One-in-three companies across Europe is preparing to cut its full-time workforce, but business leaders risk doing long-term damage to their companies if they repeat some common mistakes made during the last recession.
Plans to lay off full-time employees signal the scale of the collateral damage the current financial crisis is inflicting across the European corporate landscape. The UK has the highest proportion – at 57% – of companies preparing a major redundancy programme for full-time workers, reflecting the severity of the downturn on home shores.
In Russia, the proportion is 40%, in Austria and the Netherlands 38% and France and Spain 37%. In Germany, Europe’s biggest economy, the figure stands at 32%. Among industries, the automotive, consumer goods and industrial goods sectors have the highest proportion of companies preparing radical cuts in their workforces: 46%, 45% and 44% respectively.
Serious and longer term impact
The Boston Consulting Group (BCG)/European Association for People Management (EAPM) report – entitled ‘Creating People Advantage in Times of Crisis: How to Address Human Resources Challenges in the Recession’ – indicates that, while understandable given the short-term pressures, this strategy could well have a serious and long-term impact on a given company.
Employee commitment is a key element of an effective culture: in short, how employees are treated in bad times will be remembered by them in good times. This is not something which business leaders should ignore, since demographic factors mean that Europe’s companies will face shortages of skilled staff in the near future.
Rainer Strack – co-author of the report, and a senior partner of the company based at BCG’s Dusseldorf office – told SMT Online that, when shedding jobs, companies should act with great care.
“In the last recession, companies cut employees to save money, only to discover key shortages a few years later. In some countries, the future recruitment challenges confronting organisations will be especially acute, because the size of the workforce is set to decline as a result of a ‘double whammy’ of factors: falling birth rates and the rising number of ‘baby boomers’ entering retirement.”
Methodology for the survey
The report – part of a broader survey of 3,348 Human Resources and other executives from more than 30 European countries and 15-plus industries, which will be unveiled later this year – features the responses of 883 executives on their company’s strategy in the current economic crisis, and the lessons learned from the last episode of this nature.
These views, collated between November and January, have been supplemented by detailed face-to-face interviews with senior leaders of more than 90 major European companies which were conducted between December and March.
The findings show that some of the most popular actions executives are planning to take during this crisis proved relatively ineffective during the last recession, and were damaging to the long-term health of the company’s culture.
The three most popular planned actions are cutting back on recruitment (identified by 69% of respondents), company events (54%) and bonus payments tied to company performance (45%). When compared to the average action, the second and the third of those were less effective and had an unfavorable impact on employee commitment during the last recession.
Another popular action in this crisis – cutting back on training – is going to be relatively ineffective when compared to the average action. The action that had the most positive impact on employee commitment during the last recession – hiring the high-performing employees of competitors – is currently one of the least popular actions (19 out of 22) in this crisis.
Reviewing people strategies from the last recession
Linda Holbeche – Board member of the EAPM and director of research and practice at the CIPD – said: “Companies should review people strategies deployed during the last recession to avoid using interventions which have been proven over time to be ineffective. It’s important to recognise that a lot of managers will not have the experience of handling change of this scale, so in order to avoid the mistakes of the past companies must follow the good practice outlined in this report.”
The Best Practice of some of Europe’s top companies – which were gathered during the interviews with Board members and senior executives – have been used to develop a 12-point Human Resources action plan that should assist companies to reduce costs in a way that will not harm their prospects when the crisis comes to an end.
Philip Krinks – partner and managing director of BCG’s London office – said: “Despite the colossal pressures business and Human Resources leaders are under, they still have choices. They can significantly shape the destiny of their companies. During 2009, as well as responding to the pressures, companies have opportunities to prepare for when the recovery eventually comes.”
The 12 Human Resources points include:
– Strategic workforce planning
Companies should build scenarios based on a precise understanding of their supply (influenced by retirement and other attrition rates) and demand (influenced by business strategy and productivity) needs over 3-10 years. In this way, they can better redeploy their staff – rather than simply sacking them – and anticipate any future shortages of skilled workers.
– Performance management
Companies should overhaul their performance management and rewards systems so that these better reflect long-term business goals and reinforce the company’s values.
– Employee engagement
Companies should engage with employees in an honest, direct and empathetic way and create excitement around the opportunities at a time when traditional motivators – such as pay increases and promotion – are not an option.
– Leadership capabilities
Companies should equip their leaders with the very different set of skills needed to run a company struggling with cutbacks rather than growth opportunities.
– Change management
Companies should ensure that, when restructuring or introducing reforms in the wake of the crisis, they have a sustained and rigorous programme management and change agenda in place.
– Internal and external communication
Companies should communicate with employees in a way that is more personal, more frequent and more trusting.
Short term alternatives to redundancy
Linda Holbeche continued: “As well as using these longer term measures to create companies with far-sighted strategies, employers also need to be considering short-term alternatives to redundancies to get through current crises. These might include implementing short-time working, pay freezes or even pay cuts and sabbaticals.”
The BCG and the EAPM conducted the Web survey in Europe from November 2008 to January 2009, receiving 3,348 responses from Human Resources and other executives in 33 European countries. 883 of them answered questions about their Human Resources practices in the recession.
This survey was supplemented by interviews with more than 90 senior executives, which were conducted between December and March.
Two million jobless: who’s being hit the hardest?
As expected, official labour market figures published by the Office for National Statistics (ONS) show that UK unemployment has now topped the two million mark.
Analysing the latest ONS figures, Dr John Philpott – chief economist and public policy director at the Chartered Institute of Personnel and Development (CIPD) – finds that these are the “most doleful set of jobs figures since the start of the recession”. Philpott also highlights the groups, sectors and regions that have so far borne the brunt of the jobs downturn.
Overall labour market situation and outlook
“Not only is unemployment back to where it was in 1997,” commented Dr Philpott, “but it now looks as though we are heading towards the worst outlook for jobs in the UK’s post-war history. Full employment is not just slipping away, it’s beginning to sink without trace.”
“The rise in the headline level of unemployment above two million is only part of this sorry story. Much more alarming is a surge in claimant unemployment in February – the monthly increase of 138,000 in the number of people claiming Jobseekers’ Allowance surpasses even the darkest days of rising unemployment in previous recessions.”
That surge was driven by a flood of new claimants, reflecting other ONS statistics showing that firms cut almost a quarter of a million employees (248,000) in the final three months of 2008, and made 266,000 people redundant in the three months ending in January 2009.
“The only bright spots in the figures are increasing part-time employment and temporary working, which people are turning to as an alternative to the dole, and self-employment, though CIPD soundings suggest that this might reflect a noticeable tendency of some firms to cut in-house services and instead contract former employees to supply the same services as external suppliers.”
Sector impact: broadly based
“The impact of the recession on jobs is fairly broadly based across the private sector. In proportionate terms, the big losers according to the latest ONS figures are finance and business services, closely followed by manufacturing, with shops, hotels and restaurants another sector being hard hit. These sectors are at the forefront of a slump in job vacancies as well as redundancies.”
“As the CIPD expected, the latest figures show that the private sector is bearing all the pain of the recession, with employment in the public sector continuing to rise and public sector pay running away from that in the private sector. In the year to January, pay rises for public sector employees were climbing at 4% (including bonuses) compared with just 1.4% for employees in the private sector and 1.8% for the economy as a whole.”
What about the impact in terms of gender and age?
“As has been the case so far during the jobs downturn, men are being hit much harder than women, whether one looks at job prospects, redundancies or unemployment.”
“The recession is having a far bigger impact on employment for young people aged under-25, with older people now protected by anti-age discrimination laws and employers far less willing than in previous recessions to meet the pension liabilities associated with allowing older staff to take early retirement.”
“However, the age impact of the recession looks different if one instead reviews unemployment. As the downturn bites, more young people seem to be turning to education as an alternative to joblessness. Although more likely to keep their jobs in the downturn, older people are finding it harder to secure jobs if they do end up unemployed.”
Regional impact of the recession
“Compared with previous recessions, this jobs downturn looks far more broadly based in its regional impact. Different regions are experiencing their own monthly ups and downs, but overall this is a: ‘We’re all in it together’ recession with no obvious North-South divide so far.”
Figures published by the ONS do highlight the degree to which public sector pay and employment has remained immune to the impact of the recession.
Dr Philpott suggests that while the Government is right not to cut public sector jobs at this point in the economic cycle, ministers should take a much tighter grip on public sector pay.
“Whereas previous UK recessions have often been characterised by a regional North-South divide, the most noticeable feature of the current recession is the ‘public sector-private sector divide.'”
“The public sector is at present an entirely ‘recession free zone’. While private sector employers are shedding hundreds of thousands of jobs and freezing or cutting the pay of millions of employees, their public sector counterparts are mostly maintaining staffing levels and presiding over relatively generous pay increases.”
“As unemployment passes the two million mark, on its way to at least three million, there’s a strong case for preserving or increasing public sector employment. The public sector needs additional resources at this time to cope with the various social consequences of the recession, and it would anyway be a false economy for Government to make public sector staff redundant and then have to pay them welfare benefits. There may in due course be a need to trim the public sector workforce, but for the time being this makes no sense.”
Clamping down on public sector pay rises
“What the Government could and should do, however, is put a clamp on public sector pay rises. With the private sector in dire straits, and inflation for now giving way to deflation, there’s no labour market necessity or strong economic justification for public sector earnings to rise faster than private sector earnings.”
“Cash-strapped private businesses are asking staff to make sacrifices to save jobs. The Government and public sector employers should do likewise, redirecting savings on wage bills to help combat the rising toll of unemployment. Public sector employees have a vital role to play in dealing with the consequences of recession. Part of that role is sharing the burden of pain, which at the moment is being borne solely by their private sector counterparts.”
The Budget: what can the Government do?
This week, the CIPD is calling on the Government – and Chancellor Alistair Darling, who delivers the Budget to the House on Wednesday – to prioritise vital measures that will keep people in work, while also offering hope to the young and long-term jobless.
The CIPD wants the Chancellor to present a genuine ‘Budget for Jobs’ by focusing on keeping people in jobs during the recession, primarily through a cut in employers’ National Insurance contributions, backed by a focus on job creation for the young and long-term unemployed.
In a paper launched in advance of the Budget, Dr Philpott advises that delaying the National Insurance increase planned for 2011, as well as cutting current contributions, would bring the Chancellor one step closer to sowing the seeds of recovery.
The advice follows the results of this quarter’s CIPD/KPMG Labour Market Outlook survey, which shows 37% of the 500 employers surveyed across all sectors naming NIC cuts as a policy ‘most likely’ to improve their organisation’s resilience through recession. This is followed by a temporary cut in corporation tax (19% agree) and a further temporary cut in VAT (8%).
Measures to keep people in work
According to KPMG in the UK, cutting the Class 1 employer rate of NIC by 1% for a period of six months during the current tax year would cost just under GB pound 2.5 billion, based on HMRC’s own figures.
Colin Ben-Nathan – employment tax partner at KPMG in the UK – commented: “While we recognise that the scope for any further tax reductions is severely limited by extreme pressures on the public finances, we urge the Chancellor to focus any resources available on measures to help keep people in work, and further to encourage hiring and training.”
Holding off the annual rise in the National Minimum Wage this October is also recommended to help reduce the risk of job losses in low-paid sectors such as retail. The CIPD is additionally calling for the introduction of a manufacturing specific subsidy to support short-time working.
In the CIPD/KPMG survey, 56% of respondents from the manufacturing sector said they were most likely to use a short-time working subsidy, compared with an overall average of 28%. They were also most likely to say that it would make a difference to their organisational resilience (27% as compared to an average of just 8%).
“This year’s Budget should be about saving existing jobs as well as helping the jobless find work,” urged Dr Philpott. “Employers in general are urging the Chancellor to adjust payroll taxes to support employment, while a majority of those in the manufacturing sector believe a short-time working subsidy would enable them to hold onto staff during the recession.”
Temporary job creation programme
The paper, entitled ‘How to Make a Policy Virtue Out of a Fiscal Necessity’, also advocates a temporary job creation programme targeted directly at the young and long-term unemployed as a last resort for jobless people for whom other measures already introduced by the Government have not proven suitable.
Based on the experience of previous UK job creation programmes for the unemployed, the CIPD estimates a net cost of GB pound 5,500 per place per year on such a programme in 2009-10. The Chancellor could announce an initial programme with 250,000 participants at a net cost of around GB pound 1.4 billion. The programme would be in operation by the beginning of 2010.
The CIPD predicts that a given increase in public borrowing to finance a targeted job creation programme would generate:
– 25 times as many jobs as an equivalent sum used to cut personal income tax
– 21 times as many jobs as an equivalent sum used to cut VAT
– 12 times as many jobs as an equivalent sum used to increase public investment
– 8 times as many jobs as an equivalent sum used to increase current Government spending
Dr Philpott concluded: “Rightly or wrongly, the Chancellor may decide he can’t afford another substantial fiscal stimulus in this year’s Budget. However, by highlighting the relatively large ‘bang for the buck’ from a targeted job creation programme for the young and long-term unemployed, Mr Darling can offer real hope to tens of thousands of jobless people without breaking the bank.”