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Human and Intellectual Capital Viewpoints

Human Resources and the Crisis

by Christopher Johnson


Christopher Johnson is a senior partner at Mercer, a leading international provider of HR and related financial advice, products, and services. He is responsible for developing Mercer’s reputation for human capital services and the provision of human capital strategy, talent, and reward services in the UK market. He has been in consulting for nearly 25 years, supporting private and public-sector organizations in managing human resource issues. Before joining Mercer in 2008, he worked for the UK government’s Cabinet Office, where he was responsible for employee relations and rewards across the Civil Service. Prior to that, he was with the Hay Group, Kinsley Lord, and Towers Perrin.

There are many facets to human resources (HR), but the economic context in which HR management takes place is clearly a critical determining factor. What do you make of the current business environment and its impact on corporate decision-making?

By late 2011 developed markets, particularly in Europe, were going through a time of intense political uncertainty. What emerged strongly in our conversations with clients in the second half of 2011 was their feeling of unease and frustration at the lack of political leadership in resolving the sovereign debt crisis. If you go back a few months before that, confidence about growth was an issue, but companies felt that they knew how to take investment decisions in difficult markets and they knew how to mitigate the risks of things turning out differently from whatever was envisaged in their “plan A.” However, as political uncertainty has come to the fore, it has become very difficult for business to take big decisions. Merger and acquisition activity shrank through the second half of 2011 as companies opted to wait to see how things developed. Similarly, there has been a falling off in recruitment and expansionary projects of all kinds.

Companies are looking to the politicians to improve the climate for enterprise, which means tackling public debt and creating a climate for growth. Meanwhile, in developing and emerging economies there is growth, investments and being made, and talent is in short supply. Many multinationals are not investing in the developed markets, where the economic crisis has been most marked; rather, they are focused on growth markets in Asia, Africa, and eastern Europe.

The crisis is exacerbated by the fact that through the boom years many governments invested in public services and drove up public-sector debt. It is now clear that a number of governments were quite highly leveraged when the 2008 downturn took hold. Without the banking crash that followed, many of these ills might not have come home to roost, but the crash happened and getting fiscal and public sector deficits back on to an even keel is going to take hard work. This is the backdrop to what is going on internally in companies as far as recruitment, retention, and staff rewards and benefits are concerned.

Through the crash and the subsequent emergence from recession, companies were confident in their ability to navigate economic uncertainty. They were investing in their people, and that continued to drive business for HR consultancies such as ours. However, with the emergence of political uncertainty a more disabling state of affairs has arisen. Companies have to mitigate risk, and one of the most obvious ways of mitigating it is to be very cautious about investments and about increasing staff numbers. This is why many companies have loads of cash and, at the same time, are keeping people costs tightly under control.

What was your experience of corporate reactions to the downturn of 2008 and its aftermath as far as retrenchment was concerned?

A striking feature of this recession is that companies did not immediately turn to cutting jobs. On the whole they have tried to hold on to talent, recognizing that they have invested heavily in staff recruitment and development, and that these are the very people who they will need to help them to come through the contraction and the subsequent emergence into a new growth phase. Since jobs have not been cut, but companies have nevertheless been under intense pressure to reduce their cost base, we have seen a variety of methods deployed to reduce or contain staff costs. These have included pay freezes and a shift to part-time working and voluntary sabbaticals. As a consequence, over the last 12 months job creation has been at a far lower level in the economy as a whole than one might have expected from historical trends.

There is another dimension on the back of this that is very interesting. As companies have sought to utilize existing staff, rather than recruiting, to meet new demand, there has been a significant growth in the trend of retirement-age staff opting to stay on now that default retirement age has been removed. This means that the baby-boomer generation is going to be around for a good bit longer. They need to stay in work because they are living longer while trying to fund the lifestyle they are comfortable with. This in turn has a knock-on effect on jobs for younger generations since it becomes more difficult for them to find a way into the workplace if there is less movement in the upper levels of career progression.

On the macro-scale, you can see what happens when the numbers of unemployed youth climb to the proportions that have been reached in Egypt, Tunisia, and other North African and Middle Eastern countries caught up in the turmoil of the Arab Spring. It is very destabilizing to an economy to have large-scale unemployment and for the economy not to be producing jobs for new arrivals on the jobs market.

Again, on the macro-level in advanced economies we are seeing a huge disparity between the baby-boomer generation and those just arriving on the jobs market. By and large, the baby-boomers have already got relatively good pensions and quite a bit of capital, since many sold their houses at the height of the property boom. In contrast, people in their mid-20s are going to have relatively poor pensions, are having extreme difficulty getting on to the housing ladder, and have university loans to repay. And even when they do manage to finally buy a house, it is unlikely to appreciate in value at anything like the rate enjoyed by the baby-boomers.

So the baby-boomer generation is truly the golden generation, and we are unlikely to see its success replicated by subsequent generations. We are now into a much tougher rewards picture for entrants to the jobs market and for the generation that will follow.

At the same time, we are seeing governments forced to scale back the benefits they have become accustomed to promising their citizens. This all adds up to considerable and mounting pressure on people to work far longer for lower rewards, and that is a tough environment for corporates to operate in. Companies have an obvious need to motivate staff and to have them aligned with and committed to their goals. But this all has to take place in the context of a significantly less rewarding picture overall. In an era characterized by zero to low single-digit growth and a return to low price inflation, year-on-year salary increases are also going to be extremely modest. That, too, impacts the way companies need to think about reward structures.

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