‘Dance With The One Who Brung Ya’

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CHROs are challenged by contradictory trends and complications in the labor market, but there’s little doubt wages will continue to rise in 2023. The focus for most: retention.

U.S. companies added a staggering 517,000 jobs in January 2022, despite climbing interest rates and headline-grabbing layoffs among tech giants. Such bumper job numbers typically would be seen as a good thing. Paradoxically, because of ongoing inflation, Wall Street has reacted negatively to ongoing job creation. So, what’s going on, belt tightening or wonton profligacy in hiring departments?

“It’s the first time in my adult life that the stock market went down based on a really good jobs report,” says Lori Wisper, managing director Risk & Rewards at WTW. “Why did it? Because with the worker shortage and job creation, there’s this anticipation that the Federal Reserve will continue to raise interest rates. There’s an indication of how ho-hum we’ve become about the really robust labor market. As CHROs, that’s what’s going to drive how you manage pay.”

In simple terms, it seems like wages will continue to grow in 2023, with most companies planning to spend more than they did last year, according to a report from WTW. The average projected total salary increase for 2023 is 4.6 percent, the first time salary budgets have grown more than 4 percent in a year since 2007.

Indeed, mixed messages seem to be everywhere these days. Is a recession on its way—or will there be a soft-landing? Is inflation the big problem for businesses—or is it a labor shortage? Are layoffs because employers overextended themselves during Covid’s long-tail and are now buckling under the burden of high compensation—or are they refocusing on core competencies, emerging skillsets and AI and automation?

The answer to all these questions is: yes. And yes, it’s a confounding mess, particularly for the CHROs who must take the lead on hiring and compensation decisions. “Follow the skills,” says Diane Gherson, senior lecturer at Harvard Business School and former CHRO at IBM. “That’s the secret to understanding all of this. The people who have the right skills are getting paid.”

The confluence of elevated compensation, inflation, a tight labor market and the rise of AI “is a wild and complex issue, and it’s becoming increasingly more complex,” says Anat Lechner, clinical associate professor of management and organizations at the NYU Leonard N. Stern School of Business. “When employers have the opportunity to double-down on AI and automation, they do that. A lot of investments are made in automated processes. They’re saying if 80 percent of work can go to ChatGPT, fantastic, let’s do that.”

A Numbers Game

Amazon started the year by announcing it would eliminate 18,000 jobs. A lot of people have and will lose their livelihoods as a result. The easy explanation is that the company overpaid for labor during the height of the pandemic, hiring too many people at inflated wages, and now has to cut costs. However, that’s only partly true.

“They went through a period of such stark expansion in late 2020, into 2021, that this feels like a correction,” says Wisper. However, the picture changes when we shift the frame of reference to encompass the period before Covid. “Amazon had 798,000 employees in 2019,” Wisper notes. “By the end of 2021, they had 1.6 million. They doubled in size.” So, even taking into account recent layoffs, the company currently employees 700,000-plus more people than they did less than four years ago.

Even though some high-profile companies are enacting layoffs, the economy as a whole is still adding jobs at a breakneck clip. A tight labor market means that companies are forced to compete on wages. Furthermore, even companies that are laying off workers are often hiring simultaneously.

Companies are faced with a choice when increasing pay for high demand workers: raise prices on your products or services, cut benefits or layoff other employees. Raising prices pressures customers and may impact business, while cutting benefits tends to make it harder to attract and retain talented workers. “You have to decide, okay, we’re going to cut a service or we’re going to cut employees in a certain part of the company so that we can afford to pay more for another person,” says Kristie Loescher, management professor at the University of Texas at Austin MCombs School of Business. At the end of the day, “Good employees have options,” and CHROs must compensate for that.

“The cost of moving jobs is so much lower” than in the past, Gherson notes. Digital platforms make it easy to find new jobs and easy for recruiters to approach employees. “That means people with the skills that are needed are very much in demand and have the ability to continue to ask for higher wages.”

The hot labor market isn’t just a product of Covid’s long tail and the digital environment, either. Demographic and political factors are exacerbating it.

“Companies are going to continue to experience worker shortages because of population shifts…because of the immigration slowdown that’s happened in the last four to six years,” says Wisper, noting that many of these trends began before the pandemic. “The population shifts have been with us for quite some time.” Baby Boomers have been retiring every year since they peaked in the workforce in 1999, and Gen X is significantly smaller. “Millennials are bigger and filling some of the gap that the Baby Boomers are leaving and that the Gen Xers can’t fill, but they can’t fill it fast enough because they’re just not old enough,” Wisper notes. In practical terms, Baby Boomers are aging out and there just aren’t enough workers right now, particularly in high demand fields.

AI and Automation on the Rise

The twin tech trends of AI and automation are also part of the compensation calculus for many companies. As they look for savings on labor costs—so they can afford expensive, high demand employees or firm up operations before a potential downturn—they are increasingly turning to AI and automation. These tools allow companies to make employees more efficient and eliminate jobs that mainly focus on repetitive tasks. For instance, data entry jobs which typically may have been high turnover can be eliminated or reduced using AI and automation, and the employees who remain in those departments can shift (or retrain) to focus on data and trend analysis instead.

Right now, there’s a push and pull between workers and employers. The Covid recovery and tight labor market has given workers greater leverage than they’ve had in many years. Flexibility, remote and hybrid work, and benefits are major pressure points, in addition to pay. Unions are on the rise again. At the same time, “AI is reaching a point in its viability where it’s becoming a whole lot more capable than it was before,” says Lechner. “That runs in parallel with the conversation with employees. Even as employees are able to negotiate for better rates and terms, it may be periodic. The more you agitate the system, the greater the incentive for the system to get rid of you and replace you with a machine.”

The rise of gig platforms contributes to this dynamic as well. In many cases, CHROs may be looking to outsource jobs and tasks to gig workers and freelancers, rather than keeping them in-house. While inflation is likely slowing, “automation and gig will become more pervasive,” Lechner argues. “My prediction is we will see more jobs going to machine and gig workers,” while employers focus more than ever on high performers. In essence, in the search for savings on labor costs and greater efficiency, companies will seek to replace as many people as they can—either with freelancers and gig workers or with AI—while “enhancing their HR capability to provide a more sophisticated value to high performers.”

It can be tantalizing to embrace a view of AI and automation as a jobs killer, but the reality may be far more benign, or even positive. The HR function at IBM has been using AI for some time to help employees develop high demand skills, so that instead of laying them off, they can assign them to higher value projects. “Layoffs are not a cheap thing to do,” Gherson notes. “You’ve got to pay severance. So it’s not the easiest solution. The easiest solution is not to give an increase to the people who don’t have the skills, and then give them all the capability to grow their skills into areas that will earn them an increase.”

IBM, for instance, has a sophisticated learning platform that identifies employees’ current skill sets based on their projects, and then offers them learning tools to develop new, high demand skills. This way, employees are able to take greater control of their trajectory in the company. “We would push the hot skills that we have a high demand for now and going into the future,” Gherson explains. “And so everyone knew what they were, and you could sit at your computer and earn your certification in data science or whatever it was. And then you would open a tab and the jobs that are available to you now would be there.”

The same tools can help managers understand who should receive wage increases. Employees with high demand skills would be flagged by the AI for greater increases (to prevent them from leaving for a competitor), while those with lower demand skills might not receive a raise, but would be encouraged to develop new, high demand skills using the learning platform, so that they could earn more in those functions. (Of course, managers still have the final say on who gets a raise.)

Ultimately, navigating the current compensation environment requires CHROs to focus on a few critical factors, says Gherson. “What do we really need to be good at? What are the critical skills to make our strategy happen? And then it flows from there. You start to take a strategic look at your skills that you need to accomplish what you’ve set out to do.”

Or, as Loescher says, “Dance with the one who brung ya.”

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