Recession Handle With Care

April 4, 2008
Diana Bell has learned not to panic when the headlines of a recession start piling up on her desk.

    That’s not to say that Bell, director of global talent management and executive development at International Paper, doesn’t have anything to worry about.

    Five years ago, when the Memphis, Tennessee-based paper goods producer hit hard times, the company had to lay off 3,000 employees, or 3.5 percent of its workforce. At the same time, however, Bell and her team were already seeing the first signs of a talent shortage, particularly among the company’s engineering population.

    Now, five years later, that talent shortage has only become more pronounced and the headlines of a recession have resurfaced. But this time Bell says she and her team are better prepared.

    "We have learned the importance of taking our time in making decisions during a down cycle," Bell says.

    Unlike past recessions, where organizations indiscriminately slashed portions of their workforces to cut costs, this time some companies are giving more thought to how they reduce headcount and how they continue to retain and recruit.

    One reason is that many employers simply can’t cut much more, says Jeffrey Pfeffer, a business professor at Stanford University. He says tepid job growth during the last economic expansion means organizations have little fat to cut now. "Companies have gone into this relatively leaner," he says.

    And in an increasingly tight labor market, companies today also realize that they can’t assume that the talent they need will be available for rehiring when the markets pick up again.

"it's about getting the right players in place so that your programs are not compromised."
—Diana Bell, International Paper

    "Whereas last time many companies were making blanket layoffs, this time around more of our clients are saying that there are certain people within their organizations that they will not lay off no matter what happens," says Brian Wilkerson, practice director of talent management at Watson Wyatt Worldwide.

    At these companies, the role of HR has changed from simply being the bearer of bad news to being a crucial player in making sure their organizations not only survive a market downturn, but bounce back faster than their competitors, experts say.

    Still, many firms are laying people off.

    Since December, Washington Mutual, Macy’s, Lockheed Martin and Starbucks have announced cuts of 3,150, 2,300, 850 and 600 jobs, respectively.

    A January survey by employment consulting and legal firm Career Protection found that roughly half of the 1,300 executives polled are planning layoffs and reductions this year. That’s up from only 13 percent of executives who were considering layoffs in 2007.

    But HR executives and consultants insist that those companies that are more thoughtful about how they go about workforce reductions will be the ones that are on top of their game after the economy picks up again.

    A recent Mercer survey found that one in three U.S. companies are considering or planning staff freezes or downsizing. While only 7 percent of companies said they are considering salary freezes, 16 percent said they are considering or have already reduced their compensation budgets since the last quarter of 2007.

    "For those organizations that just drain their talent base, the opportunity to recover is going to be much more expensive and take much longer," says Lawrence Costello, senior vice president of HR at Trane, the Piscataway, New Jersey-based manufacturer of heating, ventilation and air conditioning systems and services.

Reducing headcount
    International Paper announced in March that it was purchasing Weyerhaeuser’s container board, packaging and recycling business. While the acquisition may result in layoffs among its 42,000 U.S. employees, the company doesn’t anticipate recession-related cuts. Instead, International Paper plans to reduce headcount through natural attrition, executives at the firm say.

    "Sometimes companies are too reactionary in automatically filling a position when it becomes open," says Shelia Gray, director of global talent acquisition at International Paper. "We are saying, ‘If a body is leaving, do we really need to replace it?’ "

    But this isn’t as easy as it sounds, Bell says. The company has to make sure positions that are critical to the business and require skills that are hard to come by do still get filled despite the market downturn.

"I'm not going to let the high salaries go. I'm going to look at the lowest performers."
—John Thrailkill, vice president of stores, the Container Store

    "In the past, if someone left we might have just went by without replacing them because we didn’t have to think about whether this would hurt us in the future," Bell says. "That’s changed."

    To do this, Bell and her team have drafted a list of questions that managers need to think about to determine whether an open position needs to be refilled.

    "We want our managers to ask themselves, ‘Did this person who left have skills that are in short supply at International Paper, and are these skills hard to find in the marketplace?’" Bell says.

    Like International Paper, the Container Store also hopes to avoid layoffs this year. The Coppell, Texas-based seller of home organization products has about 4,000 employees and learned a valuable lesson during the downturn eight years ago: It’s possible to downsize while preserving key talent.

    Having determined it had too many people in support roles, including middle management slots, the company cut 30 to 40 positions, says John Thrailkill, a vice president of stores.

    The people in those jobs, though, were "some of our very best people," Thrailkill says. So rather than ax those employees, the firm moved them back into "customer-facing roles," bumping out some other workers in the process, he says.

    "We took some people that had been managing several stores and moved them into a sales role in a store," Thrailkill says.

    But the affected employees did not suffer a pay cut. In fact, to make room for them and their salaries, as many as two other workers were let go for each of the transferred employees.

    Despite the apparent demotions, none of these employees left the firm. At least one of the employees has since risen to a vice president role at the company.

"It is more critical [now] than ever
 that we are disciplined in our
growth and hiring."
—Rupert Bader, director or workforce planning, Microsoft

    If the retailer does find itself in a position where it has to reduce headcount, the company is going to make sure it retains its best people, Thrailkill says.

    "I’m not going to let the high salaries go," he says. "I’m going to look at the lowest performers."

    Although Wachovia Corp. laid off roughly 100 people when it closed its subprime business, EquiBanc Mortgage, in January 2007, it hopes there will be no more workforce reductions. The company has resisted letting go of any of the 500 staffers in its talent acquisition department—even those recruiting for the subprime lending unit, where activity has slowed down significantly.

    Instead, these employees are now helping recruiters who work in areas of growth, says Phil Haynes, talent acquisition strategy manager for the Charlotte, North Carolina-based company. For example, the company is in the midst of staffing up a new equity sales office that it opened in Geneva, Switzerland, and is also looking to hire 20 wealth management experts throughout California.

    "Laying off recruiters would not be a sound strategy for us in today’s market," Haynes says. "The competition for talent is too stiff and there are too many business objectives that we want to accomplish.

Recessionary recruiting
    Some firms are seeing the market downturn as an opportunity to find talent. Line managers at Wachovia and International Paper periodically review layoff reports provided by outplacement firms to see if their competitors are discarding talent that they can use, executives say.

    Wachovia hopes to use the economic downturn, which is hitting many of its competitors particularly hard, as an opportunity to hire aggressively. The company hopes to hire 35,000 employees this year.

    To address possible concerns that job candidates might have about going to work at the firm during a market downturn, the bank provides talking points to recruiters about the state of its various business lines through its intranet site, Haynes says.

The Container Store regularly reveals sales projections to workers,
which gives them some clarity about their job security.
"They know as much as we do."
—John Thrailkill

    "The hiccups in the financial community have been primarily in the subprime mortgage investment banking side," he notes. "There may be other areas that are doing just fine, or even in expansion mode."

    An increasing number of firms are using the market downturn to poach talent from competitors, Wilkerson says.

    "Lots of companies are asking, ‘Can I steal from key players who don’t manage their workforces properly?’ " he says, noting that this is a theme particularly in the technology and financial services areas.

    But poaching employees from competitors during a recession can be a dangerous proposition, Trane’s Costello says. "If a recession makes more talent available to you, that’s great," he says. "But if you find someone who seems great and is willing to leave their company to join yours because of a recession, you have to ask if that candidate will stay with you when your company hits a down cycle."

    Software titan Microsoft is hiring these days, but taking pains not to get fat on all the new job seekers entering the market. Rupert Bader, Microsoft’s director of workforce planning, says his team is working to ensure that the firm’s many business groups are making the right hiring investments so that they continue to deliver positive financial results.

    "When more high-quality external talent is available—as we are starting to see now that companies are reducing workforces—it is more critical than ever that we are disciplined in our growth and hiring," Bader said in an e-mail.

Keeping key talent
    In past market downturns, employee morale wasn’t a top concern for many organizations, experts say. Training budgets were often slashed and pay raises were frozen for everyone because companies figured that "employees have nowhere to go," Wilkerson says.

"Lots of companies are asking,
'Can I steal from key players who don't manage their workforces properly?'"
—Brian Wilkerson, practice director
of talent management,
Watson Wyatt Worldwide

    "But then when the markets turned around, the ones who left those companies were the high performers because they remembered how the company treated them," he says. Today these companies are trying to prevent that from happening, Wilkerson says.

    Rather than cut training, Trane, which has 29,000 employees worldwide, has changed the focus of its development programs to ensure that the company maintains market share even in an economic downturn, Costello says.

    For example, the company over the past few years has launched training programs to help its sales and marketing staff on the commercial side of the business sell services and products across Trane’s business lines, rather than just focus on equipment sales.

    These skills become even more important in a down market, Costello says. For that reason, the company is spending more time making sure that all of its employees are being assessed with this goal in mind, he says.

    "In a down market, we are more reliant on selling and marketing skills, so we want to make sure that in our assessment process we are being as vigorous as we need to be," Costello says.

    If that means that some employees need to spend more time in training courses, then that’s what Trane will do, Costello says.

    "The big mistake to make would be to stop all development activity in a down market," he says.

    Employers need to figure out which aspects of their employee development programs are essential and which are just "nice-to-haves," Bell says.

    International Paper went through this process during the last market downturn and is repeating it today.

    "Every division does this, and HR is part of it," Bell says. "So we said, ‘Here is a critical minimum that you have to do for people processes; if you want to do more and have the resources, you can.’ "

"The big mistake to make would be to stop all development activity in a down market."
—Lawrence Costello,
senior vice president of HR, Trane

    For example, in the last downturn International Paper told managers that they could do leadership assessments of high-potential employees every two years instead of annually. Managers use these assessments, which focus on the employee’s results, leadership and growth potential, to help craft their development plans.

    What was interesting, however, is that in many cases managers continued to conduct annual leadership assessments. "It was interesting to see what people valued and wanted to continue to do even if they had less resources," Bell says. Also during the last economic downturn, International Paper cut the staff and budget for its leadership institute in half, but the institute still managed to run at the same quality level as before, Bell says.

    "It’s about getting the right players in place so that your programs are not compromised," she says. Instead of having outside consultants teach courses, International Paper used its own senior leaders. "And in many ways, that was better," she says.

    Bell is sure that International Paper’s training and development programs will be scrutinized again this year, but she doesn’t anticipate any major changes. "All nice-to-have training will get questioned," she says.

    Communicating with key employees is another important component of retaining employees during and after a recession, executives say.

    "More companies are saying to high performers, ‘Even though we are struggling, we want you to stick around,’ " Wilkerson says.

    International Paper makes sure this message gets across to high performers through one-on-one discussions that are a mandate at the company. Every quarter, managers at every level in the company are required to sit down with salaried employees and talk about their careers and development at the firm. Managers of hourly employees do this twice a year.

    "We are realizing that many employees view their companies by how they view their managers, so creating a good dialogue is essential," Bell says.

    Honest communication also plays a key role in the Container Store’s strategy to hold on to employees in difficult times, Thrailkill says.

    The company told its part-time employees—who make up about two-thirds of its workforce—in advance that their February hours would be pared back more than usual this year.

    The retailer regularly reveals sales projections to workers, which gives employees some clarity about their job security. "They know as much as we do," Thrailkill says. "There’s nothing we don’t share with them, except for individual salaries."

    Some companies are continuing to pay raises or bonuses to high performers despite companywide pay freezes, experts say.

    "The high performers expect more and will leave if they don’t get more, so some companies are giving more to these people," Wilkerson says. "That might upset others, but that’s a risk that many companies are willing to take."

    Similarly, despite the recession some organizations are continuing to pay bonuses to talent that is hard to come by.

    For example, Cigna this year has introduced an annual performance-based bonus pool for its nursing community. The Philadelphia-based health care services provider has 2,000 nurses on staff, working with individuals and employers on a range of prevention, disease management and wellness programs.

    "Our nurses are critical to our customers, so we want to make sure that we have a retention plan in place," says John Murabito, executive vice president of human resources and services at Cigna. Cigna declined to comment on the details of the bonus pool, other than to say that the payout will begin in 2009 based on 2008’s performance.

    While companies like Cigna, International Paper, Wachovia and the Container Store seem to be devoted to avoiding layoffs, whether they will be able to do so remains to be seen.

    "Right now we are not seeing a deep recession, but if that changes there will be mass layoffs," says John Graham, a business professor at Duke University.

    "The reality is that most public companies are managing their workforces according to their share price," says Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School. "Even if HR says that the companies are as lean as they can be, CEOs will say, ‘Well, why are our competitors able to cut, then?’ "

    But there seem to be signs that even those companies announcing mass layoffs may be thinking more about retaining their best performers in the long term.

    For example, Citigroup, which laid off 17,000 employees last year and is rumored to be planning more reductions, in January named its first head of talent management.

    Paul McKinnon "will be responsible for recruiting, developing, reviewing and retaining Citi’s senior talent," according to a January 14 internal memo by new Citigroup CEO Vikram Pandit.

    McKinnon declined to comment for this article, but observers say that his arrival at Citigroup marks a sign that even those companies hit the hardest by the downturn in the economy are thinking harder about retaining high performers.

    "This has become a business management topic within organizations," Wilkerson says. "It’s no longer just an HR issue."

Workforce Management, April 7, 2008, p. 1, 16-22 -- Subscribe Now!