The new normal Featured

7:00pm EDT December 26, 2009

Relationships between employees and employers often morph with the changing economy. But the current conditions, including record productivity levels, a jobless recovery and the possibility of health insurance reform, are driving one of the most dramatic shifts since World War II. Savvy employers are seizing the opportunity to permanently lower labor costs by restructuring benefit and compensation plans and even shifting the burden of sourcing health care coverage onto employees.

“I believe we have seen the end of one-size-fits-all benefit plans,” says Rick Beal, managing consultant with Watson Wyatt Worldwide. “Executives may encounter some internal resistance to these nontraditional ideas, but employers will ultimately opt for a less paternalistic role by offering two-tier benefit programs or simply requiring employees to find their own health coverage.”

Smart Business spoke with Beal about the emerging changes to employment relationships and how employers can benefit from the “new normal” economy.

How have employment relationships evolved over time?

In a manufacturing economy, employers managed to maintain a stable work force by offering generous benefit packages that often included defined benefit pension plans and the promise of long-term employment. As the highly educated and less-structured baby boomers entered the labor market, relationships began to morph. Technology-driven productivity increases drove an emerging economy centered on global services and workers assumed greater responsibility for managing their own careers. During the 1990s, employees held the upper hand in the labor market and employers focused on winning the talent war by creating and branding distinct employment value propositions.

How is the ‘new normal’ economy impacting employment relationships?

As labor costs escalated, traditional management models dominant in industries such as auto manufacturing have all but disappeared. While employers will always need to compete for top performers and scarce knowledge workers, the balance of power has shifted toward employers as recessionary layoffs have cut deep. This has created an abundance of workers, especially among lesser-skilled populations, and this shift in supply and demand is redefining the relationship between employees and employers.

What changes are employers considering?

Employers will continue to offer competitive base salaries, but they’ll offer smaller annual raises while relying more on incentives like full value restricted stock units or stock grants. The stock will feature lengthy holding requirements, especially for senior executives.

Most surprisingly, some employers may limit access to company-sponsored health plans to critical knowledge workers. Other companies may establish steep healthy behavior requirement hurdles before employees can participate in company-sponsored benefit plans or limit health care coverage to consumer-driven health plans with health savings accounts.

Health care and retirement plans will be increasingly portable, like current 401(k) plans, as employers provide employees with the tools and technology to manage their own financial and physical health. In short, the days of uniform benefit offerings are likely over.

What upsides and downsides might result from these changes?

Employers generally stand to benefit from these changes, but each company has to consider its current and future work force and its employment value proposition before initiating wholesale modifications to compensation and benefit plans.

  • Cost management. Employers will be able to reduce the cost of benefits administration and will benefit from predictable health care and retirement costs. Unless the next wave of technological change can increase productivity, cost control will play a dominant role in driving bottom line returns for the near future.
  • Empowerment as an employment brand. Employers will compete for talent by branding themselves as enablers of employee empowerment. Independent workers attracted to increased freedom and self-determination will be highly engaged and more productive.
  • Less control. Employers offering portable benefit plans will have less control over the timing of employee work force exits, which could negatively impact industries facing shortages of skilled workers.

How should executives proceed?

Employers need to set plans in motion before the recovery gains momentum.

  • Conduct a strategic review of total rewards programs to see if they still make sense for your company’s future work force.
  • Consider segments of the current work force where a new approach might be appropriate, such as part-time employees in the retail or service industries.
  • Ask employees to weigh in during the review process so expenditures are targeted toward the benefit programs employees value most. Employees can make prudent choices if they are presented with the facts, and some groups might actually prefer making their own health plan arrangements, especially if it increases job security.
  • Challenge the HR paradigms that impede progress. Owners may face resistance from benefits managers or company lawyers over revolutionary ideas like creating a two-tier benefits structure. Seek external opinions or hire a benefits manager from outside the HR field to stimulate nontraditional thinking.

Rick Beal is the managing consultant for Watson Wyatt Worldwide. Reach him at (415) 733-4310 or Rick.Beal@WatsonWyatt.com. At the time this article went to press, Towers Perrin and Watson Wyatt have announced their intent to merge and become Towers Watson. The merger is anticipated to close around the New Year.