Never Waste a Good Crisis: A few Lessons from the Recession* – Part 1

Aug 4, 2010 by Jerry Seibert

During the recession, did your company drive down employee engagement, or build it up?

Common wisdom has it that the steps companies typically take to manage an economic downturn have an across-the-board negative impact on employee morale. But in a study of over 2,000 companies, we found that there are big differences between the various recession tactics that companies utilized and the impact of those actions on the critical People Equity factors of employee Alignment, Capabilities and Engagement (ACE).

The latest economic data indicates the pace of the recovery may be slowing, and a double dip recession is still possible.  So this seems like a good time to look back and see what we learned during the hard times just past.

So, first off, yes, lay-offs, budget cuts and hiring freezes all had a negative impact on A, C and E.  These actions, which include the most severe responses to the recession, can leave the remaining employees feeling they now have to carry a heavier load, with no additional recognition.  With fewer resources, capabilities decline.  The perceived inequity of these tactics weakens engagement.  Implementing resource reductions also can lead to a value disconnect between employees and their company, thereby undermining alignment.   Employees find it difficult to be in sync with the strategic direction of the company when those around them are losing their jobs.

But what about more targeted strategies?

It turns out that the effects of compensation-oriented tactics were very different.  Pay cuts, pay freezes and benefit reductions did have a negative impact on employee engagement. This should come as no surprise.  But compensation cuts had no significant impact on alignment or capabilities.  It is possible that these actions, while not welcomed, are more likely to be viewed as rational and acceptable – sharing the pain through lower profits for the company and lower rewards for staff.  Thus, alignment may be maintained, and with resources preserved in the organization, capabilities remain largely intact.

But even among compensation cuts, not all strategies are created equal.  Furloughs are typically used to cut pay by cutting total work hours.  Like the other techniques, use of furloughs had no impact on alignment and capabilities.  But neither did furloughs affect engagement.  Perhaps that is because unlike the other actions, a furlough may be viewed as somewhat more equitable – you do not get paid, but neither are you required to work during the furlough.

Lesson #1. Pay cuts are less damaging than lay-offs, and furloughs are the least onerous method of pay cuts. Obvious, you say? The millions of Americans let go during the recession (rather than furloughed) probably wish it had been more obvious to their companies.

UPDATE (Aug. 9). Interesting comments by Wayne Cascio (U. of Colorado) on NPR today: Research finds that companies making extreme job cuts (>20%) in recessions see a short term profitability boost but then lag their peers for up to 9 years post-recession.

Next time: the biggest risk to ACE is not what you thought.

*adapted from my article in the April issue of Quality Progress

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by Jerry Seibert | Categories: Engagement, People Equity |

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  1. Never Waste a Good Crisis: A few Lessons from the Recession* – Part 3 - Metrus Blog
    August 30th, 2010 at 10:34 pm #

    [...] the great recession — all the more timely since the future is still looking uncertain.  From Part One and Part Two, we now know that some cost cutting actions used to survive the recession were much [...]