nav-left cat-right

Time to Unfreeze Your Wages?

posted by – March 29th, 2012

Again no raise? Adam Cobb, management professor at Wharton, and the school’s director of the Human Resources Center, Peter Cappelli, both feel that employees have borne salary freezes, cuts in benefits, and extra work because of layoffs for too long—basically since 2008., a career website recently surveyed 2,500 workers and found that 17% reported employers had cut or eliminated bonuses, while 15% said employers had dropped such perks as commuter subsidies. Half of respondents’ employers had cut pay or laid off workers in the past 6 months, and one quarter reported hiring freezes at their companies.

Cappelli wondered about the impact on employee performance, engagement, and turnover, adding “I have yet to see a company that has even attempted to work this out … [Employers] are not thinking about these employment issues in cost-benefit ways. They say, ‘Well, the economy is still soft; people aren’t quitting.'”

Cobb firmly believes organizations will pay a price down the line for their short-sighted frugality. There’s real danger, he says, to a company’s reputation and morale. If a frustrated worker “writes an angry  blog about company X cutting healthcare benefits, that isn’t ever going away,” he says. “These are things firms might not be thinking about.” Enough negative online posts, Cobb warns, can ruin a company’s ability to attract talent in the future.

Cobb and Capelli point out that employees continue to increase their productivity. They agree that people have no choice; they must also do the work of laid-off colleagues. Cappelli notes that publicly held companies feel compelled to try to please their shareholders, by focusing on quarterly earnings expectations and driving cutbacks if necessary—not to mention restoring dividends if they’ve been cut. And, of course, all of those efforts are at the expense of employees. Says Cobb of employees’ reactions, “I think there’s a general feeling of: ‘This system is rigged, and not in my favor.'”

What about contingent workers? Contractors and temporary workers have seemed like a great solution to many employers in the continuing recession. A recent Careerbuilder survey found that 35% of U.S. companies have smaller staffs than they did in 2008, and many are using staffing firms to fill in the gaps. At least for the employer, employee  benefits are entirely avoided, and the payroll hasn’t increased permanently. But as staffing firms well know, many temporary workers stay on the job for long enough to acquire valuable knowledge and skills, and they are ultimately hired as full-time workers.

Matthew Bidwell, another Wharton management professor, comments, “Just because you don’t have to pay them severance doesn’t make it any easier to let them go,” once they’ve become valuable to your operations. Bidwell also agrees with Cobb and Cappelli about the potential impact of 3-year pay freezes: “If the hiring market improves, will people quit? Or will some organizations decide that, ‘Hey, we don’t need to give automatic raises anymore.'”

Companies linking pay with performance. HR consultant Mercer, in its 2011/2012 US Compensation  Planning Survey, reported that organizations are increasingly focusing rewards on key and top employees. The survey, covering 1,200 employees who represent more than 12 million of their colleagues, found that the 8% of employees rated  as top performers got an average base pay award of 4.4% in 2011. Those rated as average, or 54% of workforces, got only an average of 2.8% pay increases.

Here are two additional strategies recommended by Wharton  professors: First, if you absolutely must cut costs, involve employees in the decisions about what and where to cut. Take their views into consideration. Research shows that workers are better prepared for negative outcomes if they see the decision-making process as open and equitable.

Second, if you reward your top-level executives as lavishly as many firms have done in the past—while you’re cutting back wages and benefits for other employees—get ready for a backlash. Watch out for sagging morale, and for the probability that when unemployment goes down, you may lose a host of your employees.

Seriously consider giving small raises or bonuses. At the end of the Wharton discussion, Cobb chimed in again with a plea to employers that they give workers a visible reward. Need convincing? MetLife’s most recent Annual Study of Employee Benefits Trends reported employee loyalty declining. More than a third of workers (36%) were anxious to move.

Meanwhile, Careerbuilder’s 2012 U.S. Job Forecast reported that 43% of HR managers were concerned that top talent would leave during the year. About one-third of those managers said voluntary turnover had increased in 2011, with departing workers citing compensation and feeling overworked as their top two reasons for leaving.