Compensation & Benefits
software solutionsLearn more
The difficult times are not over yet, at least for businesses. First, companies that survived the Covid-19 pandemic, lost revenue. Then the wave of massive quits informally labeled the Great Resignation has left many grappling with employee attrition. As firms struggle to find new employees for unfilled positions while keeping the remaining employees satisfied, rising inflation is now another element they need to deal with. And that’s especially difficult since the other problems did not go away.
In fact, for the past 12 months, job openings in the US have held record highs of more than 11 million each month. Quits continue at 4 million per month, and the number of Americans looking for a job stays low, causing a huge gap between the supply and demand of the labor force.
The situation of many companies is dramatic and it’s not getting better. 55% of employers witness a higher employee attrition rate in 2022 compared to the previous years. 1 in 4 also experience employee turnover of more than 13%. No wonder 87% of HR professionals cite employee retention as a critical or high-priority issue.
In the meantime, inflation hits levels unseen in decades in most Western countries. May releases show 8.1% for the EU eurozone with Estonia breaking 20% levels; the UK at records high 9% and the US rising to 8.6%. And those are not the peaks yet, since analysts estimate the maximums for the second half of the year. If the escalation can be contained at all.
Inevitably, the accelerated pace of inflation is at the forefront of many executives and HR professionals' minds since the businesses are hit in two ways.
First, the erosion of purchasing power results in salary increase demands. Companies that won’t satisfy those requests will need to deal with unprecedented levels of employee attrition rates as 56% of the professionals who changed jobs recently got higher pay. And to stay financially afloat many employees won't hesitate to leave.
Second, the staggering increase in commodity prices rips many firms’ P&L sheets into pieces. The whole producer price index (PPI) increased by 10% for the G7 countries and 11% for the US. PPI outpaces CPI by 3%, and the index is a critical indicator of the actual pressure on the companies as it shows the prices of goods postproduction.
But the real driver of cost is the energy. Year over year data for April shows incredible hikes with 43.6% in gas prices and 80.5% for fuel. Only in March did both commodities rise respectively by 18.3% and 22.3% on a monthly basis.
In this case, shifting price increases onto customers will probably be inevitable, but at the same time, it won’t be enough. Organizations wanting to successfully weather these extremely unfavorable conditions will need to take extra steps. Most managers will revisit the traditional and reliable technique of cost-cutting and intensified budget scrutiny.
But in light of labor shortages and high employee attrition rate, businesses need to turn to technology to improve productivity, boost efficiency, and build scalable growth platforms.
As the voluntary attrition rate is high for most companies, those that want to form resilience have to invest in their remaining employees.
Rather than entering the pay-spiral competition and throwing soon-to-be-devalued cash at your workers, serious companies need to focus on creating value also for their employees. Up- and re-skilling together with sharing ownership by expanding the pool of long-term incentive recipients will improve employee satisfaction and forge committed workers that become the strong future foundation for your business.
So, how to start?
Any expenditure management should start with spending supervision, especially in a disruptive environment. High budget visibility allows managers to see where the revenue comes from and how it is spent. It’s critical to scrutinize each category, process, department, and function and develop reliable end-to-end methods of spending visibility.
Such orchestrated approach allows traceability and compliance with the P&L sheets while at the same time promoting accountability throughout the entire company. Spending supervision is the foundation of all other actions a business needs to take in order to balance the budget.
Once you know where the money is going it’s time to adjust spending. If your company regularly relies on product suppliers you could introduce a preferred vendor program. Similarly, it’s a good time to evaluate if it makes more sense to outsource certain processes, software, and functions or produce them in-house with your employees.
In an inflationary environment, it’s also easy to eliminate the non-immediate expenses. However, rushing to make broad-based cuts may negatively affect the long-term strategy of the organization. It’s crucial to carefully consider if the adjustments may impact the long-term targets, and to what degree.
Managers need to distinguish between the non-strategic and strategic spending, such as the implementation of new technology, new service or product development, or critical at a time of employee attrition investment in people that may bring temporary losses, but in the long run will produce a profit.
For example, Disney decided to take a short-term loss in order to promote long-term growth by developing the Disney+ streaming service. The platform was initially unprofitable, but in the long run became one of the main sources of the company’s revenue.
Walmart and Target, in order to counter employee attrition, offered their employees educational subsidies. In this way, these companies treat the cost of the program as a strategic expense that helps retain employees and positively differentiate themselves from the competition.
Carefully weighing best in cost vs being able to maintain the competitive advantage puts the organization into a position where the managers can maximize the shareholder value by making the right decisions and strategically allocating the increasingly limited resources.
The largest cost savings come from eliminating or reducing unnecessary work. By carefully reviewing steps in various processes, you can simplify those activities or even remove them entirely. Analyzing what and how is done in various business units can make a key difference in effective human resource management.
For example, in order to boost the efficiency of its operations and production, Mondelez International cut down every fourth product in its portfolio. Similarly, Hilton started to offer the daily cleaning service as optional.
Forward-thinking companies will also consider automation. Identifying repetitive tasks that could be done by the bots bring about a number of benefits. Technologies such as robotic process automation(RPA), workflow, low code, or optical character recognition (OCR) enable time savings as high as 93% and often require minimal to none supervision. At the same time, these solutions virtually eradicate the risk of errors. Such new IT solutions also boost employee satisfaction since boring and monotonous work produces actively disengaged employees.
Westwing implemented RPA to prepare the final prices of its products for the website publication thus freeing the 8-person team from the laborious process of manual data processing. And low code solution implemented at ABB allowed the company to consolidate scattered mini-tools into one centrally managed solution.
And in light of today’s labor shortages, a company that struggles with a high employee turnover can turn to automation to alleviate those pressures at least temporarily. Data shows that employees leave jobs where they perform monotonous chores. However, freed from tedious repetitive duties they can concentrate on creative tasks thus becoming more engaged and willing to stay with the company. Having more time for innovation and creative thinking leads to professional growth and improves employee well being. In this way, automation helps fight another headache - employee attrition.
Contrary to the popular opinion automation does not rid employees of jobs. Quite the opposite. It creates more sophisticated positions requiring different types of skills.
The sudden rise in job openings discussed above is partly due to the progressing digital transformation adopted by many companies during the pandemic. And “as the speed of disruption gets faster, the half-life of skills is getting shorter” points out EY Global People Advisory Services Leader Michael Bertolino. In fact, EY estimates that:
Investing in employee training benefits the firm and the worker alike. Addressing skill gaps in your organization by developing your current personnel is cheaper, faster, and easier. In comparison, the current data shows that the employee replacement may cost as much as double their annual salary. It's not surprising then that most employers choose to upskill their employees for those reasons.
In addition, new employees require substantial time investment for the period of adaptation and mentoring on the part of other team members as well. In the current market conditions that’s something that very few companies can afford. And losing employees equals the loss of institutional knowledge and experience they took with them when leaving the company.
Personal development and opportunities for career growth are also among the major factors preventing employee attrition. The younger generations, especially millennials, seek out meaningful job role that offers quick career progression and create value sooner. Such employee leaves if they won’t find acceptable positions in their current place.
In such a disruptive environment as nowadays, therefore, upskilling can be treated as a long-term strategic investment that kills two birds with one stone: fills the skill gaps by training the current workforce and offers valuable career opportunities preventing employee attrition.
Ernst and Young for instance developed a custom upskilling program called EY Skills Foundry, which includes a live supply-demand heat map of critical skills across the company providing data for fast decision-making, and a database of employees’ skills and experiences that enables quick match of the right person to the right opportunity. In addition, the Skills Foundry contains a learning platform designed to offer new opportunities and speed up and scale training effectively lowering the company's employee attrition rate.
Experienced employees equipped with the particular skills the company needs are an asset that will define the future winners of this disruptive period. They are also the ones who will produce the revenue and ultimately enable the growth since by 2025 firms expect to lose $8.5 trillion because of skills shortage. The forward-thinking companies aspiring to be the champions of this transformation must develop their current workforce and be able to keep it.
However, in order to prevent the attrition and turnover of your upskilled talent, you have to offer something of value. Carrier opportunities and personal development, together with other popular nowadays soft techniques of employee retention such as positive company culture and work life balance are important but not sufficient enough. If the employee feels that their compensation level is sub-par, no other factors will be able to alleviate that issue contributing negatively to the company's employee attrition rate.
Thus in this inflationary environment, many firms feel pressure to raise the wages and offer bonuses in order to attract and keep their workforce.
But when your company faces fierce salary competition-driven both by the inflation and labor shortages it’s easy to fall into a pay spiral. And it’s truly a toxic one since the soaring inflation will annihilate the pay-hikes in a matter of months anyway. Budgets of few companies can survive that and most have to find alternative strategies that won’t explode their P&L statements long-term.
Long term incentive plan(LTIP) is actually an ideal substitute for a never-ending bonus spiral, which competitive companies should use to prevent employee attrition.
Long-term incentives offer two key benefits crucial in today’s fast-paced inflationary environment:
1. LTIPs offer a form of equity that at the time of disbursement can be paid out in cash or shares.
2. LTI award is performance-based and granted to an employee after a 3-5 year vesting period.
Since LTIPs are a grant paid out in the future for work performed in the present they are an ideal alternative to upfront cash bonuses that are still a hard-money type of compensation.
Long-term incentives are also based on selected performance metrics criteria that the recipient has to fulfill in order to receive the award at all - poor performance causes the bonus loss. In this way, LTIPs motivate your employees to work effectively and in alignment with the company’s strategy.
Moreover, LTIPs are a better alternative to a cash bonus also from the employee’s perspective. Not only do they offer actual ownership of the company in form of shares or stocks, but LTIs are also an inflation hedge that preserves value. In the last hundred years, the stock market beat inflation most of the time.
And since currently, only 22% of companies offer any form of LTIP to employees below the executive level, the firms which expand the body of recipients will get ahead in the tight race for in-demand talents. This may be a major factor in lowering your company's attrition rate.
The above suggestions present a series of steps that build a foundation for effective cost management that in turn allows companies to invest strategically while forming resiliency to weather the high inflation and employee attrition rates.
Organizations that focus on close budget supervision and unnecessary work elimination while investing the savings into strategic programs eliminating employee attrition such as automation, upskilling, and LTIPs position themselves to surpass their less engaged competition long after the volatility ends.
Ability to produce processes that deliver improved pricing and purchasing capabilities which will grow the revenue together with being able to fill the skill gaps with employees that they can retain will mark the true leaders of this disruptive period.
But those truly successful won’t just invest haphazardly in the potential opportunities. They design the right plan to roll out the idiosyncratic solutions to combat the pressures marring their particular business. This will be the critical factor dissecting those who win from those who lose.