Treat Employees Right in Tough Times

If employees really are your company's most important asset, mass layoffs and salary freezes are a poor way to show it

Time after time, I have heard senior managers say: "People are my organization's most important asset," or "Employees are No. 1 in my organization." But I'm fed up being told that, and I don't want to hear it anymore.

Yes, praise for employees sounds good. But even when the economy is strong, there's an enormous gap between the rhetoric and the reality in many companies. Now that the economy is turning down, companies face a tough test in demonstrating how important their people are to them.

Often the first reaction of companies to hard times is to reduce labor costs. It's pretty much expected that they will lay off employees and freeze or reduce wages and benefits. This is probably the right move when human capital is not a key source of competitive advantage. But what about when it is—such as at knowledge-work companies where employees are expected to add significant value to products and services? In those kinds of businesses, it hardly seems wise to focus on cutting labor costs and decreasing a key asset. Rather, it makes much more sense to think of an economic downturn as a chance to gain or increase a competitive advantage that is based on human capital.

A Buyer's Market in Talent

Down times in the economy create a buyer's market in talent, just as they create a buyer's market in real estate. Human capital-focused companies realize this and see downturns as a chance to raise the quality of their most important asset—their human capital. The most obvious way is by hiring individuals who, in good times, are not within their reach or are very difficult to recruit. Because they see people being laid off in their companies and are told salaries are frozen, they will listen to job offers that in good times they wouldn't.

But even in a downturn people won't necessarily take a lowball offer, even if things are tough in their company. They may want to hang on because they have high seniority. Thus, unless a company is doing very well in the downturn, like Google (GOOG), it may have to offer them a higher salary to recruit them.

In the best of all scenarios, even in a downturn, a company can afford to hire new talent without reducing present staff; but if that's not the case, there is nothing wrong with making some performance-based reductions in existing staff while recruiting new talent. If this is executed well, it can simultaneously serve to reinforce a company's emphasis on performance while upgrading its talent.

But what if an organization needs to reduce its head count and it is not obvious that this can be done by eliminating subpar performers? In this case, a company's objective should be to reduce its staff in a way that will not harm but may in fact enhance its employer brand.

For example, in the dot-com downturn, Cisco (CSCO) took a number of steps to ensure it would continue to be seen as a good employer even though it had to reduce its workforce. The company offered sabbaticals to some of its employees and offered to pay partial salaries to laid-off workers who went to work for charities and community ventures. It also helped subsidize the continuing education of former employees who wanted to advance their skills or change careers. Not surprisingly, when it came time for Cisco to start hiring again, it had no problem attracting a very talented pool of applicants because it was seen as a good place to work.

The Cisco approach isn't right for all companies, but every company needs to consider the impact that cost-reduction actions can have on its brand as an employer. If handled poorly, even small reductions can have a big long-term impact.

Adding Insult to Injury

Witness Northwest Airlines (NWA). Its management recently sent a booklet to employees subject to a layoff, advising them how they could save money after being laid off. Among the things included in the 101 Ways to Save Money booklet were buying jewelry at pawnshops, getting auto parts at junkyards, taking shorter showers, and finding valuable things in the trash by "dumpster diving"!

Employee outrage followed the distribution of this would-be helpful booklet. Management apologized for issuing it, but the damage had been done. Indeed, one of the positive outcomes of the proposed Delta/Northwest merger may be the disappearance of the Northwest employer brand.

So far, it doesn't appear that U.S. companies are responding to the current downturn as if people are their most important asset. More and more companies are reporting layoffs and salary freezes. But if your company wants to make people your most important asset, you can strengthen the company and prove that you mean what you say. The key question is, what kind of company will yours be? Will you take advantage of this opportunity to improve your talent level and strategic capabilities?