Smoothing the Hiring-Firing Curve
After the recent boom and bust in payrolls, companies are finding ways to make their workforces more flexible and efficient
By Eric Wahlgren, BusinessWeek Online, May 10, 2002

Floor the accelerator, then hit the brakes. That's the way many companies handled staffing during the U.S. economy's latest boom and bust. As business turned white hot in the late 1990s, they added employees as if the world's population was going to run dry. In part, the "driving factor was fear that you weren't growing fast enough, or that your competition was going to get there first," says Clark Dong, co-founder and chief executive of HereUare, a San Jose (Calif.) wireless networking company. And, of course, growth is impossible without enough people to do the work.

Then, in one of the fastest reversals of fortune in recent memory, the Internet pileup occurred. Suddenly, companies were laying off employees -- Dong sent pink slips to 15% of his staff -- and ordering pay freezes or wage cuts. Now that the dust has cleared a bit, managers are reassessing how and who they hire, and how to make sure employees perform. In short, they're looking for employment policies better suited to a much more variable business climate.

Dong expects to start hiring again this year but much more cautiously than in the past. He'll take on only proven talent -- people who've worked as contractors for his WiFi, or broadband wireless networking, company. And one more thing: Forget hiring bonuses. New hires will start at perhaps 20% less than they would have a couple of years ago. "We have grown up a little bit," Dong says.

A SINGULAR SLUMP. For as long as anyone can remember, economic slumps have delivered pain and suffering of the kind that 2.2 million furloughed U.S. employees have felt over the past 18 months or so. This time, however, there are a couple of differences. One was the huge staffing buildup that preceded the more-sudden-than-usual bust. Then, instead of rising gradually, job reductions took place in more of a shock wave.

Another difference was that this downturn affected a generation of managers and employees who had only known prosperity. Mild as it has been when compared with past slumps, this one for the first time exposed twenty-, thirty-, and even fortysomething managers to the harsh realities of a normal business cycle -- and made them focus on an aspect of managing that few had to worry about before.

Not the least of those realities is that layoffs don't always impress Wall Street. True, a perverse effect developed during the late 1990s, when anything that was good for employees -- such as declining unemployment -- seemed to give the Street chills. Nothing like a scary dip in business, however, to restore the market's sense of perspective.

DISTRESS SIGNAL. In a study published recently in the Harvard Business Review, Darrell Rigby, a director at management consultant Bain & Co., found that from August, 2000, to August, 2001, the stocks of companies in the Standard & Poor's 500-stock index that had no layoffs rose 9% on average. Meanwhile, the shares of companies that announced layoffs of more than 10% of their workforces fell by 38% on average during the period spanning 90 days before the announcement to 90 days after.

The reason, Rigby says, is that investors viewed the job reductions as cost-cutting that reflected distress. Instead, "to give you a strong payback, layoffs should be part of a consolidation plan, or the result of renewed focus on a company's core business," he says.

Not every company got swept up in the hiring-firing fervor of the past few years. According to Rigby, only 25% of S&P 500 companies got rid of people during the period he studied, with layoffs for that group totaling 500,000, or 2.2% of total employment. The other 1.2 million or so who lost jobs during that time worked in smaller companies, many of them dot-com outfits.

STRATEGIC STAFFING. Still, with corporate profits rebounding at a leisurely pace so far this year, even long-established outfits have had to reassess their cost structures. The result: "Companies are beginning to ask, 'Are my staffing plans aligned with my strategy?'" says career coach Paul Bernard, president of Paul Bernard & Associates in New York.

One outcome of the new focus is that companies are relying more on contractors to handle tasks that aren't part of their core business, says Marie Amoruso Jackson, a marketing vice-president at Icarian, a Sunnyvale (Calif.) developer of workforce management software. Does a coal company need a $100,000-per-annum Web developer if she's only fully occupied three months a year? "You're going to always have hiring and firing," but companies are now ultrasensitized to the idea of minimizing the swings, says Amoruso Jackson.

Companies are also beefing up their performance reviews, experts say. Managers are being asked for more precise assessments of their charges, and in some cases to take part in so-called 360-degree feedback, involving evaluations from both overlings and underlings. One reason for the closer scrutiny is that managers want a better handle on the skills and talent in their organizations, which lets corporate recruiters more easily hire from the inside instead of spending thousands of dollars to go outside the company.

BUSINESS AS USUAL? Another purpose of tougher performance reviews is to weed out employees who aren't making the grade -- and pare a workforce little by little, rather than in one agonizing and demoralizing swoop. "Organizations are constantly looking to find the right people," says Joseph Riggio, president of JS Riggio International, a Mahwah (N.J.) consulting and training firm. "It's about the ability to do more with less."

Less can also mean leaner salaries. Companies are trying to wring out the excesses of the late '90s, when many fattened their pay scales to keep employees from leaping to the highest bidder. Some are granting salary hikes only every 18 months instead of annually, says Steve Gross, a Philadelphia consultant who heads Mercer Human Resource Consulting's U.S. compensation practice. "They tell people that it's business as usual, because they're still getting an increase," he says. "But they're really cutting [pay increases] by a third."

For top execs, Gross adds, overall compensation is being increasingly tied to corporate performance, with salary and bonuses now making up just 20% to 30% of the total pay package for many bigwigs, vs. 50% about 20 years ago. The bulk of executive comp -- 70% to 80% -- now comes in stock options. For many CEOs, the upside is thus huge, but the downside can be steep if a stock falls.

HIRE STANDARDS. Often, though, boards can accelerate the granting of options or offer other stock programs to ensure that high-level execs don't take too big a hit. "More and more, companies are giving stock options instead of salary increases," Gross says. "And the value of stock options is a lot less today than it was two years ago."

One thing today's looser labor market has in common with the past is that it has enabled employers to tighten their hiring standards. Back during the boom days of labor shortages, Dong says, he would settle for programmers with any kind of experience in Java (a key programming language for the Web), even if they weren't a perfect fit. "There were a lot of costs associated with ramping them up and correcting their mistakes," recalls Dong. Today, most candidates Dong sees are vastly overqualified.

Overqualified or not, in a post-September 11, post-Enron world, companies are increasingly putting candidates through the wringer. Background checks, drug tests, and the grilling of references are all on the rise. Eric Boden, CEO of Irvine (Calif.) preemployment screening company HireRight, says his revenues have doubled in the past six months despite the down hiring market, as employers look to catch candidates who lie on their resumes, or, worse, forget to mention time spent in the slammer.

MUDDLE THROUGH. Companies are also reducing their reliance on executive search firms, which typically charge a fee equal to a third of a placed candidate's first-year salary. HereUare's Dong says he's relying on his company's Web site and referrals from current employees for leads. The primary role for headhunters is the search for "an 'A' player who's still working," says Wayne Mitchell, managing director of search firm Christian & Timbers' Dallas office. Such people "aren't responding to job boards and aren't looking for jobs," Mitchell adds.

Perhaps the most important lesson from the downturn is that good management means making a company so efficient that, even in bad times, the odds are decent it can muddle through without ruining people's livelihoods -- which happened to the more than 500,000 let go in mass layoffs through March of this year. "I hope that managers ask themselves what they have learned from this experience, and what they can do to make sure they never have to go through it again," says Bain's Rigby. "Cost reduction should be part of the discussion, but you must do it in good times and in bad."

Indeed, steady attention to the bottom line is good not just for companies, but also for employees whose lives may be disrupted if they're working for managers who are duds.