The Big Squeeze on Workers

Is there a risk to wringing more from a smaller staff?

On his recent family vacation in Arizona, Peter Spina spent much of his time camped out under a palm tree while his kids splashed around in the Scottsdale Princess Hotel's luxurious pool. Spina wasn't lounging. He was working--hammering out deals on his cell phone in a mad dash to break new accounts at Vulcan Ventures Inc., where he's publisher of The Sporting News. Spina says the downturn has forced him to work even longer hours than he did during the boom--about 15% more. Ditto for his sales force. Whereas once he had lots of bonus money to throw around, he now tries to make up for the tough slog by bringing popsicles to the office on hot days. The added hustling is one reason his team has racked up revenue gains of 46% this year in an abysmal ad market. "They're working longer and harder," says Spina.

Much has been made of the recent upsurge in productivity. Although recessions usually bring slides in this efficiency measure, the fourth quarter's astounding 5% gain gave more credibility to the idea that technology has made the economy more productive than ever before. But tell that to white-collar workers, and you're likely to hear that the gains have come on their backs. Rather than bring relief, layoff survivors say, the downturn has only socked it to them more. They complain about managing the orphaned workloads of downsized colleagues, scouring new avenues for business, and fighting for high-profile posts so if the ax falls, it won't hit them. "What we're discovering is that in this early stage of recovery, not only are companies making people work harder, but, believe me, some people want to," says J.P. Morgan Chase & Co. senior economist James E. Glassman. "They're trying to protect their job security."

That gripping desperation is easy for companies to use in their favor. Mike Hewitt, director of client services at consulting firm Aquent, says he and his staff have been bending over backwards to meet with clients who don't have any work for them so the company can get a jump on future business and be ready to roll when the rebound kicks in.

But it's not just fear that's motivating today's workplace. A number of other structural changes are also helping bosses to extract maximum productivity from their ranks. From the increased use of temps, to the reclassification of hourly workers into salaried employees ineligible for overtime pay, to the rise in variable pay that puts part of workers' paychecks at risk, companies are now able to get more out of less.

It's hard to say just how much more, given the state of statistical record-keeping. The Bureau of Labor Statistics says overall weekly hours worked have dropped in the recession--in part due to manufacturers slashing hours. But economists say it's impossible to draw an accurate picture from the BLS data. They note that the data is flawed because it often builds in an assumption that all levels of employees work 35 hours a week--managers and hourly staff alike. To which many economists reply: Come on. Morgan Stanley Dean Witter & Co. chief economist Stephen Roach, for example, believes the BLS numbers understate the number of hours worked, therefore overstating productivity.

Still, whatever the numbers say, there's no doubt that right now employees feel they have little choice but to accept the grueling loads. Despite some evidence of a rebound, the job market in many quarters is still weak. In April, the specter of layoffs revived when General Electric Capital Services Inc. announced cuts of 7,000 jobs and Lucent Technologies Inc. (LU ) eliminated an additional 6,000 positions. Job cuts are no longer a last resort in hard times but an ongoing tool for matching supply with demand.

This is one reason some economists predict a replay, at least initially, of the early-1990s jobless recovery. Rather than scoop up more permanent hires at the first whiff of demand, economists say CEOs are likely to be leery, especially with economic data so mixed. Many have bad memories of boom-time hiring binges in which they took on mediocre people just to fill slots and then wound up having to pay weeks of costly severance. Instead, economists say CEOs are likely to focus first on extracting even more from their existing ranks until demand reaches a breaking point. The big question now, asks Mary Hammershock, vice-president for human resources for Silicon Valley's Blue Martini Software, is "how much longer can you get people to do this when the upside has gone away?"

Certainly, if demand surges unexpectedly, companies could kick into hiring mode faster than expected--as soon as the third quarter. But with the earnings picture still weak and corporate uncertainty strong, employers won't engage in aggressive permanent hiring until they see the whites of the recovery's eyes. Already, companies are looking first to bring in contract workers that they can quickly tap and zap without paying any benefits or severance. In fact, the temps have been the fastest growing sector of employment this year. And they aren't accounted for as regular employees. This helps companies that use a lot of them, like Cisco Systems Inc., to drive up revenue per employee.

The growing use of the just-in-time workforce is not the only means by which companies are priming the productivity pump. Workers complain that many employers are taking advantage of outdated labor laws by misclassifying them as salaried-exempt so they can skirt overtime pay. Already, Wal-Mart Stores (WMT ), Taco Bell (YUM ), Starbucks (SBUX ), and U-Haul, among others, have been slapped with class actions. In the case of General Dynamics Corp. (GD ), this resulted in a $100 million award that is now on appeal. At Farmer's Insurance, employees got $90 million. Some employers are so worried about the issue that they are now doing wage-and-hour audits.

Another potential productivity enhancer: incentive pay, which enables bosses to motivate people to work harder during tough times to make up for lost wages. General Electric Co. (GE ) will soon start factoring customer performance into employee pay, putting an even greater chunk of compensation at risk. Under this system, if a customer's business suffers, so does the GE employee's paycheck.

Yet even as they push existing employees, companies also have to think about what's down the road--the likely return of tight labor markets and a replay of the 1990s' battle for talent. Demographers and labor experts note that the recession merely masked the deep skills shortages lurking within the labor force. "It will be even worse than it was in 2000," predicts Texas Instruments Inc. (TXN ) Chairman, CEO, and President Tom Engibous, who says the sequel could come as early as 2003.

Like many CEOs, Engibous faces the tough job of balancing the need to juice profits right now with the longer term goal of cultivating his choice employees. That's why he has launched a "re-recruiting initiative" at TI, asking workers what they need--days off, new assignments, a different boss--to keep them satisfied right now. He figures if he waits until the rebound is in full bloom, it could be too late. For companies that squeeze too hard, it probably already is.

By Michelle Conlin in New York

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