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The Wild New Workforce

Cover Story

The Wild New Workforce

It first emerged in Silicon Valley. Now it's forcing companies to play by new rules

Guys like Reed Kingston scare the pants off CEOs. Two months ago, Kingston, a partner in Ernst & Young's Cupertino (Calif.) office, waved goodbye to his huge, ergonomically correct office, razor-sharp secretary, and consulting work with some of Silicon Valley's most glamorous companies. Today, he does scut work like bookkeeping off a second-hand laminate desk for a voice recognition startup called Voci Corp. The offices are in the back of a grimy machine shop. As the company's vice-president of sales and service, he has no assistant, no benefits, and no salary.

What makes Kingston so worrisome? He's anything but the stereotypical tattooed twentysomething with a bungee- jumper attitude about corporate loyalty. Kingston is, in fact, a 42-year-old company man--the type of hard-working, sober citizen who has been the backbone of corporate America for generations. Spending his entire 18-year career at the Big Five firm, he finally made partner three years ago. He has a wife, twin four-year-old daughters, a huge home, and an even bigger mortgage. "I'm risk-averse," Kingston says.

The really scary part is how many Reed Kingstons there are. Their worker wanderlust, fueled by stock options, signing bonuses, and the chance to take on a bigger challenge, is not restricted to Silicon Valley anymore. With the tightest labor markets in 30 years and unprecedented opportunities beckoning, it's a wonder that more members of the wild new workforce haven't cleared out their cubicles and leveraged themselves into better gigs. After all, when budget hotels offer managers free BMWs, pancake houses in Texas dole out $4,000 signing bonuses, and Deloitte & Touche gives away new Jeep Wranglers and $15,000 checks to employees simply for referring new bodies, then every worker should feel emboldened. If this boss won't provide a raise, stock options, extra time off, or whatever, then another one will.

So how is it that the growth in real hourly compensation has actually slowed--from a 4.3% annual rate in the third quarter of 1998 to 2.3% this year? Necessity begets invention, and businesses that have little or no pricing power with their customers have been getting pretty crafty about cooking up ways to cope with a labor market that would have devastated them a decade ago. They know that big across-the-board raises would wreck profits, so they simply refuse to hand them out. In fact, annual raises have fallen from 5.2% in 1990 to 4.2% in 1998 and 1999. Meanwhile, variable pay--stock options and bonuses often tied to performance goals--is increasing (charts, page 41). This is a way to compensate superstars in the expansion without locking in higher fixed costs that will be burdensome in a downturn.SHREDDED CONTRACTS. The new compensation isn't free, although it is cheaper (page 44). Still, companies have little choice when the job market looks like a city gripped by a speculative real-estate boom. "When the valuable properties are surging, some average lots on the extreme perimeter go for irrational prices," says Bruce Dennis, president of startup Sevant Inc. in San Jose, Calif.

Something else is going on here, though--something that will likely outlast the current hiring crunch: Just as the New Economy is dismantling the old rules of commerce, the new workforce is shredding the contracts between employers and employees. Employers are giving up rigid wage scales in favor of flexible compensation. They are learning to live with high turnover and abolishing seniority-based pay. "We're in a dramatic transformation," says Hewitt Associates LLC compensation consultant Paul Shafer. "We're moving toward person-based pay."

And the trend away from corporate loyalty that began in the 1980s when companies eliminated layers of mid-career employees has now flipped in favor of the worker. In this environment, an employee who remains loyal to an organization is penalized. After all, if the woman in the next cubicle can jump to another company for a 20% raise, a signing bonus, and stock options, why should you wait around for that 4% merit hike?

That's where Reed Kingston was. Week after week, underlings would come and tell him that they were being wooed by startups promising rewards and challenges that Ernst & Young could never match. "I found it harder and harder to tell them why they should stay," he says. So, he joined them--trading his security and six-figure salary for the chance to make a fortune and a big difference in the life of a new company.PRECIPICE. How long business can continue to plug the holes in the dikes is unclear. Much depends on whether the Reed Kingston syndrome spreads further down into the workforce. Already, warns John Challenger of Challenger, Gray & Christmas, Corporate America "is dangerously close to the precipice" as it tries to keep up.

Before business goes over the edge, it's more likely that economic growth in the U.S. will moderate, and the job market will loosen up. It's a safe bet that nobody will be doling out "smart-dress" allowances, free flying lessons, or new cars as they are today. What will remain is an altered employment relationship in which increasingly independent workers negotiate their own way through their careers. "These seem to be tendencies that aren't driven by the business cycle," says Daniel J.B. Mitchell, a professor of management and public policy at the University of California at Los Angeles.

One side effect that could create tension: the stark contrasts in the workplace as companies lavish bonuses and fat salaries on new hires, while existing workers bump along with compensation low enough to keep the overall average down. "[Companies] can't afford to be concerned with internal equity," says Eric Larre, a consultant with Aon Corp.

And the differences across industries are stunning. In computer manufacturing, pay for nonsupervisory workers rose 12% in the third quarter, according to the BLS. For telephone communication workers, in contrast, the BLS says pay actually fell 0.7%. Dan H. Marks, president of auto dealer Libertyville Classic Group Inc. in Waukegan, Ill., says his technicians are getting 10% fewer hours of warranty work this year, and average wages are off about $80 a week.JUGGLING JOB OFFERS. These tensions between the haves and the have-nots are fueling a lot of new resentments. At workplaces everywhere, new hires with no experience are swaggering into the office with pay packages far bigger than those of veteran staffers. Elite employees are making so much money so quickly and are juggling so many job offers that they live in constant fear of making the wrong decision and blowing their chance of getting their "two commas" and retiring at age 40.

Many companies recognize the need to keep the troops happy--with special bonuses and soft perks. California-based Cheesecake Factory Inc. pays salaries 20% above market rates, according to People Report, a human resource journal. But it also gives stock options to all its general managers. They also get to drive shiny new BMW 323's. Sounds expensive. But the company says it has actually saved money, losing only two general managers in the last two years in an industry where 38% turnover is average.

TIS, a Manhattan-based e-business consulting firm, keeps its turnover to a minuscule 3% by hiring for the long term. It avoids one-dimensional, work-over-the-weekend geeks. Instead it looks for people who have compelling outside interests and encourages them to bring their passions to work. In his spare time, Senior Software Engineer Andrew Peterson is a tightrope-walking juggler. On any given day at TIS's hip downtown Manhattan offices, he can be seen practicing in his circus gear.

For all the enlightened approaches that the new workplace is inspiring, there are plenty of companies getting more out of their workers the old-fashioned way--by simply loading on the work without upping the pay. That's exactly what Sivivian Merrick says happened to her at MCI Communications Corp. Merrick joined the company--now part of MCI WorldCom Inc.--in 1997 in a job taking orders for phone service. MCI gave her a $37,000 salary and a fancy title: "provisioner engineer."

In a class action pending in federal court in Houston, Merrick and others allege the engineer title was a disingenuous way for MCI to get around paying workers overtime. Merrick says she worked 70-hour weeks, subsisting on fast food and minding her 4-year-old son Mister while she worked into the night. MCI says it won't comment on pending litigation.

Throughout the economy, the speedup is well under way. The 40-hour week has all but disappeared: Americans now log 260 more hours a year than they did a decade ago. Pharmacists and government workers have already won suits awarding them extra pay for overtime work. Flight attendants at Continental Airlines are mulling a class action over a requirement that they show up at the airport 45 minutes prior to the flight's departure. Their gripe: They don't start getting paid until the door to the aircraft has slammed shut.

Whether it's longer hours or clever tricks to boost productivity, companies are finding ways to get the job done without paying more. Fargo (N.D.)-based Tharaldson Enterprises, the country's largest private hotel operator, puts the laundry right behind the front desk so check-in clerks can wash linen in their free time. Maids are paid by the room, not by the hour.

Another option is to tap new pools of labor, including immigrants, offshore workers, the disabled, prison inmates, welfare recipients, and senior citizens. Mark Gregory, a fast-food operator with shops in the Midwest, is looking into getting special permits to allow him to hire 14- and 15-year-olds to pick up the slack. Gregory already tried sending recruiters to the parking lots of competitors and offered workers leaving their jobs an extra $2 an hour if they'd come work for him at a new Arby's.

Gregory is one of many business owners who say that without immigrants, they might have to switch off the lights. He's down to one English-speaker, and the cost of training the others, plus the extra compensation, will crimp his operating margins by 4%. Immigrants are filling jobs across the economy are doing everything from washing dishes to doing the heavy thinking in some of the nation's top research laboratories. Glovia International, an El Segundo (Calif.)-based software company, says 90% of the software developers in its Pro4 division are on H-1B visas, which allow "specialty occupation" workers to enter the U.S. for employment. They come from Japan, South Korea, India, Russia, Mexico, Ireland, and Britain.

The other way to tap foreign labor is to follow General Electric Co.'s lead, pushing work offshore--directly or by demanding that suppliers do so (story, page 74). Microsoft Corp. and RealNetworks Inc. use a Bangalore, India, company, Aditi Corp., to handle customer e-mails.

How much longer can companies keep pulling these rabbits out of their hats? The H-1B visa program is under constant assault by labor groups who say it is just a way to undercut the American worker. And Southfield (Mich.)-based Quality Information Systems Inc. in October pleaded guilty to federal felony charges of visa fraud for running what Peter Tangalos, an attorney for 25 former QIS consultants, says was "a sweatshop for computer consultants."

In the end, no amount of juggling and clever tactics will completely reverse the power of workers to get higher wages at some point. Even now, the low rise in nominal wages may be artificially depressed by the fears of economic downturn that were in the air when budgets were set in late 1998. For now, the outlook for 2000 seems tame: Hewitt Associates says raises will stay at 4.2%. But if salaried employees who have been putting in extra-long hours to keep up with the sizzling economy demand more when budget season gives way to salary review season, then the figure could jump.

The good news for employers is that by making compensation more flexible, they are better prepared for the inevitable downturn. If things go bad, it's easy enough to stop giving signing bonuses, tell the temp workers to go home, and cancel the BMWs. That's both good and bad for the economy: Lower compensation erases consumer buying power at a vulnerable moment, but it preserves employer profits.

However the economic cycle plays out, the workers will never willingly go back to the old ways. In the New Workforce, even gray-templed loyalists like Reed Kingston are taking the kind of chances once reserved for a circus. And employers, like it or not, are learning to keep a lot of balls in the air.By Michelle Conlin and Peter Coy in New York, with Ann Therese Palmer in Chicago, Gabrielle Saveri in San Mateo, Calif., and Bureau ReportsReturn to top

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