Small Isn't Beautiful When Skills Are Scarce

Patrick J. Moquin has been on the job only since Aug. 1, and he's already reading the help-wanted ads. But that's part of his job as the first-ever vice-president of human resources for Unitrode Corp., a manufacturer of integrated circuits in Merrimack, N.H. Moquin is checking out the competition to see what Unitrode must offer to attract the design engineers and other professionals so crucial to the company's growth. "The price of admission is making sure you are paying a very competitive compensation package," he says.

Moquin isn't the only one on a quest for top-notch employees. With the U.S.'s healthy economy and tight labor markets, small companies across the nation will face the difficult task of filling jobs that require more than basic skills. From software developers in Seattle to machinists in Chicago, specialized positions are going unfilled, even as unskilled labor remains plentiful.

Small and midsize companies are increasingly worried about labor shortages and the near-certainty of having to sweeten the pot to attract skilled workers. Some 25% of companies with fewer than 500 employees cite a lack of qualified workers among their three most significant challenges, according to a joint study by Arthur Andersen & Co.'s Enterprise Group and National Small Business United. That's up from 20% in 1994 and 13% in 1993. In fact, when asked to list the top three hurdles to growth and survival, small businesses mentioned labor costs more often than even government regulation.

So far, the national trends in costs for wages, salaries, and benefits have glossed over these concerns. The growth in labor costs continued to slow in the second quarter--a pattern that held true in all major regions (charts). However, the slowdown in labor costs is due solely to sharp cutbacks in what companies, mainly large corporations, are paying for benefits, which make up about a fourth of total compensation costs nationally. Because of slower growth in the costs of health care, workers' compensation, and state unemployment insurance, benefits grew only 2.6% during the past year, the slowest pace on record.

The downtrend won't last. The economic expansion, already 41/2 years old, has helped to push the national jobless rate down to 5.6% in August--below the level that is thought to be "full employment." Only 2.8% of the workforce is without jobs in the Research Triangle area of Raleigh-Durham-Chapel Hill, N.C. Even in Michigan--a state long associated with winding unemployment lines--the rate is just 5.1%. Moreover, the economy is unlikely to decelerate enough to open up much slack in the labor markets. The result: higher costs to attract, train, and retain good employees.

The pressure can already be seen in wage and salaries, which make up about 75% of labor costs nationally. Hourly pay for the U.S. nonfarm sector is up 3% in the year ended in June, up from 2.5% a year earlier. At Walker, Richer, & Quinn Inc. (WRQ), a Seattle-based producer of connectivity software with a payroll of 150 workers, competition for technical talent has caused wage creep. "People are expecting a 10% salary increase if they change jobs, and other companies are offering hefty signing bonuses," says Norris Palmanter, employment director of the two-year-old company. WRQ has lost one potential candidate because it could not match the competition's bonus.

Indeed, most small companies have neither the cash nor the cachet of big-name corporations. Tm remain in the hiring game, smaller companies must be creative in using their limited resources to attract the best job candidates. It boils down to what the company can afford. Cobra Electronics Corp., a Chicago-based maker of radar-detection devices that employs about 150 people, emphasizes perks such as flex-time, and it's using recruiters for the first time. Others simply bite the bullet and offer everything from child-care services to stock options to attract employees for key positions.

For most companies, though, the goal is to add workers without adding costs. One method: emphasizing flexibility and growth opportunities. "A lot of people are looking for the same technical people we are," says WRQ's Palmanter. "We let people have the freedom to be creative." At Seattle's Caffe Appassionato Co., a three-year-old retail and wholesale coffee company, a "barista" who makes espresso now may eventually become the store manager, says vice-president Tucker McHugh, who emphasizes promotion from within.

In today's information economy, the hottest market is for workers with computer skills. Tivoli Systems Inc., a software maker in Austin, expects to add more than 100 new workers this year to the 200 already there. It's recruiting people with technical backgrounds, including computer science and engineering, with salaries up to the low six figures for certain positions, says William G. Bock, senior vice-president for operations. One solution for Tivoli, which expects sales of $40 million-plus this year, is subcontracting. It signed up 10 outside companies when its professional-services business, which offers computer consulting and training to customers, was overwhelmed by demand. Bock admits that using outsiders is more expensive, but the strategy gives Tivoli quick access to a large pool of labor.

Of course, rising wages don't have to rob a company's bottom line. As long as new workers boost productivity, the addition to revenues covers the extra costs. At circuit maker Unitrode, the rule of thumb is to ensure that base-wage costs don't grow by more than half the pace of revenue gains. Still, there is no set formula for a fair and cost-efficient compensation package. "It becomes a matter of risk management," says Unitrode's Moquin. "How much are you willing to pay before you bastardize the integrity of the process?"

Don't expect the job scramble to level off soon. In a recent survey of small-business owners by KeyCorp, a bank holding company based in Cleveland, 38% expected their companies to grow in the coming year, up from 26% a year ago. That means demand for skilled labor will continue to outpace supply, positioning 1996 not just as a year of help wanted, but of help wanted desperately.

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