HR Magazine, January 2001: Stepping Carefully

Attention to staffing levels, compensation and training will help ride out a slowdown.

While experts debate the extent of the economic pause they all expect, a number of disparate factors, such as history’s tightest job market, and slower growth of the nation’s labor pool, make managing the slowdown more complex for HR professionals.

Most agree that the old "slash and burn" approach to payroll costs won’t work this time, and point to a number of other areas where HR managers need to focus their attention when the economy starts to cool.

Staffing and Training

Because many organizations have learned the hard way that it’s usually cheaper to retain and retrain than to fire and rehire, careful workforce planning gains special emphasis. Cutting back on hours is a common reaction to slower sales. Once you’ve hired and trained workers, it makes more sense to adjust their hours than to let them go.

"A big lesson learned from the recessionary times of the early ’90s was that companies were much too quick to cut staff," says Anna Rappaport, principal and worldwide partner at William M. Mercer Inc. in Chicago. "Ten years ago, it was actually thought that employees were pretty interchangeable; now they’re really not."

John Challenger, CEO of Challenger, Gray & Christmas Inc., an outplacement consulting firm in Chicago, says, "Companies are tending to look at the workforce as just-in-time." A greater reliance on independent contractors and temporary workers, for example, reduces the need for layoffs. Moreover, including job-sharing among flexible work options can help if HR is called upon to eliminate some jobs and combine others.

In a slower growth economy, maintaining productivity gets tougher, another reason for a renewed emphasis on training. Rappaport suggests cross-training as a smart strategy. "Develop a skills-building program so that employees can move into different roles if need be."

There’s also new evidence that investments in workforce training can influence a company’s future financial performance, including its total stockholder return, according to research by the American Society for Training & Development (ASTD) based in Alexandria, Va.

In a major study of training practices and outcomes of 575 U.S.-based publicly traded firms during 1996, 1997 and 1998, ASTD found that companies that invested $680 more in training per employee than the average company in the study improved their total return the next year by 6 percentage points.

Researchers found similar patterns when looking at gross profit margin, income per employee and price-to-book ratios (a measure of how expensive a stock is). Firms in the top quarter of the study group that invested an average of $1,595 per employee in training experienced 24 percent higher gross profit margins, 218 percent higher income per employee and 26 percent higher price-to-book ratios than firms in the bottom quarter that invested on average $128 per employee.

"It is clear that a firm’s commitment to workplace learning is directly linked to its bottom line," says Mark Van Buren, director of research for ASTD.

Training has been a big emphasis at Beers Construction Co., a 3,600-employee firm based in Atlanta, says Scott Cranford, vice president of human resources. Last year, for example, the company held three training programs at its Atlanta headquarters. The one-week course covered the basics of the construction industry and drew 200 office managers and project engineers from Beers’ locations around the country, Cranford says.

Conducted by company group vice presidents, the course focuses employees on understanding what skills they have and what skills they need. "Everyone finds out they may have similar knowledge to share or that they need to learn more in a particular area," says Cranford. "We’ve found that it can really make a difference." Beers also stepped up training in interviewing techniques for its hiring managers.

Benefits and Compensation

Considered nearly untouchable as key components in a competitive recruitment and retention market, benefits and compensation are likely to remain last on the list of corporate cuts. "With the marketplace the way it is and the lack of talent a constant, you really have to have competitive benefits," says Cranford. "You can’t scrimp."

In fact, the benefits blanket is being spread even wider in an effort to keep workers happy and on the job. To combat a 50 percent turnover rate among its 10,000 employees, Spartan Retail, a supermarkets subsidiary of Spartan Stores Inc., based in Grand Rapids, Mich., has extended such benefits as tuition reimbursement and prescription-drug coverage to employees who previously were excluded because of their job classifications.

Plans for 2001 and 2002, according to HR Director Beth Baumgartner, call for creating more opportunities for flexible work schedules, career pathing, training and other work-life benefits.

Indeed, two national studies show that while the cost of health insurance is rising, more companies aren’t cutting benefits, but are picking up the extra expense and even expanding coverage. Despite health premium increases averaging 8 percent or more over the last year, employees are not paying more for health insurance and, in some cases, are paying less, according to a benefits survey of 3,000 employers conducted by the Kaiser Family Foundation in Menlo Park, Calif., and the Health Research and Educational Trust in Chicago.

In addition, an Arthur Andersen survey of more than 450 organizations found that more companies also are providing medical coverage to part-time employees who work at least 20 hours per week—with 90 percent of them saying they treat part-time and full-time employees the same with respect to medical coverage.

Companies already squeezed between higher health care costs and bottom-line concerns also need to expect higher benefits use during an economic downturn, says Mercer’s Rappaport. Historically, she says, weak economic periods have brought higher health care usage—as well as higher disability and workers’ compensation claims.

"Employees faced with the possible loss of jobs and company-paid health coverage are likely to take care of nagging ailments that they may have been postponing," she says. "The stress of workforce reductions or other cutbacks also can foster health-related problems."

But among nontraditional benefits—particularly the trendier fads—the picture already is changing.

New benefits added fast by labor-starved employers may have been too costly or not effective enough in attracting and keeping employees, suggests a recent SHRM survey. The poll offers some evidence that employers have grown more cautious about the number of benefits they offer.

The SHRM 2000 Benefits Survey shows overall decreases from the previous year’s poll in the number of employers offering relocation assistance, health and wellness programs, subsidized cafeterias and certain types of leave.

"We are in a period where we’ve really changed the dynamic of how organizations treat their people," says Challenger. "Employers pay much more attention to soft benefits and accommodations. But as HR is under increasing pressure in a slower growth economy to shave costs, it’ll be difficult to balance that with the new employee expectations of today’s job market."

So what will be first on the chopping block? "The wacky ones," predicts Challenger. "The things like free BMWs, veterinary services for pets on site or nap rooms. It’ll be easier to let those go."

Bottom line: The economy will have an effect on the types and extent of benefits programs and compensation plans that HR designs. In a downturn, return on investment will dictate which perks stay and which go.

"I would poll employees now to get a sense of what’s most important to them and take your cues from that," he says.

Investing for Efficiency

Business investment in equipment and software increased at a healthy annual rate of 8.5 percent in the third quarter of 2000, the U.S. Commerce Department reported—sound, but less strong than in the first half of 2000. This latest advance marks a record 38 consecutive quarters of growth in equipment and software spending. Information technology hardware and software have accounted for 70 percent of that contribution.

Thousands of companies have invested heavily in new technology—and HR certainly has been a recipient. By electronically processing 98 percent of the resumes it receives, for example, New York-based AT&T Corp. has cut the time it takes to fill a position from 120 to 48 days.

But as the economy cooled in the third quarter to a 2.4 percent annual growth rate—after growth of 5.2 percent in the first six months of 2000 and the slowest pace since the spring of 1999—economists pointed to less investment by American businesses as one reason. One offshoot of that fact: Companies will have to look harder and deeper within the organization to find additional efficiencies.

"As productivity slows and profit margins shrink, there is going to be pressure on everybody to buckle down," says Kathryn Kobe, vice president and senior economist at Joel Popkin & Co., based in Washington, D.C. "HR will be asked to find savings that may be hard to find—the easy stuff has already been found."

It may be harder to do in certain regions of the country as well. That’s because productivity varies widely across the United States. For example, as measured by output per worker and adjusted for differences in industry composition, productivity is as high as 19 percent above the U.S. average in Connecticut and California and as low as nearly 25 percent below average in North Dakota, Nebraska and Montana, according to state economic data.

"Each company will have to make a decision on if and where to pull back if necessary," adds Challenger. "It will be very interesting to see how it all plays out."

Susan J. Wells is a business journalist based in the Washington, D.C., area with more than 16 years of experience covering business news and workforce issues.​