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Balancing boom & bust

By Stephen Hornberger and Iain Morris
| www.cos-mag.com

During economic downturns like today, Canadian employers must determine whether their human capital is aninvestment or an expense to be managed, and be prepared to adapt theirphilosophy and their total rewards to support their businessobjectives.

{mosimage}The Canadian economy, so reliant on the U.S., has been struggling through 2008. In particular, the manufacturing sector has been suffering due to the U.S. slowdown, the situation exacerbated by the strong loonie, making our goods relatively more expensive to U.S. and other international buyers. Consequently, job losses have been heavy among manufacturing-sector employers, primarily in Ontario and Quebec. In the Canadian West, however, Alberta’s economy continues to boom, led primarily by the energy and natural-resource sectors. Organizations in these sectors, and the West in general, are faced with a tightening labour market and real challenges in securing the right talent to meet their business objectives.

How then should a Canadian organization develop its human capital strategy for 2009 and beyond? With one region of the country continuing to boom and experiencing talent shortages, and another region dealing with limited growth and job losses - how can companies, particularly those of national scope, develop fair and  consistent rewards packages? Or should they?

Over the past 60 years, the average economic downturn has lasted 11 to 18 months. With the typically  short-term nature of these downturns comes a built-in risk of short-term, “knee-jerk” reactions such as  widespread or drastic change (e.g., major layoffs). Management must ponder a fundamental and philosophical question: are human capital costs an investment to be managed or an expense to be reduced? Rather than overreacting to bad economic news or forecasts, employers that stay the course in tough times and bring solid solutions to their workforce challenges are better positioned for the long term to cope with economic shocks and labour-market fluctuations.

We are familiar with the warnings that Canada’s aging workforce may contribute to tightening labour markets as the baby boomers retire - perhaps one of the most compelling reasons to develop a long-term outlook with respect to human capital investments.

In Canada, immigration provides an advantage over countries that have limited or declining access to talent, although organizations everywhere must take this demographic challenge into consideration. Organizations that recognize this and establish long-term solutions to address this issue, among others, will ultimately succeed in attracting and retaining the talent required to meet their business objectives over the long term.

Mercer has conducted surveys, both in North America and globally, to ascertain how organizations are establishing their human capital strategies and compensation philosophies for 2009 and beyond. Based on the survey findings, we believe that companies are committed, at this early stage, to “staying the course”  more so than not. Of some 400 North American companies surveyed by Mercer in recent weeks, 64 per cent intend to maintain their budgeted staffing levels; 87 per cent are not considering any change to their compensation budgets; and 93 per cent are not instituting any salary freezes at this point.

Talent is key

Some Canadian organizations have recognized that talent is their only sustainable form of competitive advantage. This thinking is relatively new. As recently as a decade ago, the way of dealing with revenue shrinkage during difficult economic climates was simply to shrink the human-capital expense proportionally as a means of maintaining consistent earnings. Newer thinking includes increased use of contingent labour to allow greater flexibility in managing human-capital expenses.

Replacing downsized staff may take substantially greater effort and expense with today’s varying scarcities of talent and expertise across the country. Of course, there are companies that will be forced to make human-capital reductions during particularly strenuous times, but reductions should be made with the strategic goal of remaining competitive when the climate improves.

Jobs held by younger, less experienced workers are typically trimmed first, but organizations must consider where their talent mix could use some refreshing for the future.

Quick-fix plans can be quite effective in solving the immediate needs in a tight labour market. Short- and medium-term, primarily cash-based approaches, are often used:

  • Aligning salary structures with market-premium positioning (e.g., 75th percentile);
  • For national or multiregional organizations, implementing geographic salary structure differentials to recognize that pay differs across regions;
  • Providing signing bonuses to aid in attraction;
  • Implementing temporary market premiums to attract and retain talent (particularly for hot skills); and
  • Providing retention bonuses (e.g., cash bonus for 18-24 months of employment).

While these are often quite effective, a long term and holistic approach to total rewards and talent  management is crucial. If emerging giants China and India can teach us any lessons, a strictly cash-based approach is likely ineffective in achieving an organization’s desired results. For example, China and India are reporting 25-per-cent to 30-per-cent annual salary hikes, yet retention remains a significant issue, with 20-per-cent to 50-per-cent annual turnover levels.

Periodically, but especially in an economic downturn and/or in tight labour markets, companies should assess their individual situations and examine the efficacy of their compensation philosophies and overarching human-capital strategies.

An adaptable compensation philosophy helps in attracting and retaining key talent, and in turn helps achieve business goals. It should be assessed on a regular basis to ensure it meets the needs of an organization

under pressures. To be effective, the compensation philosophy should focus on six key areas, described in the accompanying chart.

In a highly competitive environment, overarching human-capital strategies must not fail to reflect effective talent-acquisition and retention policies. Additionally, and especially in multinational or multiregional organizations, human-capital strategies should allow for flexibility, reflecting different degrees of competitive pressures across different geographies or regions.

Looking at the whole rewards picture

Organizations should take a total-rewards perspective with their human-capital strategies, holistically considering base pay, variable pay, benefits, and career-development opportunities, allowing organizations to control the overall human-capital costs in a broader context that addresses how employees value their  eewards, as well as how those rewards are measured. Ultimately, it’s a matter of managing and investing human capital costs wisely and strategically, so as not to lose the competitive-edge talent that will not only help carry the organization through a downturn but will position it best for the long term.

For an organization to employ a workforce that aims to satisfy the organization’s strategic mission and  cultural values, employees must be satisfied, motivated, committed, and engaged. Psychologists and industrial-relations theorists define “engagement” as a state where employees consistently perform beyond expectations for their given job and, additionally, demonstrate commitment to the organization by speaking positively about it, inside and outside the workplace. Engaged employees tend to be more resilient and accepting when faced with short-term dissatisfaction (e.g., reduced incentive-plan budgets as a result of a challenging fiscal year).

To enhance employee engagement, organizations need to explore creative and holistic, non-traditional rewards packages. Different generations in today’s workforce may have different priorities and expectations from their employers, and may require very different intrinsic motivators to become fully engaged. And, of  course, some goals span generations: predictable income/benefits, meaningful roles, growth opportunities,

and being treated with dignity and respect.

Flexible work arrangements are highly valued. Organizations across Canada and globally have recognized  this and are increasingly promoting flexible work arrangements as an innovative approach to attract and  retain skilled labour. Flexible working hours, part-time work, job sharing, telecommuting, career breaks, and phased retirement can enhance employee engagement and engender a greater willingness to perform beyond expectations.

Organizations must determine whether their human-capital is an investment or an expense to be managed, and be prepared to adapt their philosophy and their total rewards to support their business objectives. Short-term tools and solutions, like signing bonuses, can be invaluable in a tight marketing, but a more  holistic-, total-rewards view should always be the perspective to ultimately succeed in attracting and retaining the talent required to meet their business objectives over the long term.


Stephen Hornberger is a senior associate with Mercer’s human capital business and can be reached at Stephen.hornberger@mercer.com. Iain Morris is a principal with Mercer’s human capital business and

can be reached at Iain.morris@mercer.com.

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