The Economics of Emotional Intelligence

On May 24th, I gave a presentation called ‘Emotional Intelligence – The Missing Ingredient in Workplace Dynamics’ at a Young Presidents’  Organization YPO Webinar. In the presentation I advance a performance management system called ‘The Covenant Model’ which forces critical dialogue to build relationships between managers and subordinates. One of the questions raised was “How much does introducing ‘The Covenant Model’ cost”? Time did not permit me to give an adequate response, something I will attempt to do in this article.

First of all, this system should not be viewed as a cost, but rather as an investment to improve individual and group performance and reduce unnecessary stress factors.

To put this into some context, based on extensive research, two thirds of North American workers are not being managed or led, rather they are being monitored and controlled; and communication between managers and employees is limited to direct orders, the annual or semi-annual performance review, and when things go south. We have also found that most performance management systems do not adequately address the issues of diversity, inclusion, equity, fairness, preferential treatment, cronyism, ambiguity, subjectivity, bias and relevancy of activities. These ten issues exist in most organizations.

Current performance management systems in place in most organizations do little to improve performance and are primarily used to determine compensation and advancement rather than as a means to facilitate constructive and positive manager/subordinate relationships. Another deficiency is a disproportionate emphasis on results versus how such results are achieved.

The role of management is to apply the 5 R’s – the RIGHT people, doing the RIGHT things, the RIGHT way, at the RIGHT time, for the RIGHT reasons. Given the current manager/subordinate relationships, for two thirds of North American workers the 5 R’s are not effectively being applied. If managers are not doing this, they are not really managers.

Unless the 5 R’s are effectively applied, there is no way full potential performance can be realized.

‘The Covenant Model’ is a value exchange model, which establishes the framework to build constructive and positive relationships. Here is the way it works. The employer sets out clear expectations they have of employees on performance, behaviours and attitudes. From this the employer solicits from employees what they need from the employer to deliver on the expectations they have of them. Once agreement is reached, it becomes a covenant. Key to this is rather than the annual or semi-annual reviews, there are regular and ongoing discussions to ensure the expectations of each are being met.

People need to be comfortable in having these discussions. This is where emotional intelligence comes in. Managers must have the ability to identify, use, understand, and manage their own emotions as well as the emotions of others, and their emotional relationship with others. Then they will not only be more comfortable in having these critical discussions, but they will also become more effective leaders.

Having applied this model for years in the organizations under my responsibility, I can attest that, effectively applied, it:

  • improves individual and group performance,
  • reduces unnecessary stress, surprises and excuses,
  • identifies issues, opportunities and risks, and
  • increases the ratio of employees to managers (i.e. fewer managers)

I have found that there is a general lack of understanding on how to improve performance; and opportunities for this are usually lost, and therefore the ability to achieve full potential is not realized. Specifically, here are three opportunities that are usually overlooked.

  1. Target cost reductions as a percent of revenues vs absolute dollars. By increasing revenues and holding or increasing overheads and expenses at a lower rate than the increase in revenue is a productivity improvement.
  2. Eliminate micro controlling. The term micro management is a misnomer, it’s not managing. Giving people at all levels greater autonomy allows for an increase in the employee to manager ratio.
  3. Reduce bureaucracy, and the trivial non-value activities. Given that 74 percent of North American employees feel that their organizations are overly focused on trivial and bureaucratic activities, this represents a huge opportunity not only for individual organizations but overall GDP.

Let me illustrate, with a case example – Shoppers Drug Mart, Canada’s largest Drug Retailer, where I helped lead a management buyout in 1999.

At the time of the buyout, we had 567 stores operating under a franchise model with a head office and eight geographic divisions (each with their own infrastructures).

What we found was a loose federation of 567 companies where the only consistency was inconsistency in variety and assortment, store conditions, staffing levels, scheduling, pricing, hours of operation and customer relationships. Although it was a franchise model, they operated under a command and control approach, and divisional support was minimal; and there was more focus on the results rather than on how results were achieved. We also found that store operating costs, divisional and head office overheads, and ratios of stores per district managers far exceeded industry benchmarks.

Our objective to double the size of the business within a decade required a different operating and relationship model. Recognizing the benefits and the potential of a franchise model, rather than change to a conventional chain similar to a Walgreen and CVS, we embarked on reinventing our franchisee relationship using ‘The Covenant Model’.

The expectations we set for the franchisees included adherence to newly established standards on store conditions, pricing, merchandising and marketing plans, staffing levels and schedules, and programs to build relationships with the customer.

In extensive individual and group sessions these expectations were presented and discussions focused on what the franchisees expected of us to deliver on our expectations of them.

The expectations they identified included the ability to provide input on the standards; on programs being introduced; before any major changes, facility improvements, new or updated technologies, more communication, and more autonomy versus divisional command and control.

Agreement was reached, which became our covenant.

This transformation of our relationship occurred in less than a year, which resulted in our having a superior economic model against industry benchmarks. We also reached our objective of doubling the size of the number of stores within seven years rather than ten. Our EPS went from $1. to $2.64 and the enterprise value went from $5. per share to $58.

We attribute these results to the value exchange relationships we built with all of our stakeholders by applying ‘The Covenant Model’. If we could do it – so can you.


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