In a Downturn, Employers Cut Jobs Rather than Pay

Why employers facing a recession will eliminate jobs and slash benefits before they cut wages.

The parallels between the current economic downturn and the Great Depression are often scary. This is the first time since the 1930s that the U.S. has experienced big, extended declines in house prices. And as in the Depression, the financial system is under extreme stress.

But there is one important way in which history is not repeating itself. Average annual earnings of workers fell for several years in the 1930s but have not fallen since. And it looks like they won't fall in 2009, either. Businesses are reporting that they plan to increase pay by roughly 3.5% in 2009 for U.S. workers, according to recent surveys by compensation consultants Mercer, Watson Wyatt Worldwide (WW), and Hewitt Associates (HEW). Salary increases are crucial because rising wages make it easier for some families to pay their debts.

By penciling in pay hikes, employers are signaling that they don't believe that the U.S. government will flub policy so badly that the country succumbs to another depression. Their plan to raise pay is good for the economy: Lenders will be more likely to make loans if they think families will have the income to pay them back. Households will be less afraid to shop. "Confidence is crucial to limiting the negative effect of the current financial crisis," says International Monetary Fund economist Luca Antonio Ricci.

The news isn't all good. Pay hikes may fall below current expectations, and while employers are planning to raise pay, they are simultaneously cutting jobs. The jobless rate hit 6.5% in October, and many economists think it could reach 8% by late 2009. Employers are also looking for less conspicuous ways to save on benefits, such as reducing 401(k) matches or increasing deductibles and co-payments in health plans. A Watson Wyatt Worldwide survey in mid-October showed that 26% of employers were planning layoffs or other reductions in force in the coming 12 months, while 25% planned to raise employee contributions for health care. In contrast, only 4% were planning to cut salaries. "Firms are cutting workers instead of wages," says Ethan S. Harris, co-head of U.S. economics at Barclays Capital in New York.

By raising pay while cutting jobs, companies can "thin the herd" while giving remaining workers "the big corporate hug they need," says William C. Yoh, CEO and president of Yoh, a unit of Day & Zimmerman Group that supplies high-tech temps. Starbucks (SBUX) recently announced it was cutting jobs but isn't cutting pay or benefits. "We have to take care of our partners [i.e., employees] and keep them engaged," says spokeswoman Tara Darrow.

Companies are cutting bonuses, which have accounted for a growing share of compensation for many workers. But at some companies, bonuses are so important that reducing them can be as traumatic as slashing base pay. That's one reason Wall Street resists calls from Washington to eliminate or sharply restrict their bonuses. Law firms have even less to gain from trimming bonuses because they account for only a small portion of associates' pay. "Firms are kind of locked into laying off or not laying off," says Dan DiPietro, head of a Citigroup (C) unit that lends to law firms.

That leaves benefit cuts, which are more likely than pay cuts to escape employees' notice. Edward Kaplan, national health practice leader for Segal Co., an employee benefits consulting firm in New York, says one employer he deals with has excluded coverage for Nexium and Prevacid, the much-prescribed heartburn medicines, saying there are plenty of generic substitutes available. Those medicines account for 7% of the employer's drug costs.

Of course, some hard-pressed companies are cutting or freezing pay. Nortel Networks (NT) and American Express (AXP) both announced salary freezes for many employees. The mayor of Columbus, Ohio, is freezing 2009 pay for himself and 400 other employees. And in Los Angeles, restaurant operator Grill Concepts (GRIL) is slicing top executives' pay 10% in an effort to avoid job cuts. Says Grill Concepts Chief Executive Officer Philip Gay: "It doesn't make you feel good when you go home at night if you've let people go."

But those are the exceptions. There's a good chance that if you keep your job in 2009, you'll get a raise. What's more impressive is that the raise is likely to be greater than the rate of inflation. That's because inflation is plummeting. The median estimate of economists for 2009 inflation is just 1.5%, according to a Bloomberg survey released Nov. 12.

Why raise inflation-adjusted pay in the teeth of a severe recession? After all, theory says that the price of labor should adjust to the demand for it. Theory also says that workers and employers alike should care only about pay adjusted for inflation. In reality, though, both groups tend to get anchored to certain pay hike numbers (4% is a favorite) regardless of changes in the rate of inflation.

That may be one reason employers haven't shaved much off their 2009 pay-hike forecasts. Amazingly, Mercer found that 2009 salary-increase budget projections for 190 U.S. companies barely declined from April to October (from 3.7% to 3.6%) despite a steep decline in projected inflation. "I wouldn't say inflation rates plus or minus are causative" in setting pay, says Laura Sejen, Watson Wyatt's practice director for strategic rewards. Americans have a lot to worry about in 2009. But for now, pay cuts are not at the top of the list.

Source: Business Week, November 12, 2008

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U.S. Downsizing and Economic Trends

U.S. Downsizing and Economic Trends Report ISSUE 21 (October 4, 2008-October 17, 2008) has been posted. For full report click here.

Workplace Bullying: Why Women Are Affected More

It's a classic case of mean-girl syndrome, where cliques are formed and isolation sets in for anyone not included in the popular circle. But this is not the playground--it's the workplace.

According to a study conducted last year by the Workplace Bullying Institute and Zogby International, an astounding 71 percent of office conflict cases are women bullying other women.

"I'm not at all surprised by the findings," says David Thomas, professor of business administration and chairman of the Organizational Behavior department at Harvard Business School. "If you think about the kind of bullying that goes on between [women], which is often more psychological, more subtle, more in the form of social putdowns, that's the kind of bullying that happens in the workplace."

In fact, women bully other women 2.5 times more frequently than they target men, preferring to use sabotage and abuse of authority as their forms of bullying. In addition, women who bully in the workplace prefer to do it behind closed doors and are slightly more likely than men to enlist the help of others to "gang up" on their targets.

"Sometimes it's a natural inclination to feel that I have more power, control, rights when I am someone who is a majority member," says Stephen Young, president of Insight Education Systems and former chief diversity officer for JPMorgan Chase, No. 13 on The 2008 DiversityInc Top 50 Companies for Diversity list.

But what if the isolation is reversed and the perpetrator suddenly becomes the victim?

"The punishment that the group can put on the bully is essentially to deprive that bully of interaction with the group, and that is often what will bring about a more compliant kind of behavior," says Thomas.

Known by the United Nations' International Labor Organization as the "silent epidemic," workplace bullying often goes unreported. But it is four times more prevalent than illegal, discriminatory harassment. Since it is not considered illegal, even when reported, employers rarely take action or, in some instances, can exacerbate the problem for the person being targeted.

"If I'm more powerful in terms of influence … I have more influence with the boss because the boss likes me better [or] I've been around longer; that gives me an element of power," says Young.

But why do more women bully?

"Sometimes gender and race cause people to treat others like the roles that they had traditionally been in as opposed to identifying specifically what their role is," says Young. "When you have been the recipient of treatment that denies you equal opportunity, sometimes people--not [just] women, but people--will overcompensate."

There are resolutions to these conflicts, however. Here are four ways to resolve office conflict:

At the first instance, the conflict should be addressed.

"When someone is exhibiting a bullying personality, it goes to something we call 'the art of inquiry,'" Young explains. "Asking questions puts you in a much more powerful position than making statements. Never allow someone else who has equal power to force a decision that goes against your best interest."

Find an intermediary.

If attempts at direct communication fail, you may need to find an intermediary, someone who can stay neutral and objective to the situation.

"The mistake we make is waiting so long to bring it to our manager and things have escalated, so by this point in time, you and this person are having words and arguments," states Thomas.

Managers aren't always allies.

Don't assume your manager will be willing to immediately mediate the conflict. Some managers choose to do nothing about it at all. In fact, 44 percent surveyed did nothing while 18 percent worsened the problem for the person being targeted. This is an indication that sometimes, depending on your manager's reaction when approached, it is better left for you to resolve.

"If your manager is not going to be an ally and you're not ready to escalate it, then you have to figure out how you isolate yourself from that individual so that you limit your interactions with them," says Thomas. "Other people become a buffer between you and them."

When all else fails …

Communication, asking questions and even bringing it to the attention of your manager could all be possible solutions to office conflict. However, 40 percent of the cases surveyed indicated that a resolution could not be reached and the target voluntarily left the organization--which may be the only solution for some.

"I think it gets to that point because the bully becomes very effective at ultimately having the victim feel isolated," says Thomas. "[It's] the same reason that when kids are bullied, they try to get out of going to school."

Source: By Zayda Rivera©DiversityInc.

10 Recruiting Problems You Might Face During Tough Economic Times

During volatile economic times, some things that used to be easy in recruiting and Talent Management become much more difficult. As a result, it’s important to identify and then focus on these new problem areas:

• Hiring freezes. One of the first knee-jerk reactions during tough times are company-wide freezes. Although salary, promotion, and budget freezes negatively impact retention, hiring freezes can decimate a recruiting function. Some tips on fighting hiring freezes can be found in my recent article.
• Stock options are no longer a major motivator. With the stock market constantly going up and down, stock options become less valuable as a motivator both for current employees and for candidates. As a result, you need to shift your sales approach to candidates to emphasize exciting work, flexible work, better benefits, more security, or to focus on cash performance bonuses.
• Job security is king. Economic volatility makes both employees and candidates nervous about their future. This fear among potential candidates causes them to increase their emphasis on security, which will definitely make “drawing away” the currently employed top performer from their current firm much harder. Recruiting needs to re-examine the information that it provides on job security on its website, in position descriptions and in its offers in order to make it more compelling.
• An increased volume of traffic. Normally, all great recruiters focus on the employed candidate (the so-called passive candidates). However, layoffs and high unemployment may mean that some high-quality people are now available among the ranks of the unemployed. Unfortunately, if you actively recruit during tough times, the volume of mediocre but enthusiastic unemployed people who will apply for your jobs will also increase dramatically. This high-volume, low-quality flow means that your screeners will be strained and that your selection process has to be more precise to ensure that you don’t mistakenly hire highly enthusiastic people who turn out to be low performers.
• Relocation issues. Moving people between regions becomes nearly impossible when individuals can’t get new mortgages or sell their existing homes. This problem affects both internal transfers and new hires. Alternatives to consider include focusing on recent college grads who generally rent or consider “narrowing” your recruiting area to a reasonable commuting distance.
• A loss of trust and confidence. Although your firm might not have been involved, the general mistrust of business that has resulted from the economic turmoil means that both your employees and your candidates will likely now have less trust and confidence in anything that you say. In recruiting, this means that your website must be more objective and believable, your interviews need to be more credible and your offers will need to be stronger, if you expect to convince the cynical.
• Managers will focus less on recruiting. Few managers have ever really enjoyed recruiting. But their interest in it will likely even decrease further during tough times as the stress from their business workload increases, while their available staff decreases. Their interest in recruiting will decrease because they certainly won’t be doing it as often but also because of the increased frustration that invariably occurs when many of their “active searches” are never be completed because of frequent “surprise” hiring or budget freezes. Their lack of interest in reading resumes and interviews will invariably mean a dramatically slower average “time to fill” at your firm.
• Layoffs. Although you probably can’t stop layoffs from happening, you should certainly fight to minimize their impact on your employment brand image. Work with PR to ensure that layoffs by your firm don’t become front-page news for potential applicants to see and worry over.
• Technology budgets. Almost invariably during tight economic times, any budget resources available for buying new technology (ATS systems or new software) are likely to disappear. So either make your purchases immediately or be prepared to live with what you have for a while.
• Recruiting budget cuts. Almost everyone gets their budget cut during business downturns but there’s no reason for recruiting’s budget to be cut any deeper than others. The key to maintaining your budget is to build a strong business case demonstrating that cutting recruiting has more negative business impacts than the limited cost savings that these cuts generate. Also utilize split samples to demonstrate your impact. When possible, work with powerful executives in growth businesses to get them to “champion” your cause or to directly fund recruiting initiatives that impact their business unit. Also, work with the CFO’s office to quantify the dollar impact of low quality and bad hires, as well as the revenues lost as a result of position vacancies in revenue-generating and revenue impact positions.

Finally, focus on winning external recruiting and “Best Place To Work” awards to increase your visibility and credibility among executives.

Source: Managing Recruiting During an Economic Downturn: The Top 10 Action Steps to Take
by Dr. John Sullivan Oct 20, 2008, 6:00 am ET

Will Hiring Freezes Decimate Recruiting?

Whenever there is a downturn in economic conditions, one of the first knee-jerk reactions that many CFOs and senior managers take is placing a freeze on all hiring, pay raises, budgets, and promotions.

The effect of long-term hiring freezes is particularly damaging to the recruiting function, because “no hiring” generally means that a majority of recruiters will be laid off. Historically, budgets for recruiting have been cut so low that the function is literally decimated, making it rather difficult for companies to resurrect a decent function when the economy swings up.

Many executives think that the decision to institute some sort of resource freeze is one that helps the organization because it contains costs; however, the opposite is more often the case. Poorly thought-out freezes that impact talent acquisition and other talent-management activities may actually harm the organization by:

• Driving increases or vacancies in revenue producing/impacting roles that decrease revenues beyond any cost savings.
• Driving increases in employee burnout/turnover.
• Missing out on new talent opportunities (i.e., not be able to hire a superstar that becomes available).
• Decreasing an organization’s capability/capacity to innovate.
• Damaging the employer brand making hiring more difficult when the economy returns.

Rather than waiting for the inevitable announcement of a freeze, recruiters need to be proactive and preempt any such silliness long before it occurs by making the business case for leveraging this time to re-architect the talent acquisition function, upgrade its strategic programs, and trade up the talent population while salaries and vendor costs can be negotiated down significantly.

Source: The Economic Downturn Means That Hiring Freezes Will Soon Decimate Recruiting
by Dr. John Sullivan, Oct 13, 2008, 6:28 am ET