Human Capital & Careers

Risks & Benefits: Gauging the Downturn

How high will unemployment go? Employers eagerly await the answer to see whether HR policies need retooling.
David KatzJanuary 11, 2001

Just like that, the tight labor market seems like old news.

Seemingly yesterday, the shift in the balance of power toward employees and away from employers seemed like the biggest revolution since the fall of the Berlin Wall.

Suddenly, talented workers—youthful ingenious ones and sage-like elders—were lusted after by employers to fill newly expanded workplaces. Stock options tied to the tail of a surging stock market were a prime lure. Signing bonuses abounded.

That environment is still largely in place. But the tight labor market seems to be unraveling day by day. Last Monday, for instance, this site took note of layoffs at 12 companies, as well as some doomful national numbers.

To be sure, the Labor Department reported on January 5 that unemployment had held steady at 4 percent in December. But how long will it stay there? And if it starts to rise, how high will it go?

Indeed, the contrast between the strong unemployment numbers and layoffs at a growing number of individual companies has put employers contemplating their benefits and compensation strategies in a tough spot. They must hatch their plans in the face of baffling uncertainty about the labor market.

What should companies be doing now? Some experts think it might be a little early to shift their overall strategy.

However, companies are likely to start mulling the next step. If they bet that unemployment will rise sharply, that will mean less aggressive employee-retention policies and more cost- cutting. Such employers would withdraw from heavy use of stock options—not that these devices would be much of a lure in a heavily contracting stock market, anyway.

In fact, when it comes to stock options, Steve Gross, the head of employee-compensation consulting for William M. Mercer Inc. in Philadelphia, advises employers to think about no longer giving them out to everyone. “Segment the workforce. Only do something for the people [you] can’t do business without,” he says, adding that he wouldn’t advise making wholesale cutbacks right now. To allay employee anxieties about a future dive in their employers’ stock, companies can take next year’s option grant and distribute it now, he suggests.

In another area, health benefits, companies worried about an extreme downturn might think about retrenching by adding coinsurance provisions or hiking deductibles.

However, at this point, few companies are inclined to make moves in anticipation of a employee-employer shift in the balance of power. “I haven’t found corporations changing plans in the direction of benefit and pay cutbacks, says Gross. “There’s still a feeling that there’s a shortage of good people.”

In hatching their benefits strategy, most employers thus seem more worried about long- term tightness in the labor market than in a near-term unemployment surge. That’s certainly the case at OGE Energy Corp., an Oklahoma City- based electric and gas utility holding company.

I talked to C.D. Montgomery, manager of organizational development and training at OGE, to find out whether the downturn was causing him to shift his human resources focus. A board member of the Alexandria, Va.-based Society for Human Resource Management, he also provides a good perspective on the responses of his HR colleagues.

“In general,” he tells me, “the slowing economy is not making an impact” on the entrenched HR goal of attracting and retaining talent.

OGE in particular isn’t contemplating changing its benefits and compensation strategy in response to the slowing economy. “As a utility energy company, we’re more conservative” than companies in other industries, Montgomery says.

A Boomer Bust?

But the company, like many others, is facing “demographic problems,” the executive says.

“Baby Boomers are not mobile,” he notes. And that inertia could spawn problems as the first wave of Boomers starts to retire and companies try to attract others of their generation to replace them.

With that in mind, OGE has made some changes in its pension plans aimed at retaining Baby Boomers and attracting talented younger workers. To lure the latter, the company added a cash-balance pension plan to cover anyone hired after January 1 of this year. As a benefit to older workers, existing employees can still choose to take part in OGE’s traditional defined-benefit plan, rather than the cash-balance plan.

Cash-balance plans are defined-benefit plans that look like defined-contribution plans. While each participant has an “account” credited with a dollar amount that resembles an employer contribution generally determined as a percentage of pay, the participant’s benefit is still defined.

The important point is that cash-balance plans appeal a lot more to younger workers than do traditional defined benefit plans because they’re portable and the benefits accrue more swiftly during an employee’s first years of employment.

Unlike cash-balance plans, which are based on yearly accumulations, traditional defined- benefit plans are based more on retirement age and the employee’s length of service.

To further sweeten the deal for older employees, OGE is offering existing workers the chance to take a lump-sum distribution, rather than an annuity, on their defined- benefit plans when they retire, according to Montgomery.

Workers on board before January 1 can also now learn how much money they would be entitled to if they retired right now and took the lump- sum distribution. While that may move some workers to retire, Montgomery thinks it’s more of an encouragement to stay on.

When most people learn how much money they’d get now, they’re likely to conclude “how much better my retirement will be,” he insists.

Deregulation Spurs Competition

Besides demographics, says Montgomery, an event specific to OGE’s industry and location will be a big driver of HR strategies: the scheduled deregulation of power generation in Oklahoma in 2002.

Specifically, the company is pondering how to change its pay and benefit packages to fit the coming separation between the deregulated power-generation side of its business and the regulated transmission and distribution sides.

Montgomery says he expects deregulation will be delayed in Oklahoma as the state assesses the difficulties California has had with energy deregulation. But once deregulation occurs in Oklahoma, and OGE’s generation business is split into a separate company competing with other companies for market share, its recruitment policies for the generation unit will have to turn more aggressive.

Although OGE currently only offers stock options at the executive level, it may consider a broad-based plan for the new generation unit, Montgomery says. He acknowledges that the current plight of Pacific Gas & Electric and Southern Californiais creating some concern about utility stocks in general.

“But generally, a utility stock is generally a good investment because it doesn’t change much and pays a decent dividend,” he points out, noting that OGE’s stock looks strong right now, having hit its high price for last year, $24.75, on December 28. It will pay a quarterly dividend of 33 cents on January 30.

Long-term structural issues like deregulation, coupled with changing demographics, are thus influencing OGE’s HR outlook a good deal more than the current plunge in the stock market and the growing incidence of layoffs, Montgomery says. If you’re a dot-com rather than a utility, however, your perspective may be different, he acknowledges.

Nevertheless, he adds, “a recession can change all that” and plunge all types of companies into benefit retrenchment.

Still, however, it’s good to see that the long- term thinking about “human capital” that characterized the expansion and made it a model of what can happen when an economy goes pro-employee has held firm so far through the current downturn. It’s that kind of thinking, after all, that can help pull us out of it.

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