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The Great Reversal?

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The problem: Corporate leaders are facing signs of a downturn but are unsure how aggressively to react, especially when it comes to hiring workers and offering them flexibility.

Why it matters: Many sectors are still facing labor shortages and know that employee pullbacks or layoffs can backfire.

The solution: Whether it’s hiring freezes or changes in return-to-work policies, leaders need to be transparent about their reasoning.

The corporate leader could feel it. In the group meeting she had called, she could sense that her employees were nervous. After a less-than-stellar update on earnings, she opened the floor to questions that turned out to be a lot different than the ones she’d heard in 2021. Are layoffs coming? Have hiring freezes started? Are departments cutting back on budgets? No one asked about hybrid work, bonuses, or return-to-office plans.

A year ago, when the world economy began roaring back from the devastation of the pandemic, the balance of power between companies and their employees changed. Workers’ leverage grew. And grew. Facing an unprecedented labor shortage, firms began posting millions of jobs, allowing workers to ask for—and often receive—substantial raises or promotions. Work-from-home flexibility became a given too, even as indoor operations in service industries, from restaurants to movie theaters, resumed. Many HR officials say they needed to find ways to get people through the door to meet the economy’s new demands.

Yet workers by millions took the stunning step of quitting, often with no other jobs in hand. Such was the freedom they had at the start of the year, with 11 million jobs unfilled. The media coined a term for it: The Great Resignation.

But many corporate pros and experts are not quite sure what to call the era we’re living in today. Many jobs remain unfilled, and some unhappy workers are still quitting. But the script between employers and employees appears to have been flipped, experts say. The trifecta of a looming recession, surging inflation, and subdued stock markets has forced firms to make adjustments on everything from salary caps to hiring freezes. And that has taken a toll on many workers’ psyches, shying them away from asking for benefits and arrangements common only a few months ago. “People are waiting for reality to come back into play,” says Doug Charles, president of Korn Ferry in the Americas.

“People will return to the job market because we have a bit of a perfect storm.”

Trying to navigate these times, some firms are acting quickly. In a recent Korn Ferry survey of dozens of multinational clients, some 21 percent say they have initiated hiring freezes in one form or another. Another fifth have toughened up their work-at-home arrangements, finalizing return-to-office policies. Yet even as companies gain back some of the leverage they ceded to workers, most know that going too far can backfire—now and in the future. “CEOs will need to offer reasons well beyond ‘because I said so’ to make changes to their various employee policies,” says Jamen Graves, global co-leader of Korn Ferry’s CEO and Enterprise Leadership Development practice.

What complicates this new era is its contradictions. Across lower-level jobs, and for certain key skill sets, labor shortages remain stubbornly high, for example. In many cases, multinational executives find themselves dealing with unfilled openings in some departments even as they shut down salary wars and decrease flexibility in others. Below, a look at the major areas that firms and Korn Ferry partners say are shifting in these shifting times.

Hiring

Over the last few months, an increasing number of economists and business leaders have been predicting a recession. Most employees expect one too—which likely will have an impact on both job seekers and employers.

Eighty percent of those seeking employment expect the US to enter a recession in the next year, and nearly half of them anticipate that the market will get worse over the next six months, according to a new survey of more than 11,000 candidates from the online job-posting service Joblist. Further, 60 percent of job seekers feel they need to speed up their search before market conditions change. The number of job openings in the United States plunged by nearly 7 percent from April to May. All told, job openings have fallen by 500,000 since peaking at 11.8 million last March.

The shifting job market is just one worry for workers. Another is inflation, which—by cutting into spending power and eating away at savings built up during the pandemic—is already pushing people back to work. Alan Guarino, vice chairman and co-leader of Korn Ferry’s CEO and Board Services practice, says some of these shifts may be short-lived, but for now workers feel pressure. “People will return to the job market because we have a bit of a perfect storm,” he says.

Different times, different realities

December 2021

  • Make 5 job offers, 1 person accepts
  • Counteroffers for every employee who threatens to quit
  • Inflation at 7.0% annual pace
  • Productivity is fine
  • Most bosses want everyone back in the workplace

July 2022

  • Make 5 job offers, 4-5 people accept
  • Counteroffers for a select few who threaten to quit
  • Inflation at 8.6% annual pace
  • Productivity is dropping fast
  • Most bosses make peace with hybrid schedule

What this means, experts say, is that employers can make adjustments to their hiring offers without worrying unduly that potential employees will walk away. Organizations are starting to offer smaller raises and fewer bonuses than they did last year; they’re also taking a stricter line on remote work. “Some benefits are being reserved for those who have their manager’s trust,” says Jacob Zabkowicz, vice president and general manager for Korn Ferry’s Global RPO business.

Employers have begun initiating hiring freezes as well. In a survey of its biggest clients, Korn Ferry found that 20 percent have put in place hiring freezes of some form in 2022. Many organizations have become reluctant to spend on mid- and senior-level positions unless absolutely necessary. “If they don’t need it, they won’t spend it,” says Sheila O’Grady, a senior client partner in Korn Ferry’s Consumer practice. Instead of hiring anyone they can, some talent professionals are slowing things down for fear of hiring the wrong person just as the economy softens.

But employers haven’t reclaimed all the leverage they ceded during the pandemic. They remain desperate for new recruits in lower-wage jobs. “There’s not a multiunit business that I walk into where there isn’t a hiring sign on the door or at the register,” O’Grady says. The quest also continues for in-demand skills such as data analytics and nursing.

Compensation

For a few months in 2021, it seemed as if employees could make any wage demand and companies at least had to consider it. With the job market so tilted in favor of workers, firms significantly bumped starting pay to candidates (in order to hire them) and to existing workers (in order to try to keep them). Wages and salaries in the United States increased 5.3 percent, on average, for the 12-month period ending in June 2022, a massive jump over the 3.2 percent for the prior 12-month period. This number masks the fact that some firms had to boost salaries by 50 percent or more to attract or retain talent.

Today’s conditions have all but ended the era of massive pay bumps, especially in sectors sensitive to inflation. In a Korn Ferry survey of more than 100 retail firms, for example, 51 percent had no plans to offer additional compensation in light of inflation, while another 53 percent had not had any discussions about merit raises next year. “Your valuation criteria is going back to what it was used to,” Charles says. Still, with unemployment low and the number of job quits remaining high, experts believe that organizations will be handing out average raises of 4 percent to 5 percent during the next fiscal year. These won’t be blanket increases, which were common last year; instead, they’ll be directed toward top talent, says Tom McMullen, a senior client partner in Korn Ferry’s ESG and Inclusive Rewards practice. “A one-size-fits-all approach might be the easiest to implement, but it’s not fit for leaders' purposes now,” McMullen says.

“From a worker's standpoint, the shifting job market is just one worry.”

For some organizations, the bigger compensation issue now might be pay equity. During the last 18 months, many companies stretched their salary guidelines. But over time, some employees discovered they were making far less than new hires; this created engagement issues for managers. Some firms responded by raising some, but not all, salaries. “Anything that is subjective or done on an individual basis is likely to cause gaps and inequity in treatment across groups of people,” says Benjamin Frost, a senior client partner in Korn Ferry’s Products group who works on compensation issues. The best way forward, McMullen says, is to create more robust principles around compensation management, such as hiring guidelines, promotions, hiring and retention bonuses, and counteroffers. “Companies need to refocus on this issue, starting with a reassessment of where they stand now,” he says.

Return to Office

It turns out that it was a lot easier to get employees to work remotely than it is to get them to return to the office. During the Great Resignation, plenty of software coders, marketers, accountants, lawyers—along with thousands of other workers— adjusted productively to life without commuting. Millions of them now want to continue working remotely, even as many of their managers struggle to get them back to the workplace. In some markets, only 40 percent of workers have returned to their offices, and even in the cities leading the way, that figure is around 70 percent.

As the Korn Ferry survey found, one in five companies have not finalized their return-to-office plans, after more a than a year of back-and-forth decisions in this area. Guarino believes that some of this may continue in an economic downturn. But he warns firms to not embrace this shift long-term. “There are many companies who have made the decision to be hybrid or remote,” he says. “So employees will have options.”

One option that some leaders are trying: offering remote work only to employees who have gained their trust. “That trust is becoming something employers want to be able to evaluate, much like a worker’s ability to close a sale or work well with colleagues,” says David Vied, global sector leader of Korn Ferry’s Medical Devices and Diagnostics practice.

Productivity

For most of the pandemic, productivity remained stable or even increased for many industries. But that has changed recently. In the second quarter of 2020, business sector productivity, or output per hour, fell at a 4.6 percent annual clip. That’s on top of a 7.4 percent annualized drop in the first quarter, the largest pullback in 74 years. That has many leaders scrambling for new efficiencies—looking everywhere to reduce costs, or at least stem increases.

In general, clients should consider rolling out cost-cutting strategies from the least painful to the most painful, says Nathan Blain, Korn Ferry’s global lead for optimizing people costs. Start with things like eliminating waste (such as unused software licenses), cutting back on business-travel expenses, reducing reliance on contract workers and consultants, and using targeted, rather than blanket, salary and bonus awards.

“One option some leaders are trying: offering remote work only to employees who have gained their trust.”

The next step involves “ruthless work prioritization,” Blain says. This could include cutting fresh projects that might be great to have but are disconnected from the overall strategy of the business. Layoffs appear toward the bottom of the list. “If you have done this well, you end up with a workforce that is still relatively rightsized to the workload,” Blain says. Unfortunately, he adds, most companies tend to cut workforce significantly, leaving the remaining workers to pick up the slack.

At least for now, workers understand that the economy is softening and are willing to pitch in. In a recent Korn Ferry survey, an overwhelming 63 percent of professionals said they'll be taking a shorter vacation in 2022. In addition, nearly 40 percent said they’ll check in with work multiple times a day during vacation—almost double the number who said the same in 2021—while only 8 percent said they wouldn’t contact their offices at all, down from 13 percent in 2021. Savvy organizations should tap into this sentiment, McMullen says. “The best companies say, ‘Hey we’d like your help. If you have ideas about cutting costs or boosting productivity, let us know.’”

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Experts say that this new era of economic softness could bring about some painful adjustments for organizations that—outside of the first few months of the pandemic—have enjoyed more than a decade of increased profits and strength. Navigating potential layoffs and cutbacks, if needed, will be a challenge for leaders. For his part, Doug Charles says the best option might be to evaluate what operations and strategies worked before and during the pandemic and figuring out which of those are sustainable now. Identify sustainable revenue sources and make any pandemic-era efficiency gains permanent. Otherwise, do some cutting. “Don’t go back all the way to what you used to be," he says.

Companies also should be identifying their best-performing employees and most essential roles, experts say. HR officials and managers need to do top talent reviews to find out which employees have the leadership traits the firm needs, which have high levels of learning agility, and which are most gifted at problem-solving. If layoffs are to come, leaders shouldn’t carry them out indiscriminately. Firms can wind up laying off just as many top-performing employees as they do average performers or underachievers—or even more. That could leave organizations short of roles that are critical to their future business.

Regardless of what firms do during in coming months, experts say, workers will have long memories. They will remember which leaders treated them with respect and empathy when business conditions deteriorated. Making rash decisions now could damage an employer’s reputation, a highly valued commodity. “The best steps should be taken with an eye to the future,” says Elise Freedman, a senior client partner in Korn Ferry’s Workforce Transformation practice.