People@Work: Will an improving economy spur top talent to flee?

Despite the brightening economic picture, a new survey shows about a third of employers remain skittish about hiring new employees. An even greater percentage say they plan to cut jobs in the new year. Yet some signs now show that many companies are concerned that previous cutbacks have put them at risk for a talent war, according to Towers Perrin, an employment-services consulting firm.

In response to last year's financial crisis, many employers not only cut jobs but reduced benefits and pension-plan contributions, and froze salaries. Now that the global economy has stabilized, "significant concern" is brewing within organizations about losing their top performers, the survey says. "Specifically, 70% of companies reported that they are very or somewhat concerned that high-performing employees may leave," Towers Perrin says, "up from 62% expressing such concern this year."

Employers in some cases took a hatchet to human-resource costs when perhaps a scalpel would have been more prudent, says Ravin Jesuthasan, managing principal at Towers Perrin. "When the economy turns, this critical talent may well remember the actions their company took during the downturn and make the decision to leave," he says.

Incentives May Include One-Time Stock or Cash Bonuses

Nevertheless, Jesuthasan says employers weren't blind to their own actions and are now trying to remedy the situation. Some have responded to the growing threat of losing key workers by providing them with one-time stock or cash bonuses or salary increases, he says. That trend is likely to continue into next year, even as salaries for lesser performers remain frozen.

In which forms those incentives take "almost gets to an individual case," says economist John Alan James, a professor of management at Pace University's business school in New York. In many instances, employees are deep in debt and need cash to help stabilize their personal finances, he says, whereas workers who aren't in such dire straits are perfect candidates for stock options.

Another method to reward high-performing employees is through group incentives, says James. Such compensation may be based on predetermined goals and be split among members of the group. In any scenario, much depends on the company's own cash position. "It's a complicated situation," he says. "There's no easy solution."

Looking more broadly, James says, employers' indecision on raises, hiring and expansion is being intensified by legislative behavior in Washington. It's impossible for companies to plan strategically if they don't know which proposals the White House or Congress will offer up next, such as those currently being debated on health care, energy and tax policy. Many employers are opting to stay in a holding pattern until they get a better sense of which laws will pass and in what form.

No Big Rush to Raise Most Workers' Pay

Professor David Lewin of UCLA's Anderson School of Management takes issue with that point. "Uncertainty has actually been a fact of life for the last quarter-century or a little more," he says. Just as Congress is debating an overhaul of health-care insurance now, lawmakers in the late 1990s were busy deregulating financial services and banking.

Regardless of the reasoning, Lewin expects that employers will err on the side of caution when it comes to compensation. "I don't anticipate a big rush to raise pay," he says, adding that there will be exceptions for particularly talented or well-situated employees, as in nearly any economic situation.

With the economy brightening, most employers are expecting increases in demand for products and services, which in turn puts greater pressure on the workforce. Whether employers will respond to that increased demand in the traditional way, by raising pay, or continue to hold the line on compensation, remains unknown.

The companies best suited to deal with the issue now are those that responded to the financial crisis not through eliminating jobs but by cutting pay and benefits, thereby keeping people employed and thus building loyalty, Lewin says. "Those companies are in a pretty good position to not have to raise their compensation rates unless a modest recovery turns into a rapid one."

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