interview which was followed by group interview.

• After the group interview, the candidate went through a “sales-pitch” interview by the plant manager where the purpose was more to sale the organization to the prospective candidate.

• The interview process seldom tried to generate information on technical areas. It was assumed that any shortfall in this area could be learned in the position.

• Company looked for self-motivated and dependable employees. Employees were hired based on their fit with the company

• All AES employees were committed to the hiring process. Interviewing was done by a cross-section of people not just the plant manager.

• Question for discussion: – What was AES strategy for manpower acquisition? – What potential employee market segmentation they used for recruitment?– What was the goal of selection that they pursued?

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Compensation and benefits

• Pay was decided based what other were being paid both inside and outside.

• AES was not pay leader. They wanted those who liked their place to work. They used their pleasant work environment as a pull to bring employees.

• Question for discussion: – What was the strategic advantage that the company

was expecting to gain from such policy?

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Incentive Pay

• There were three forms of incentive pay– Individual bonus;– Plant performance bonus: Distributed equally among

all members;– Corporate wide bonus based on the overall results of

AES: typically about 10%.• Total bonus comes to about 20% to 25% of

annual salary. • Questions for discussion:• What was the strategic advantage of giving plant

performance and AES performance based bonus.

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Performance assessment and reward

• As part of performance individual conducted his/her own self-appraisal;

• Individual annual salary raise was made by taking this annual appraisal and observations and suggestions from peers and area and non-area superintendents.

• Questions for discussion:– Why company made annual pay raise by taking

suggestions from peers and non-area superintendents?

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Retirement System

• Company had contributory retirement system where company paid 100% matching payment for first 5% of employee contribution. Most people contribute around 20% to 25% mostly in company stock. Company maintained a five year vesting period for stock purchase which means unless someone holds the stock for five years it cannot be encashed.

• Question for discussion: – What was the benefit of giving stock option to

employees?

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Promotion

• In AES most promotions were done from company internal markets. Job vacancies were posted. Any one from any plant could bid for it. Job applicants were interviewed by plant superintendents and promotion decisions were made at area superintendents meetings.

• It was company deliberate policy of not to fill up any senior position from open market.

• Questions: – Why company tried to stick with this policy when

many other US companies long abundant such policies?

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Training and Development

• Policy Toward employee development: • Trainee identification:

– Company took performance problems seriously and did everything possible to help individuals to improve. Problem employees were mentored by seniors.

• Job Rotation: – In order to provide wider opportunity for learning and

improve their performance, company would transfer people to other areas.

• Family Counseling: – Company provided family counseling service to help

employees improve their performance.

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Training Methods

• Most training were on the job type. Experienced employees trained new employees. People sometime booked course from outside if they needed. There was no centralized training facility in a plant.

• Questions for discussion:– What was the strategic advantage of using such

method of employee development?– Under what condition such employee development

methods were likely to be less effective?

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Career Development

• There was no formal career path for employee in AES; • Individual find his/her own way to choosing a career and

grow; This desire to grow and learn is critical being an employee of AES.

• AES had a tuition reimbursement program under which any employee working for an academic degree would have got back 80% of the tuition fee. He/she would get another 10% if he/she gets a B and another 10% if he/she got an A in the course.

• In order to be eligible for tuition reimbursement, the course must have been work related.

• Question for discussion: Why under tuition fee reimbursement program, the tuition fee was reimbursed only if the program was work related.

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Employment Security

• Company had no formal policy of job security;• Security was in skill and expertise that the employee

develop in the company;• Company never had any organization wide lay-off policy.• They occasionally reduced manpower in plants to run it

more efficiently. Such reduction were done as voluntary as possible.

• The plant had limited use of part-time employee. They used contract employees only during outage.

• Question for discussion:• Why company did not use temporary or contract

employees very extensively?

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Work organization

• In Thames plant, company never insisted on any time record of employees. They did not report to any supervisor. They developed a list of jobs and they just did that. Trust was the underlying strength of the company.

• Apart from regular work of a plant, occasional specialized demands were handled by forming task forces. Sometime such task forces may come from another plant. They had audit task force, environmental task force, safety task force, human resource task force for deciding on insurance plan.

• Question for discussion:• What were the benefits of using task force in addressing

such service demands?

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Measurement and Information

• Company shared most performance information with employees periodically.

• Information on financial and operating performance of Thames plant was shared once a month in a communication meeting. Company paid overtime to employees for their participation.

• Company measurement focus was mostly at broad company level. Company policy was not to waste energy in micro level measurement.

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Industrial relations

• The Thames plant had no trade union neither was there any attempt to form trade union.

• There were a few other acquired plants where there was trade union before.

• Similarly, AES plants in Argentina, Brazil, Northern Ireland Hungary had trade unions. But there was cordial relations with trade unions

• Question for discussion:• Why there was no trade union or any attempt to

form trade union in most AES plants?

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Company Philosophy towards HR Department

• Company believed the HR department made rules that were required by only 1% of the work force but that tied up the hands of rest 99%.

• AES tried to get everyone to be reasonable, acted responsibly and used their own discretion.

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Company Structure

• Company followed the principle of decentralized management and had only five levels of hierarchy, three at plant level, a set of regional presidents or divisional managers who were expected to oversee the plants and projects in their areas and the CEO.

• The corporate culture and organizing principle came to be called “honeycomb”, where there were large number of small, flexible interrelated teams working on projects and learning in the process.

• There was no corporate staff. Every division had responsibility for its strategy and business development, finance, engineering, environment compliance, safety and all other human resource issues and operations.

• The widespread diffusion of both knowledge and responsibility was one of the key sources of AES competitive advantage.

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What was company’s business strategy and why?

• AES power plant produced a product that was very homogeneous across companies;

• Subsidiaries of oil companies and gas companies were entering the business with ease;

• Due to falling entry barrier, competition was growing rapidly; • It was a very capital intensive business; Capital cost was very high.

Interest cost on capital was substantial. • Much of its operating cost was on account of fuel;• Technical Skill requirements on the part of the employees were not

very high.• Given that it was heavy capital intensive business and produced very

homogeneous product, company strategy was more tilted towards low cost strategy which was implemented by giving attention to cost of using employee resources and getting maximum output.

• For every hour run of the plant, the cost on account of capital and fuel is fixed. There was very little scope for reducing the cost there. The total operating cost per unit output could be brought down by making the employees more motivated and productive.

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Question on company belief on importance of HR function

• Company managed its employees without any separate HR function or department:

• Questions:

• What kind of relation was their between HR system and business system of the company?

• What were its advantage and disadvantage?

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Company Relation between Business and HR

• Was Linear?

• Was it Concurrent?

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Organizational Process: Relations Between Business Process and HR

HRHR Line Employees Organization Performance

External Environment

Linear Relations: Advantages and disadvantages?

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Organizational System.. (Cont’d)

Concurrent relations: Advantages and Disadvantages?

LineManager Performance

OrganizationOrganization

Employees

HR

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Key learning

• In order to have more effective organization, the HR function is preferably be done by the line managers themselves.

• By having a strong culture a business organization may do away with many staff functions and in the process can reduce its operating cost substantially.