This post is Part 1 of the series; Avoiding the mistakes of past economic cycles
The economic expansion has set a new record, passing 120 consecutive months, but worrisome signs are on the horizon that the expansion is ending. And when that happens, every company will face some hard choices.
The biggest one employees worry about, of course, is layoffs. Many organizations might see this as the quickest way to cut costs, but our research shows that there are other options organizations can take that in the long run benefit both the employer and employee. In fact, there is a way to respond to a business slowdown in a way that increases engagement.
I’ve devoted much research to understanding the critical factors of employee alignment, capabilities and engagement, or ACE (formally known as the People Equity model). The ACE framework is an excellent way to assess how well talent investments are being optimized in organizations. Compared to engagement alone, I have found this combination to better predict company and team success. For example, an engaged team may be quite productive – yet efficiently working on the wrong priorities if misaligned with the company strategy. Considering all three factors is essential, particularly in a recession, when many of the choices facing companies put ACE at risk.
Of course, unpleasant things like lay-offs, budget cuts, and hiring freezes all have a negative impact on A, C and E. These actions, which include the most severe responses to a recession, can leave the remaining employees feeling they now have to carry a heavier load, with no additional recognition. With fewer resources, capabilities decline. The perceived inequity of these tactics weakens engagement. Implementing resource reductions also can lead to a value disconnect between employees and their company, thereby undermining alignment. Employees find it difficult to be in sync with the strategic direction of the company when those around them are losing their jobs. All in all, it’s a bad situation for both the organization and its employees.
But what about more targeted strategies?
It turns out that the effects of compensation-oriented tactics are very different. Pay cuts, pay freezes, and benefit reductions do have a negative impact on employee engagement, as you’d expect. But compensation cuts in our research had no significant impact on alignment or capabilities. It is possible that these actions, while not welcomed, are more likely to be viewed as rational and acceptable – sharing the pain through lower profits for the company and lower rewards for staff. Thus, alignment may be maintained, and with resources preserved in the organization, capabilities remain largely intact.
That being said, even among compensation cuts, not all strategies are created equal. Furloughs are typically used to cut pay by cutting total work hours, have a defined length, and unlike with lay-offs that have higher levels of uncertainty, workers remain employees. As with the other techniques, use of furloughs had no impact on alignment and capabilities. But neither did furloughs affect engagement. Perhaps that is because unlike the other actions, a furlough may be viewed as somewhat more equitable – you do not get paid, but neither are you required to work during the furlough. And furloughs are by definition temporary. Of course, we recommend that any compensation cuts happen with transparency and honesty from top leadership, who can improve overall ACE by recognizing the impact these cuts have on employees and sharing future plans for recovery.
Lesson #1. In an economic downturn, pay cuts are less damaging than lay-offs, and furloughs are the least onerous method of pay cuts.
This article is part 1 of a 3-part series. Next time: the biggest risk to Alignment, Capabilities and Engagement is not what you thought.
Jerry Seibert is an Executive Consultant at OrgVitality and an author of Hidden Drivers of Success: Leveraging Employee Insights for Strategic Advantage. With over 30 years of experience in the industry, he consults with organizations to assess how well talent investments are being optimized in organizations and help drive change that enhances employee alignment, capabilities and engagement. For more information, contact Jerry Seibert directly.