Author: Fay Hansen

Misery is relative, and effective workforce management relies on that relativity in a downturn. As the first quarter of 2009 unfolded, a new one-two program for cost reductions emerged, with companies announcing mass layoffs for thousands of workers in one breath and a wage freeze for all remaining employees in the next.

This pattern is now playing out across all industries. On January 15, Saks Inc. announced that it would cut 9 percent of its workforce, freeze salaries and eliminate its 401(k) match. On January 22, Microsoft announced that it would terminate 5,000 employees and cancel all merit increases. On January 26, Sprint Nextel announced that it would cut 8,000 jobs, freeze salaries, cancel its 401(k) match and end tuition reimbursement.

A mid-January survey by Towers Perrin found salary freezes in place at four out of 10 companies. The proportion is likely to rise to 60 to 70 percent by the end of the first half of 2009, according to Ravin Jesuthasan, managing principal and global practice leader of Towers Perrin’s rewards and performance management practice.

Where freezes are not in place, actual wage cuts have occurred or are on the table. A December survey by Watson Wyatt found that 5 percent of firms instituted wage cuts in 2008; an additional 6 percent said they might cut wages in 2009. In its January Beige Book report, the Federal Reserve found a place in its long litany of deteriorating conditions to note that employers are introducing wage cuts.

On January 8, trucking firm YRC Worldwide announced that it had negotiated a 10 percent pay cut with its Teamster drivers and would institute pay cuts for nonunion employees. Advanced Micro Devices Inc. announced on January 16 that it would eliminate 1,100 jobs and cut pay between 5 and 20 percent for workers and executives.

Salary freezes and wage cuts quickly sweep across whole sectors because they fundamentally reset the cost base that companies must meet to remain competitive. “If a company sees a peer freeze salaries, it will be motivated to do the same,” Jesuthasan says. “It is in the same market for talent and under the same financial pressures.”

Salaries may be frozen, but labor markets are not. Even in the most desperate environments, the small numbers of employees who can create competitive advantage retain their mobility. Employers may be prepared to starve the many, but they must feed these few.

Retaining pivotal employees
While companies continue to look for ways to reduce costs, 62 percent remain concerned about the potential impact on their ability to retain high-performing talent or those in pivotal roles, according to the Towers Perrin survey. To address this concern, many companies are turning to cash awards and targeted salary increases even as they cut these expenses for the rest of their workforce.

“It is absolutely crucial to identify pivotal employees when an organization is looking to take out costs,” Jesuthasan says. “Rewards for pivotal employees are a very real consideration for most companies that are freezing salaries. Pivotal talent may have options in competitor companies or even other industries.”

Employers are slashing training budgets designed to keep pivotal employees on board, but maintaining cash incentives for this select group. “We now see a meshing of employer and employee concerns,” Jesuthasan reports. “For the first time in many years, pivotal employees are now focused on money rather than career development and training, which has always been their primary concern.”

Pivotal employees are defined by their strategic and financial impact and their direct contribution to competitive advantage. Other employees may be high-level, high-performing or high-potential, but not pivotal.

“Pivotal employees form a vertical slice of the workforce that may reach all the way down to the people touching customers,” Jesuthasan says. In an airline focused on growing its business traveler segment, for example, the people who manage that segment may be pivotal, while the pilots are not.

“The key distinction is between ‘pivotal’ and ‘important,’” Jesuthasan says. “In some organizations, the CFO may be important but not pivotal.” Leaders are always important, and some core and support jobs may be important, but they may not be pivotal or strategic. The pivotal group may constitute as little as 5 percent of the total workforce.

Pivotal employees are not immune from cost-cutting measures, however. Some organizations are conducting performance-based layoffs that target all lowest-rated workers—the “1s”—even if they are pivotal employees.

“Organizations need to look at the vertical slice and then look at performance within that vertical slice,” Jesuthasan notes. “Don’t hang on to 1s regardless of where or who they are in the organization. But in this environment, many organizations will have to go up to 2s when they make cuts, and then you must be mindful of where they sit. It is at these margins that the decisions become really challenging.”

Redesigning incentives
The critical labor-cost reductions that many companies must make to survive the downturn now hinge on effective workforce management practices that compensation experts have advocated for more than a decade.

“Segmenting the workforce is the most critical development we’re seeing because it is forcing companies to redeploy their investment in pay, literally taking away from some and giving to others,” Jesuthasan says. “We’ve been talking about this for years, but apparently we needed a depression to force companies to do this.”

To retain their pivotal employees, three out of 10 employers are using cash retention awards and four out of 10 are using targeted salary increases, according to Towers Perrin. “We are seeing a pulling apart of the organization and a multiclass situation emerging, where some employees will see salary cuts and others will see meaningful increases,” Jesuthasan says.

Many of the companies that are freezing salaries are using spot cash awards for pivotal employees. “In fact, these awards are being granted simultaneously with the announcement that a salary freeze is in effect,” Jesuthasan reports.

Most of the awards include a retention tool of some kind. For example, the award may be structured over two years so that the employee receives 50 percent at the end of the first year and 50 percent at the end of the second year. These retention awards often involve significant dollars, with amounts equal to what would have been a year’s bonus payment or 20 to 50 percent of salary.

Some organizations are using stock rewards or discretionary bonuses. “Also, with profits and earnings down at many companies, organizations are going back and redesigning their bonus plans to emphasize what individuals can control,” Jesuthasan reports. “If they used a profit-sharing plan that is now less effective because of the financial position of the company, they may shift to team-based rewards or project-based incentives.”

The practice of using variable pay as a key retention tool while slashing salary budgets is confirmed by Hewitt’s December 2008 survey, which reports that most companies are not making drastic cuts to their 2009 variable-pay budgets. For salaried exempt employees, spending on variable pay as a percentage of payroll is expected to be 11.1 percent in 2009, slightly lower than the projected increase of 12.1 percent in July.

Beyond 2009
The salary freezes implemented in 2009 may well carry over into 2010, but retention risks will remain low. A Towers Perrin survey conducted in August 2008 and again in December 2008 found a significant rise in the number of workers who value job security far more than pay levels, promotions or career development.

The declines in employee expectations and mobility that occur in downturns create the conditions for resetting wages to the levels that existed at the end of the previous trough. On an aggregate level, the great salary freeze of 2009 will put a quick end to the very short-lived rise in real wages that marked the final quarter of 2008. Without the widespread salary budget cuts that unfolded in the first quarter of 2009, real wages might have reached 2003 levels, reversing a 30-year trend toward lower real wage costs.

The salary freezes now in effect align with forecasts that call for zero inflation in 2009. But if pricing power picks up in 2010 and inflation rises to a projected 1.5 to 2 percent, ongoing wage freezes will cut into living standards. The array of health care and retirement benefit reductions ushered in along with the salary budget cuts will further the downshift in total labor costs.

The long-term effect will accelerate the equalization of wage levels at the global level.

“In the United States, it has been rare that anyone would leave to go work in another market, but there are more people now who will find it more attractive to work in Europe or India,” Jesuthasan notes. “Also, we saw a lot of work leave the United States because of labor costs, but now the wage differential has eased, and some of that work may come back. Whether we want it back is another issue.”

Manpower Inc.’s countercyclical star is Right Management, the world’s largest outplacement services provider, with headquarters in Philadelphia and 2,500 employees worldwide. In the fourth quarter of 2008, when the rest of Manpower’s divisions tumbled, Right’s revenues rose 10.3 percent over the fourth quarter of 2007.

    With revenue of $449.7 million in 2008, Right represents a small part of Milwaukee-based Manpower’s $21.6 billion-a-year empire, but it provides welcome relief from the otherwise grueling environment that now grips Manpower’s recruiting and staffing divisions as well as the entire staffing industry.

    Right was adding business before the downturn began. Even during the growth phase of the business cycle, employers used outplacement services on a consistent basis to assist employees who lose their jobs during restructurings, technology shifts, and mergers and acquisitions.

    “But as the recession has deepened, existing outplacement clients have asked for more services, and we’ve also added new clients,” says Rich Doherty, vice president for client services, based in Right’s Seattle office.

    Because recruiting and outplacement are the bookends of the employment relationship, recruiters may find opportunities in working with outplacement firms on a number of levels. As layoffs throw millions of qualified candidates into the job market, recruiters can use outplacement firms for efficient sourcing.

    In addition, as recruiting levels drop precipitously and many recruiters find themselves out of work, outplacement may offer a new career path for those who are ready to shift their perspective.

Sourcing from outplacement
   Recruiters now charged with filling positions from swollen markets can tap outplacement firms to help narrow the field.

    “Recruiters like our candidates because they are well prepared,” Doherty says. “They know how to write a strong résumé and they’ve received coaching on how to present themselves.”

    Right uses a variety of channels to communicate with corporate and agency recruiters who might find suitable candidates among its job seekers. For approved recruiters, Right offers a job bank where recruiters can post open positions and create virtual job fairs.

    Right also provides a résumé bank for the candidates it is trying to place. “We get a lot of inquiries, particularly from companies that are looking to trade out talent and upgrade,” Doherty notes. “Savvy recruiters recognize the advantage of recruiting our candidates.”

    Right’s job resource consultants also reach out directly to corporate and agency recruiters.

    “In most local markets, outplacement specialists have a relationship with the retained search firms,” Doherty says.

    Doherty notes that while employers are laying off workers, many are interested in exploring the possibilities for re-employing their displaced employees.

    “Our outplacement clients have asked us to help them be creative in maintaining relationships with their laid-off employees through contingent and project work,” he says. “Despite the downturn, employers are still concerned about talent issues down the road.”

    Keystone Partners, a career management services firm based in Boston, also reaches out to recruiters through several channels to place job seekers from the firm’s outplacement clients. Keystone has seen a steady increase in its outplacement work over the past six months as existing clients expand their requests for services and new clients come on board.

    Keystone posts synopses of job seekers on its Web site and actively contacts recruiters.

    “Both contingency and retained recruiters see us as a good source for candidates,” says Elaine Varelas, managing partner. “It is important for companies to understand that when a recruiter brings in a candidate though an outplacement service, that doesn’t mean the recruiter hasn’t done his or her job.”

    Keystone also brings in recruiters to speak to job seekers about how they can best work with recruiters. In these sessions, the recruiters explain the sourcing and hiring process and how contingencies work.

    Many corporate and agency recruiters are now closely monitoring layoffs.

    “Some corporate recruiters are very proactive and contact us to inquire about layoffs at another company,” Varelas reports. “They let us know that if we are handling the outplacement services, they want to see the candidates. And, they let us know which jobs they are interested in filling and the type of talent they are looking for.”

Outplacement advantages
   Surveys conducted by Right indicate that a substantial majority of employers now offer outplacement services.

    “Some industries have been hit very hard by the recession, and employers recognize that a job search within these industries is very challenging,” Doherty says. “And increasingly, employers realize that a job search in any industry is difficult under the current conditions.”

    The current trend among large employers is to offer outplacement services to more employees—in some cases, to all employees.

    “We still offer executive outplacement with a very hands-on approach, but we are also using more technology so that employers can make outplacement services available to more employees at a lower cost,” Doherty says.

    Doherty notes that most of Right’s clients say they want to offer outplacement services to their displaced employees because they believe it’s the right thing to do.

    “But one of the underlying drivers is that providing outplacement services sends a positive message to the remaining employees,” he notes.

    Employers also remain concerned about talent shortages in the years to come and offer outplacement services to help preserve their employment brand. Doherty notes that many are also concerned about post-termination litigation and offer outplacement services to reduce that risk.

    Right carefully tracks how many of its job candidates find work and asks them to report how they discovered new employment. Right assists job seekers with building and tapping their personal networks, and 45 percent to 50 percent report that they found new positions through this approach.

    More than 30 percent report that they found work through Internet channels; about 5 percent used traditional methods such as responding to newspaper ads.

    “Only 15 percent land a new job through an in-house recruiter or a recruitment agency,” Doherty says. “This is because many jobs are simply not put out to the market. In general, people are getting jobs, but it may take longer than it normally would.”

    At Keystone, Varelas stresses the advantages of using outplacement specialists to plan any workforce reduction. Consultants can advise the employer on all aspects of a termination or layoff, including scheduling the day of notification and developing scripts to announce the reduction.

    Outplacement services can also boost organizational resilience, Varelas notes.

    “It is very important to re-recruit the retained employees through communication and support and carefully reviewing with them the mission and culture of the organization,” she says. “Some employers are reticent because they are afraid to make promises to the remaining employees, but employers can still communicate to them that they are valued.”

    Keystone maintains relationships with a number of contingent employment firms.

    “In some cases, candidates need a temporary job for financial reasons, but we try to find them temporary positions that will also enhance their competitiveness in the market,” Varelas says.

    Varelas advises employers to become knowledgeable about outplacement services before selecting a firm.

    “This is particularly important because companies that provide only online services are marketing to employers. These services are never adequate. Online services are very valuable as an enhancement for consulting. Personal support is crucial, even if it is only one hour of strategy discussion and consulting.”

    The price range for outplacement services varies considerably by job category and the extent of services provided.

    According to Varelas, an employer might expect to pay $500 to $1,000 per employee for nonexempt workers. Outplacement services in this price range would cover a one- or two-day program for groups of 12 employees each, with some individual consulting included and online support provided.

    For outplacement services for managerial employees, the price might range from $3,000 to $5,000 per employee. For senior executives, the range would be $6,000 to $10,000 or more for top executives.

New career path for recruiters
   Keystone has outplacement specialists who are former recruiters.

    “Recruiters are good in the job development role and some of them are good at one-to-one counseling,” Varelas notes.

    The skill sets for recruiting and outplacement work overlap, but recruiters looking for work with outplacement firms may need to shift their perspective.

    “Outplacement work is relationship-driven, and some recruiters are more accustomed to transaction-driven work, so they may not be a good fit,” Varelas explains.

    Recruiters interested in working at an outplacement firm should enhance their relationship-building skills and emphasize the talent management planning and consulting aspects of their work experience.

    To improve their skills and job possibilities at outplacement firms, recruiters should also understand that outplacement work is exploratory.

    “Recruiters are used to looking for a candidate to fill a specific job rather than exploring all career possibilities for a job seeker,” Varelas says.

    Right is not hiring recruiters.

    “We rely on experienced career management people, and recruiters generally only have one piece of the skill set that we need,” Doherty says. “But we have people on staff who were recruiters, and recruiters can think about the skills they have that might allow them to transition to outplacement.

    “They can connect with outplacement firms to determine the additional skills they need. There are jobs out there in outplacement services.”

The background screening industry in the United States is a relatively unregulated multibillion-dollar sector that has no comparable foreign counterpart. U.S.-based employers with screening policies designed to meet their domestic needs and the U.S. legal framework face a completely different reality when they move abroad. Particularly in the European Union and increasingly across the developing world, a job applicant’s right to privacy trumps an employer’s right to collect information about a potential employee.

    “What works in the United States doesn’t work abroad,” says Andrew Boling, partner at Baker & McKenzie in Chicago. “You have to assume that your screening practices will be restricted. And in the European Union, background screening is much more limited, even for an applicant who is applying for a job in the United States. Criminal background checks are limited if they are allowed at all. Credit checks are even more restricted and seldom done, with very limited exceptions.”

    In many overseas locations, employers are not plagued by the same levels of employee theft and fraud and workplace violence that prompt high levels of screening in the United States. “Anecdotally, if you look at issues like workplace violence, the incidence is much lower in Europe,” Boling says. In addition, sharp differences in legal liabilities diminish the need for screening. “The negligent hiring concept is a very U.S.-centric risk,” Boling says, “so screening issues abroad are not as grave as in the United States.”

“What works in the United States doesn’t work abroad. … In Europe, what’s private stays private.”  —Andrew Boling, partner, Baker & McKenzie, Chicago

    The severe limitations placed on screening in other countries arise from a fundamental appreciation for and deference to individual privacy rights. “Outside of the United States, individual privacy rights enjoy the same protections that we give to our First Amendment rights,” Boling says. “In Europe, what’s private stays private.” In France, for example, credit checks generally are not permissible even if a job applicant consents.

    The levels of consumer debt are also generally lower outside the U.S., and personal bankruptcy is much more uncommon, so credit checks commonly generate a lower number of negative hits in the countries where they are permissible. Non-U.S. employers also take a different approach to the financial status of job applicants. “How you manage your personal finances is considered to be irrelevant to how you qualify for or perform on a job,” Boling says.

    U.S. employers operating abroad often do the maximum amount of screening allowed by law, but they are likely to encounter greater limitations going forward, Boling notes. Although laws concerning background screening are still emerging in the developing world, he sees a trend toward adopting the more restrictive approach to screening that is common in Europe rather than the more unregulated U.S. approach.

    “In Asia, there is embryonic legislation that is following the European model, but is somewhat less restrictive,” he says. China’s 2008 workforce legislation, for example, embraces the European model of employment rights. U.S.-based screening companies are now marketing their services outside the United States, but employers should be aware that the information they can legally generate is likely to be more limited.

Workforce Management, February 16, 2009, p. 37 — Subscribe Now!

In the context of the current recession and existing retirement plan design, employers are left to pick their poison. Defined-benefit plans provide excellent tools for managing retirements but pull hard cash out of the company, while defined-contribution plans require less hard cash but leave companies ill-equipped to manage retirements. Hybrid plans—a third option—are just now emerging from years of regulatory chaos.

In the past three decades, companies have steadily adopted the defined-contribution option, primarily in the form of 401(k) plans. The financial downturn has confirmed, however, that 401(k) plans fuel retirement patterns that run counter to business needs in a cyclical economy.

When economic growth is strong and employers need to retain workers, 401(k) account balances rise and employees are more likely to retire. When growth slows and employers need to trim headcount, 401(k) balances drop and workers are less likely to retire. An extensive 2008 study from the Wharton Pension Research Council confirms that plan participants significantly delay their retirement during the down phase of a business cycle.

Already-inadequate 401(k) account balances have taken a huge hit in the current downturn. For workers nearing retirement—those 56 to 65 with 21 to 30 years of job tenure—the average account balance fell 20 percent in the first 11 months of 2008, according to the Employee Benefit Research Institute. For some participants, accounts are down 30 to 40 percent.

Before the full depth of the downturn unfolded, Alan Glickstein, senior retirement consultant at Watson Wyatt Worldwide, had already warned employers about the latent risk in 401(k) plans, which leave companies with little control over who retires and when. With the financial crisis, this risk is no longer latent.

Employers now face two issues: the short-term problem of managing the workforce through a period when workers are unwilling to retire in a timely fashion, and the longer-term challenge of redesigning retirement plans to create better control over retirement patterns.

Short-term strategies
For employers operating outside the United States, mandatory retirement laws and government-sponsored pensions ease the challenges of managing a workforce through a downturn. Within the U.S., however, the next few years will pose a particularly sharp challenge.

In the short term, employers have two options. “The first is to simply deal with the fact that some employees will stay on longer than you want and determine what that means for employee morale, productivity, costs and career paths for younger employees,” Glickstein says. “The second option is to create programs that encourage these older employees to fully or partially leave.”

Glickstein believes more employers will offer retirement incentives, such as voluntary programs with a window for additional retirement benefits. “These programs need to be modeled economically, however, because they carry costs,” he cautions. “Even in a more normal environment, the take-up rate is hard to predict and now it will be harder still. There’s a psychological fear factor among employees that is difficult to account for.”

A phased retirement program could be part of the package, and Glickstein reports a tremendous rise in interest in these programs over the past year. “The objective is to manage workers out of the workforce in a fashion that carries lower risks for both the employer and the employee,” he notes.

The ability to manage retirements may be further complicated by the rapidly growing trend to conserve cash by suspending the employer 401(k) matching contribution. A Watson Wyatt Worldwide survey found that 3 percent of employers eliminated their 401(k) match in the first 11 months of 2008 and 7 percent plan to eliminate it in 2009.

“What we are most concerned about is that actions taken during the crisis will reduce employees’ ability to retire and increase problems for employers,” Glickstein says.

“Some employers have no choice, but employers who do should look at all the alternatives and what happens in the longer term to retirements and morale when you cut the match,” he says. “These employers need to have more strategic discussions right now about their retirement plans and their future ability to manage the workforce.”

Consequences of cuts
Five percent of midsize and large employers made cuts in their 401(k) match during the 2002 downturn, according to Pamela Hess, director of retirement research for Hewitt Associates. She believes that the portion of companies cutting their match could reach 5 percent in 2009 or 10 percent if the recession is particularly long and deep.

“A lot of companies are asking us about cutting their match because it is one of the easy big-dollar savings, and once some companies in an industry do it, it’s easy for others to follow,” Hess says.

The cuts could last for two to three years or even four to five, but most companies will eventually reinstate the match, she believes. “That’s not altruistic—they want their employees to retire at some point,” she says.

Eliminating the employer match carries a number of potential risks. Studies of 401(k) plans demonstrate that an employer match raises participation rates significantly and increases the employee contribution rate by almost 1 percent.

At some companies, eliminating the match may trigger nondiscrimination issues or eliminate safe harbors. “Employers may need to change vesting or tweak other elements of the plan to reduce the number of lower-paid employees who leave the plan or cut their savings rate,” Hess says. “Reducing the match rather than eliminating it might be more palatable for employees. They may be more likely to stay the course.”

The economic downturn may also end the trend toward automatic enrollment.

“Companies that might have adopted it will hold off because of the cost, and companies that might have pushed it out to their existing employees will also hold off,” Hess says. “Opt-out rates are now 10 to 11 percent, but could go higher, especially at companies that have applied automatic enrollment to their existing employees.”

According to Hewitt’s research, 4 percent of 401(k) participants dropped out of their plans in 2008—a surprisingly low rate, Hess says. If the more pessimistic economic forecasts are correct, however, the consequences for 401(k) plans could be dire.

“The system has never experienced a time when these plans are so important and the markets are so bad,” Hess says. “Participation could drop by 20 to 30 percent.

“Employees who drop out of their plans may not get back in. People will not be able to retire, and tweaking a plan is not going to move older employees out of the company if they can’t afford to retire,” she says.

Glickstein does not believe the current downturn will spell the end of defined-contribution plans, but he says that employers must shift their focus from front-end fund-accumulation issues to back-end drawdown issues. “We need to see if we can turbo-charge defined-contribution plans to address the weaknesses by looking at annuity options and target-date funds, for example,” he says.

Rethinking pensions
The funded status of pension plans at S&P 1,500 companies dropped from 104 percent at year-end 2007 to 75 percent at the end of 2008, according to Mercer, a loss estimated at $469 billion. Mercer warns that the levels of funding needed in 2009 will create a serious drag on corporate earnings.

As employers face higher contributions to restore funding levels, the pressure to abandon traditional pension plans will grow. U.S. employers will be required to contribute more than $108 billion to their pension plans in 2009, according to Watson Wyatt.

Watson Wyatt research indicates that the rate of decline in the number of Fortune 100 companies offering defined-benefit plans slowed after passage of the Pension Protection Act of 2006, which established a more supportive environment for both traditional and hybrid plans. The trend away from traditional defined-benefit plans may accelerate again in this crisis.

As employers increasingly recognize the risks inherent in defined-contribution plans, however, interest in hybrid plans may grow. “Some companies moved to a defined-contribution plan only because of the chaos surrounding hybrid plans,” Glickstein says.

“Hybrid plans are now much more viable, and we will see an uptick in the number of companies adopting these plans on the other side of the crisis. We’ll see robust growth.”

Much of the growth will come as more companies with traditional pension plans convert to hybrids, but some will come from new plans, Glickstein predicts. “The high-tech industry, for example, has no history of defined-benefit plans, but now the companies have matured and the industry is ripe for new hybrid plans.”

The real challenge lies in the regulatory environment. “For years, hybrids were dead on arrival,” Glickstein says. “And now, there is no legal framework for phased retirement. The regulatory environment is the biggest obstacle to creating more agile retirement plans.”

He says, however, that the impending crisis in Social Security funding may lead to more collaborative discussions between the federal government and employers about retirement programs.

One upside of the economic downturn is that it is likely to spark new thinking about employer-provided retirement benefits, government-sponsored retirement programs and broader workforce management issues.

“Employers have shown an interest in better plan design,” Glickstein says. “They are also beginning to acknowledge that 401(k) plans carry financial risks just as pension plans do. It’s been an important ‘Aha!’ moment.”

Workforce Management, February 16, 2009, p. 29 — Subscribe Now!

Harvard Business School’s Class of 2010 will send 900 new MBAs out into the job market, but one-third who are non-U.S. citizens will be effectively off limits for recruiters from Bank of America, JPMorgan Chase and Goldman Sachs.

All three companies recruit on Harvard’s campus but now fall under new restrictions on H-1B visas, the primary vehicle for hiring foreign students graduating from U.S. universities. The new H-1B restrictions, which are part of the American Recovery and Reinvestment Act of 2009 signed into law on February 17, apply to any company receiving Troubled Assets Relief Program funds.

If Citigroup, for instance, wants to hire Stanford University’s top Ph.D. computer science graduate and that graduate happens to be an Indian nonresident, Citigroup’s recruiters will find that their hands are tied because the company is covered under the new law.

Still, Harvard’s 297 non-U.S. citizen MBAs likely will find work elsewhere; so will the 274 non-U.S. citizen MBA graduates from MIT’s Sloan School and the 320 non-U.S. citizen graduates from the University of Pennsylvania’s Wharton School—40 percent of its MBA class. The foreign companies that routinely recruit at the top U.S. business schools will welcome these MBAs, while some of the largest and best-known U.S. companies will lose their first-choice candidates to overseas competitors.

“Most employers receiving federal funds will not take the risk of filing H-1B petitions because the new requirements are almost impossible to comply with,” says Jim Alexander, managing partner at Maggio & Kattar, an immigration law firm based in Washington.

The jobs filled by H-1B visa candidates each year represent less than one-twentieth of 1 percent of total U.S. employment, but were singled out for special protection under the $787 billion stimulus act. In fact, the congressional debates about this minuscule number of jobs unleashed a wave of anti-immigrant sentiment that could threaten the entire H-1B category and deter the most talented students and workers worldwide from looking for or accepting employment in the United States.

The anti-immigrant wave has been duly noted by the mainstream and business press in India, which closely tracked the passage of the H-1B visa restrictions, warning readers that fewer U.S. firms would be able to recruit Indian science, engineering and computer specialists for work in the United States.

H-1B visa holders at U.S. companies blogged about the anti-immigrant sentiments that fueled the restrictions and the insults they routinely endure from those who view H-1B visa workers as “underpaid” and “subservient.” With companies relying on global talent pools to fuel growth, some anti-immigrant forces have created a poisonous atmosphere for recruiting.

“With the H-1B restrictions in play, some jobs will go unfilled, some will be filled with lesser candidates, and more U.S. companies will move work overseas,” says Ted Ruthizer, partner and business immigration co-chair at Kramer Levin Naftalis & Frankel in New York and a lecturer at Columbia Law School.

‘Dependent’ company restrictions
The current cap on the number of H-1B visas granted each year is 65,000, which includes 5,400 set aside for candidates from Singapore and 1,400 for candidates from Chile. An additional 20,000 H-1B visas are available for advanced-degree students graduating from U.S. universities.

The new H-1B restrictions contained in the stimulus act require any company that receives money under TARP to comply with onerous rules that previously applied only to “H-1B dependent” companies, defined as those with 15 percent or more of their workers on H-1B visas.

Under the new stimulus act restrictions, the 15 percent threshold does not apply to TARP recipients. Any company that receives federal funds and petitions for even one H-1B visa is now covered by the dependent employer rules.

Those rules require employers to make various attestations about their recruiting, hiring and layoff practices. A no-displacement attestation requires the employer to state that it has not and will not lay off a U.S. worker in a similar position within 90 days before or after filing an H-1B petition.

“In addition to the required attestation that there have been no layoffs in similar positions, the employer must retain paperwork on any employee in a similar position who left the company for any reason, including voluntary quits and those fired for cause,” Alexander says.

The new no-displacement requirement means a company that laid off employees in January, before the restrictive provisions were added to the stimulus bill, is essentially barred from filing H-1B petitions in the current round, which begins April 1.

If the employer places an H-1B worker at a customer site, the employer must attest that the customer has not laid off a U.S. worker in a similar position within 90 days before or after the date of the placement.

“This means that the employer must be aware of any layoffs at the customer’s site and must basically micromanage the customer’s labor activities—not the best scenario for positive business relations,” says Angelo Paparelli, business immigration partner at Seyfarth Shaw, who maintains a bicoastal practice in Irvine, California, and New York.

The new restrictions also require any employer receiving federal funds to make a recruitment attestation that it has made a “good faith” effort to recruit a U.S. worker for the position to be filled by the H-1B candidate. The recruiting effort must meet industry standards, including standards for posting and advertising the job, and must include salary offers that are as high or higher than the salary offered to the H-1B candidate.

“The ‘good faith’ recruiting attestation requires affirmative labor market testing on an ongoing basis,” Paparelli notes.

The new restrictions also eliminate two important exemptions from the original dependent rules. The original rules include exemptions for jobs paying at least $60,000 a year in cash compensation and for jobs that require a master’s degree or higher in a specialty related to the intended employment and generally accepted by the industry as a necessary credential for the job. These two exemptions cover many H-1B positions, but are not allowed for employers receiving federal funds.

“The dependent employer provisions add a cost of compliance in an already financially stressed business environment,” Paparelli notes. “The attempt is to add additional costs and hardships for employers.”

Employment decision consequences
Anti-immigrant advocates continue to claim that employers can adequately fill all H-1B jobs with available U.S. citizen employees. For years, this claim has been undercut by labor market studies and extensive data on university enrollments. Additional studies have documented the central role of immigrant talent in U.S. startup companies, patent filings, technological advancement and job creation.

Deep, long-term shortcomings in the U.S. education system have left the country dependent on foreign-born scientists, engineers, computer specialists and other highly skilled workers to fuel the research and innovation that drive economic growth.

“H-1B visa costs average $10,000 per candidate in government fees and attorney costs, and employers would certainly avoid these costs if they could,” Ruthizer says.

Experts agree that solving the outright labor shortage for some jobs and addressing the acute mismatch in skills for others will require substantial reforms in U.S. secondary schools, the university system and training programs.

The U.S. companies that are heavy users of H-1B visas have poured billions of dollars into trying to improve the supply of qualified U.S. workers. The Bill and Melinda Gates Foundation, funded by the sale of Microsoft stock, has invested more than $2 billion to improve U.S. secondary education, with a focus on science and technology, plus an additional $1.7 billion for college scholarship programs.

Intel, Oracle and other H-1B users have pumped billions more into the U.S. education system. In addition, by law, $1,500 of the fee that employers pay for every H-1B petition goes to scholarships and training programs reserved for U.S. students.

In recent months, anti-immigration forces in Congress have seized on the very limited cases of H-1B fraud as a vehicle for reducing or banning H-1Bs.

“Congress buys the idea that these employees are brought in to work for lower wages,” Paparelli says. “That’s a false perception.

“The vast majority of employers using these visas are law-abiding employers who incur high fees and costs and additional risks and subject themselves to criminal liability because they need these workers and cannot find suitable employee here.”

Employers have worked for years to increase the cap for H-1B visas from its current level, which experts agree is inadequate. The new H-1B restrictions signal a serious setback for this goal and for the broader call to let labor markets and business needs drive recruiting decisions.

“Cap removal will now be an uphill battle,” Ruthizer says.

“We’ve heard discussions about applying labor certification requirements for all H-1B visas,” Alexander says. “That would greatly reduce the number of H-1Bs.”

The Department of Labor certification process now entails long waits for a review with additional delays stretching into years if there are any questions. “By that time, the business opportunity has evaporated,” Alexander says.

The new H-1B restrictions will remain in effect for two years.

“Employers need to make sure that they are in contact with their congressional delegation and that Congress understands that limitations on foreign workers will simply mean that more jobs will be moved offshore, for example, to Canada, where the immigration restrictions are not as tight,” Alexander says.

CEO Steve Ballmer rocked the high-tech world with his January 22 e-mail to Microsoft employees announcing that the company would eliminate 5,000 jobs in the next 18 months, including 1,400 immediately.

The layoffs and other cost-saving measures will help Microsoft save $600 million in the first quarter of 2009 and $1.5 billion for the full fiscal year ending June 30.

Ballmer noted, however, that net employment would contract by only 2,000 to 3,000 jobs. He explained the company would simultaneously “open new positions to support key investment areas during this same period of time.”

Microsoft’s decision to hire new employees in the middle of a mass layoff reflects a broader trend now under way. Nearly two-thirds of employers plan to lay off workers in 2009, but many will not freeze hiring, according to the latest surveys.

Instead, companies will continue to hire new employees for their still profitable units, upgrade their talent and replace higher-cost employees with lower-cost new hires. Hiring during layoffs, however, increases the likelihood of a discrimination lawsuit.

“We suggest to our clients that there is opportunity in the recession to hire talent if a company is able to do so,” says Michael Rosen, partner and employment law specialist at law firm Foley Hoag in Boston. “There is some inherent risk, but it can be minimized as long as the company is sensitive to it.”

The risk continuum
The lawsuits generated by layoffs are complex. Dell is now facing a $500 million class-action suit claiming the company targeted female and older employees in layoffs affecting 8,900 workers. The company is moving through a massive restructuring designed to cut $3 billion in spending by the end of fiscal 2011.

The lawsuit, filed in October by four female and older human resources managers who lost their jobs, states that Dell executives manipulated performance ratings to justify terminations and informed them that there were no other available jobs at a time when there were open positions. The complaint is a virtual catalog of the legal issues that arise in layoffs.

The risks entailed in hiring during layoffs run along a continuum, Rosen explains. The lowest levels of risk occur at companies with multiple divisions that are not equally affected by the downturn. The company may lay off workers in an affected unit while still hiring in units that are not.

“There is no legal requirement that you must move people from one division to another,” Rosen notes.

The risk level is lower when a company lays off workers but then consolidates or modifies jobs and hires new workers to fill them.

But it rises when a company lays off workers from within a group of employees and simultaneously hires new workers for that same group without changing the skills required or the job titles.

“These actions need to be defensible,” Rosen cautions.

Although hiring during a layoff may trigger charges of discrimination based on race, gender or age, employment law experts generally agree that lawsuits based on a claim of age discrimination are among the most difficult to defend.

In any mass layoff, the employer should test for disparate impact on protected groups.

“If you are laying off employees with a disproportionate impact on those over age 40, you need to be prepared to explain why you are hiring and justify who you are hiring,” Rosen notes.

The matrix approach to structuring layoffs now common among employers often ranks employees on factors that include salary and performance. Historically, disproportionate numbers of older employees, who tend to be more senior and more costly, are swept into the layoff list.

The Supreme Court has made it clear that layoff and hiring decisions based on compensation costs can be defended, Rosen notes. Although it is illegal to discriminate against employees age 40 and over because of their age, it is not illegal to lay off those who are at higher salary levels, even if this policy has a disproportionate effect on older workers.

Hiring younger workers to replace older workers increases exposure to a lawsuit, however.

“The real issue is not just whether you will win or lose a case, but the odds that you are going to have to spend the money to defend a case,” Rosen says.

Cases may turn on whether hiring during a layoff causes a shift in workforce demographics so that the average age drops substantially.

“On pure numbers, it exposes the employer to age discrimination claims,” Rosen cautions. “That doesn’t mean you can’t do it, but you need to be prepared to defend both the layoff and the hiring decisions.

“If an employer lays off 10 employees who are over age 50 and costly and hires 10 who are under 30 at lower salaries, you can defend that. But this sort of one-to-one scenario produces the most glaring numbers, and I like a case where the numbers are not glaring.”

Business justification
A sharp increase in discrimination lawsuits triggered by recent layoffs is already apparent, according to Kevin Shaughnessy, partner at Baker Hostetler in Orlando, Florida.

“We’ve seen an extreme rise in claims nationwide, and not just age claims, but race and gender discrimination claims as well.

“Employer concerns about laying off older employees are well founded, but these actions can be managed. If money is the only issue and you can hire cheaper, you have to justify the disparate impact on older workers.”

Business justifications include the need to lower costs.

“The company can still be profitable, but it becomes more difficult to justify the layoff if there are no pressing economic factors,” Shaughnessy says.

Exposure to a lawsuit can be reduced if the employer considers the laid-off employees for the open positions and those positions can be distinguished from the jobs included in the layoff.

“If the job title is similar, employers must carefully evaluate the job description for the open position,” Shaughnessy notes.

Shaughnessy advises employers to keep careful records on the business reasons for the layoff, the selection process used and the difference between the jobs that were eliminated and the jobs where hiring is taking place.

“In a large layoff of thousands of employees, there is some safety in the numbers, and it is less likely that the company would have engaged in discriminatory actions,” Shaughnessy says. “Financial considerations are paramount.”

Shaughnessy notes, however, that laying off senior people and hiring new employees at lower salaries can undermine trust in the company. The remaining employees may wonder at what age they will be terminated.

“There is a tremendous morale upheaval during a layoff and this is exacerbated by bring in new employees,” he says.

Employers should issue effective communications to all employees.

“There should be an explanation for the layoffs and the new hiring that is taking place,” Shaughnessy advises. “For example, explain that one product line is not profitable and layoffs are needed, but another product line is profitable and requires a slightly different skill set from the first. This doesn’t end the angst, but it can go a long way to ensuring less upheaval.”

During a layoff, hiring new employees into consolidated job functions and reorganized job titles is more common than simply replacing older workers with younger ones in the same job, according to Lisa Cassilly, partner in Alston & Bird in Atlanta.

“The law does not prohibit restructuring to reduce pay for jobs,” Cassilly says. “What is important is the need for clearly defined, essential job duties. This is a fact-intensive issue, and the clearer the demarcations, the better. For the open positions, there must be identifiable minimum qualifications. It is also wise to post the positions internally.”

If an employer lays off older workers and posts openings for the same position at a lower salary, Cassilly suggests that the employer should identify the position and the compensation and offer it to more senior employees.

“If they are qualified and willing to accept the compensation, they can be retained or hired back,” she says. “There may be morale issues, however.”

If an employer is using a layoff to clean out low performers, Cassilly advises that the performance criteria for any open positions should be specified.

“Be mindful of the temptation to include performance-related reductions in a layoff without noting that they were performance related,” she says. “If data-gathering for the layoff includes performance considerations, be honest about that.”

When hiring for the open positions, Cassilly advises employers to clearly define the qualifications required and measure them against the performance record of the employees who were laid off.

“If there are attendance or productivity problems that the employer hopes to remedy, for example, the minimum attendance or productivity criteria should be noted,” she says.

Employers that provide severance payments may be able to reduce the risk of a lawsuit.

“It is possible that we may see fewer claims than in earlier downturns because more employers are conditioning severance payments on obtaining releases from the terminated employees,” Rosen notes. “Releases are not always effective, but they will preclude a portion of claims.”

Much of the advertising world pulled the plug on recruiting in January when a number of large ad companies, including Ogilvy, Omnicom and Interpublic, initiated substantial layoffs.

The U.S. advertising industry employs 453,500 workers, with 180,500 employed at ad agencies. These agencies shed almost 7,000 workers in the last four months of 2008, according to the latest data from the Bureau of Labor Statistics. Significant layoffs continued in January.

While the staffing cutbacks are dramatic, industry financials reveal a bleak future. Publicis Groupe media agency ZenithOptimedia predicts that U.S. ad spending will fall 6.2 percent in 2009 to $161.8 billion, compounding the pain of a 3.8 percent decline in 2008.

Although recruiting is at a standstill at most agencies—particularly those that rely on auto and financial services accounts—agencies with health care and packaged goods clients are still hiring. And at niche agencies serving those sectors, the recession has made it even more difficult pull in the passive candidates needed to meet ongoing demand for highly specialized talent.

Health care advertising agencies, for example, are still hiring from what remains a very small pool of candidates with a specific mix of creativity, advertising experience and health care industry expertise.

“In health care advertising, we still see a real shortage of qualified candidates,” says Alison Lalli, an in-house recruiter for Grey Healthcare Group, a niche advertising agency for the health care industry.

Grey Healthcare employs 750 administrative, creative and executive-level employees, with 250 based at its headquarters in New York. Clients for the firm’s services include Pfizer, Johnson & Johnson, Wyeth and Medtronic.

“For the entry-level positions, we can recruit from a larger pool, but above that, applicants without agency experience or from outside the health care industry find it very difficult to meet the skills we need,” Lalli notes.

Investing the time
Although high unemployment rates now facilitate recruiting for many job titles, hiring candidates at the top of the skills roster remains challenging. The unemployment rate for job seekers with a bachelor’s degree or higher stands at 3.7 percent, a full point higher than in September—before the economic downturn sharpened, but still within the range of full employment.

Advertising is a top-heavy industry, with more than 40 percent of all jobs classified as managerial or professional positions. Most positions, including entry-level jobs, require a bachelor’s degree or higher. Despite the downturn, long-term job growth forecasts for the industry remain above all-industry projections.

Candidates with formal training, industry experience and a proven track record are in short supply. At Grey Healthcare, Lalli and her colleague Antonette Poli handle all recruiting for the New York office. That means filling 40 to 50 positions a year, including some that attract only two qualified candidates. The recruiters turn to outside recruiting firms only for temporary positions or urgent-need cases.

During a downturn, the passive candidates that Grey Healthcare and other employers need commonly retreat into the perceived security of their existing position rather than incur the risk of changing jobs. These risk-averse passive candidates require targeted recruiting resources.

Recruiters must be prepared to devote substantial time to understanding the candidate’s career goals, which often drive the employment decision. Recruiters must also pay special attention in selecting the best representatives to meet with the candidate and be prepared to redefine the job.

At Grey Healthcare, Lalli and Poli have crafted a simple but fruitful approach to the difficult challenge of filling jobs in what remains a highly competitive market. They focus on investing time upfront with the hiring managers and building relationships with passive candidates, even those who show no interest in a position.

When a position opens, Lalli and Poli meet with the hiring manager to define the skills, knowledge and behavioral characteristics required for position. For each open position, the hiring manager must submit a list of the three skill areas that they believe are crucial to performing well in the job. Lalli and Poli also carefully review nonflexible requirements such as the amount of travel required.

The hiring manager, a human resources representative and the executive vice president of the division all sign off on the requisition.

“The details are authorized from the beginning so we can move quickly to make an offer,” Lalli says.

For the initial search, the recruiters utilize their contracts with Monster, Yahoo HotJobs and a pharmaceutical advertising network. They also tap their own professional contacts and pursue potential applicants referred by candidates and employees. For passive candidates, they rely heavily on their own database.

Candidates who pass through a phone screen with Lalli and Poli are invited for a face-to-face interview with the two recruiters.

“We use behavioral and skill-set questions, with the same questions put to all the candidates before we send them on to interview with the hiring manager,” Lalli reports.

Both recruiters meet with the hiring manager after the interview. Candidates may also meet with agency team members to get a better sense of what they might gain from working with talented professionals at the firm.

When a qualified candidate passes through the interviews successfully, Lalli and Poli move quickly to make the offer, usually within a day or two. During periods of economic uncertainty, a quick offer is an important part of easing a passive candidate’s concerns about leaving one job for another.

Lalli and Poli negotiate the starting salary. The requisition includes the authorized range. “It can be tricky if we have a candidate with competing offers,” Poli says.

To go beyond the starting range, they must request approval from human resources, the executive vice president for the division and the CFO. Their average time-to-fill from requisition to hire is 30 days.

Pitching the firm
Prying passive candidates out of their existing position requires an approach that is specifically tailored to the ad firm’s culture.

“Passive candidates are our most talented candidates, and from the very beginning, we stress the training and growth opportunities that the agency offers,” Poli says. “We leverage our ability to attract top passive candidates and then sell them a great growth opportunity.”

The recruiters map out the career paths for passive candidates and the time frame for advancement.

“We also offer a rich culture and the opportunity to work with a team of talented people,” Poli says. “When candidates see a strong team dynamic, that’s attractive. We emphasize the whole package: career development, strong teams, good pay and benefits.”

The recruiters provide candidates with information on all aspects of the agency’s broad range of disciplines, which helps candidates understand the full extent of the opportunities within the firm.

“We also discuss the firm’s competitive benefits package, including tuition reimbursement, which is very important to applicants,” Lalli says.

Lalli and Poli stress the importance of ending interviews and all communications with candidates on a positive note. They notify unsuccessful candidates about their status, thank them for their time and interest and explore any possible future employment opportunities.

“Because the talent pool is so small, it’s crucial to maintain relationships,” Poli notes. “The challenge is always to find new talent.”

The recruiters also conduct exploratory interviews on an ongoing basis, even if there are no open positions. These interviews build the recruiting database and help the recruiters refine and update their understanding of the issues that might make passive candidates willing to change jobs.

“We contact passive candidates and invite them in for an exploratory interview and a look at the agency,” Poli says. “We then contact them once a month to update them on what’s going on at the firm and to ask them how they are. This pulls in passive candidates. They are impressed by our interest in them and by our open communications.”

Protecting the prize
Lalli and Poli remain involved through the onboarding process to protect their investment in landing candidates for the agency’s hard-to-fill positions.

“Turnover in the industry is very high,” Poli notes. “After six months on a job, many employees in the industry begin to think about other opportunities. Professional employees in our advertising division may get two calls a day from other agencies. It’s rough.”

The recruiters recently revised the onboarding process to extend it well beyond the initial two-week training and orientation program. They now conduct a 30-day follow-up with all new hires that includes a confidential survey and a 90-day performance checkup with the new hires and their hiring managers.

The 90-day checkup reviews the three critical skills areas that the hiring manager noted for the position and the new hire’s performance in them.

“The decision to formalize and expand the onboarding process arose from our objectives for improving retention,” Lalli reports. Lalli and Poli use time-to-fill, turnover and retention metrics to evaluate their work.

The recruiters see internal recruiting as a central part of their job and the key to successful staffing. They work closely with the in-house training team and human resources to maintain a strong internal pool.

“Grey Healthcare provides great training for junior employees to build the pool of internal candidates,” Lalli says. “In a perfect world, we would be able to fill all of the higher-level positions internally, but we can’t always do that.”

When the global banking system exploded in October, INSEAD, the international business school based in France and Singapore, was just beginning a major executive education program on innovative business-to-business marketing for one of the largest companies in the world.

The school immediately brought in an economist who had worked closely with Federal Reserve Chairman Ben Bernanke to provide unique insights into the credit meltdown, and another who specializes in recovery finance.

“We added these two nuances to the program to help the company think about the behavior changes needed in the current crisis,” says Narayan Pant, INSEAD’s dean of executive education.

Dartmouth’s Tuck School of Business in Hanover, New Hampshire, moved with equal speed. “Our ‘leading in a crisis’ module became our ‘leading in a global financial crisis’ module,” says Clark Callahan, executive director of executive education.

“We are embedding a ‘managing through a downturn’ element—including themes and materials—in all of our executive programs,” Callahan says. “The idea is to help people make sense of what has happened and what it means going forward, because that is the level of the conversation at this point. We can make curriculum changes very quickly.”

The rapid response at both schools is part of a broader shift in executive education to create programs that reflect the immediate realities of the business world on a company-specific basis. This shift entails high levels of customization in all aspects of executive education and an intense focus on changing behaviors rather than dispensing information.

The new customization now reaches well beyond designing executive education programs for specific corporate clients. It is now transforming open-enrollment classes and executive MBA curriculums and spurring new consortium and coaching programs. It is also fueling focused programs for small groups of executives based on their position in the corporate hierarchy. In every case, the curriculums mirror the new global environment and the demand for leadership skills on every continent.

Experiential learning
“Ten years ago, executive education programs around the world discovered that they were no longer in the education business but in the business of behavioral change,” Pant says. “Companies send their executives into programs because they want them to behave differently when they go back to their work. Programs that can create such change must be a combination of cognitive, emotional and experiential work in a global context.”

At INSEAD, this shift in client needs generated changes in the open-enrollment curriculum. “In the past, we simply described what we did and enrolled participants,” Pant says. “Now we target segments of the executive group, find out exactly who those people are and tailor content to them. We are no longer purveying information, but crafting the behaviors needed.”

INSEAD consistently occupies top positions in rankings of the world’s best MBA and executive education programs. More than 9,500 executives representing 126 countries participate in its executive education programs every year. In addition to its open-enrollment programs, the school provides custom programs for such companies as IBM, Royal Dutch Shell, ExxonMobil, SAP, Toshiba, HSBC and Microsoft.

U.S. enrollments represent the greatest growth in both the open-enrollment and custom programs at INSEAD, reflecting the rising demand among U.S. companies for executives with global exposure and training. At INSEAD, no single nationality makes up more than 10 percent of total enrollment.

“Companies are increasingly sophisticated in evaluating their own development needs and want to be involved in the education programs designed to create the behavior changes required,” Pant says. “In the customized programs, we realized years ago that the ready-made plug-and-play model was over. Now we start with basic questions for the client about the most granular behavior changes necessary to move the company in the direction that it wants to go.”

Pant describes an INSEAD program designed for a highly successful European company.

“Its order book was filled for the next four years,” he notes. “It operated as a skilled engineering firm in a regional environment. The employees were content. But the CEO saw the global movement toward Asia and knew it would soon force them out of their comfort zone. They needed greater openness, more lateral thinking and the ability to develop strategies that would be resilient across diverse scenarios.”

INSEAD created a program to make the company’s executives and managers question their business assumptions. “We took them to India to meet with senior leaders in government and organizations so they could understand what the markets might look like in 10 years,” Pant says. “Then we took them to Hong Kong to look at a government-owned manufacturing facility that operates with extraordinary levels of quality—far higher than most private organizations.”

INSEAD faculty then introduced the tools that the managers needed to help them build business models and design strategies to succeed in different scenarios —some extremely harsh, some extremely favorable.

“By the end of the program, we had created 40 senior managers who had a very different perspective,” Pant says.

Leadership focus
Part of the push for greater customization stems from the demand for leadership development. “The executive education industry used to design products and push them out,” says Rita McGlone, senior director for executive education at the University of Pennsylvania’s Whar­ton School. “This has changed dramatically over the past five years because companies are smarter and clearer about what they need. They now understand that there is a huge difference between business acumen and leadership skills.”

The majority of Wharton’s open-enrollment programs are now some form of leadership development. In the custom programs, the focus is on developing leader- ship to drive and manage change in the organization. Wharton’s executive education programs serve more than 12,000 participants annually and an alumni network of 84,000 executives worldwide.

“Executive education is now seen as more of a continuum rather than just a specific product,” McGlone says. “Particularly with the customized programs, it’s about creating change in the organization or moving a team along in a particular direction. We now spend a lot of time interviewing stakeholders in the company to ensure that what participants say they need is in alignment with what the company thinks they need.”

The assessment may lead to the creation of a specific program or coaching plan or to sending employees into open-enrollment programs. “The whole time frame for working with the client has changed,” McGlone notes. “There may be follow-up programs or a virtual classroom and meetings that extend over time.”

In both its open-enrollment and customized programs, Wharton has made a decisive shift to focus on the behaviors required for effective personal and team leadership.

“The impact of all the changes in the programs is a new emphasis on the return on the investment in terms of applying the knowledge and tools gained in the workplace,” McGlone says. “There is also a much greater emphasis on experiential learning, which we know is the most effective form of learning for adults.”

Another aspect of customization appears in the proliferation of specialized programs designed for subgroups within the executive camp. At the top sits Wharton’s advanced management program, which executives may enter only if they are within three steps of the CEO slot.

“The objective is to take potential C-suite candidates and expose them to the worldwide changes that will impact business,” McGlone says. “They develop creative thinking about this impact.”

Participants must be nominated by one of their company’s top three C-suite executives or a member of the board, and they must have 15 to 25 years of management experience. The executives who enter the program spend five weeks honing their skills in global strategy. “There’s not much offered in the way of nuts and bolts,” McGlone notes.

Wharton limits this rarefied offering to 60 participants to ensure that every executive has sufficient time with faculty. The executives come from large multinational companies, with U.S.-based companies representing 20 to 30 percent of the total.

Coaching and consortiums
Tuck’s approach to customization flows from its deliberate decision to run a small, selective business school. It offers only one MBA program, which emphasizes management and leadership, and no executive MBA is offered.

“It’s about picking our abilities carefully and executing them well,” Callahan says.

“For executive education, on the custom side we run smaller programs for fewer companies and half a dozen very high-end open-enrollment programs,” he says. “We are not looking to grow dramatically because we want to maintain the uniqueness of the personal scale at Tuck. We focus on close work with faculty, and Tuck’s remote location encourages that close contact.”

Over the past five years, Tuck’s executive education program has adopted a clear focus on leadership development. “We help executives look forward with a strategic mind-set to meet the challenges presented by business change,” Callahan explains. “We also help them look outward to identify and develop the leadership styles necessary to manage change and growth, for example, by building brands globally.”

The curriculum is also designed to help executives look inward, with personal reflection on the behaviors necessary for success, including ethical behavior, building senior teams and conducting strategic negotiations. “Even when we talk about financial analysis, it is from a behavioral perspective,” Callahan says. “The goal is to trans- form yourself, your organization and your industry.”

Tuck has also executed a major shift toward action learning. Open-enrollment courses begin with a business challenge—a structured assignment with a template issued ahead of the program’s start date.

“We might have 15 different companies represented in one program, but each participant is working on a business challenge he or she has constructed with content that is unique to their organization,” Callahan explains.

Tuck has launched a new consortium approach to executive education that blends the best of customized corporate programs and open-enrollment classes. The initial consortium is a custom program for four companies with a focus on global leadership. The companies, which do not compete with one another, agreed beforehand on the structure and style of the course.

“The commitment is to top-tier executive development,” Callahan says.

Participants are nominated by a senior executive, and only those who have already agreed to accept an international assignment are admitted to the program. “Each one has been targeted as a trans­national leader,” Callahan notes. “They are in the high end of high-potential employees.”

The consortium group consists of 40 to 50 participants, with U.S. executives forming a minority. The group spends the first week of the three-week program on the Tuck campus in Hanover, the second week in Chennai, India, and the third week in Shanghai, China.

“The consortium model works well for us and for our clients,” Callahan says. “It is a more complex approach to executive education. We have to get to know each client as we would for a custom program, but then we multiply that by four. It is very powerful because it blends the benefits of a custom program tailored to a specific company with the benefits of an open-enrollment program that allows participants to network with and benefit from the experiences of executives outside their own organization.”

Another aspect of the customized approach at Tuck revolves around coaching and follow-up. “This started on the custom side of the business but is now increasingly a part of open-enrollment programs,” Callahan says. “We bring in Tuck executive coaches to participate in the program along with our faculty.”

Tuck conducts follow-up meetings after a program, and then clients determine the amount of coaching that will occur beyond that point. The school builds into its executive education agreements an option for six to 18 months of coaching at the end of the program. “Another variant is that an executive may want to bring a Tuck coach into the company to work with the participant’s inner circle,” Callahan adds.

Callahan, McGlone and Pant do not anticipate dramatic declines in their executive education enrollments because of the financial crisis.

“In our programs, we teach that the business of good management becomes all the more important during times of crisis,” Pant says. “In a world where everyone has to focus on value and where resources will be very scarce for the next three to five years, executive education has to focus on value and how behaviors must change to create value in this environment.”

Workforce Management, December 15, 2008, p. 24-29 — Subscribe Now!

Every year, Cisco trains 600,000 students world­wide in information and communication networking skills through its Networking Academy, a project that began quite fortuitously in 1997 when the company reached out to a single school.

    Since the academy’s inception, more than 2 million students have graduated from 10,000 programs in 165 countries.

    The academy program covers 280 hours of training using a combination of Web-based and instructor-led sessions along with a hands-on lab environment to teach students how to design, build and maintain computer networks. In Central and Eastern Europe alone, 32,000 students have passed the first four semesters that make up the Cisco Certified Networking Associate level. The company now operates 744 academies in the region.

    “The Networking Academy is not a recruitment arm for Cisco,” says Markus Schwertel, academy manager for Cisco’s Central and Eastern European region. “Students can apply for positions with Cisco and many are hired, but the objective is broader. We are not filling the pipeline for the IT sector, but many of the students find jobs in the sector even before they graduate.”

    The scale of the project is different from Cisco’s direct needs, notes Agnieszka Halas, Cisco’s human resources manager for Central and Eastern Europe.

    “But all supply chains in the region are related, and you need people who have IT and networking knowledge in your supply chain and in the economy as a whole,” Halas says. “Cisco also is building its employee brand in the region, and the Networking Academy contributes to this. Our employees demonstrate a pride not only in our products but also in Cisco’s work in the ecosystem it helps create.”

    Imagine the 51,000 Central and Eastern European students who are now enrolled in the academy, Schwertel says.

    “If in the course of their future careers each one builds only one network, that would have a significant impact for Cisco—not today, but in five years or 10 years,” he says. “The academy is not a business line; it’s a not-for-profit enterprise. Part of the mission is to invest in the communities where we do business. This is a long-term global perspective.”

    Cisco is using the academy model to build out its new Entrepreneurship Institute across Central and Eastern Europe, with pilot programs in Turkey, Poland and Hungary. “The Entrepreneurship Institute is the logical next step for using our experience with the Networking Academy to build an ecosystem that includes business skills,” Halas notes. “The managerial skill set is a piece that is missing in the market.”

    One of Cisco’s objectives for the Entrepreneurship Institute is to strengthen the small and midsize business sectors, which represent 60 percent of all business.

    “They are the lifeblood of the region,” Halas says. “The educational system is gearing up to meet the needs of a free-market economy, but there is some lag in building the local labor markets. Larger companies and multinationals can find the needed skills through the inflow of talent and the transfer of knowledge within the company. But small and midsize businesses don’t have this access and must draw from the educational institutions. Their access to business knowledge drives their growth and creates growth opportunities for Cisco.”

Workforce Management, November 17, 2008, p. 30 — Subscribe Now!

Wages are rising at double-digit rates across much of Central and Eastern Europe, but Cisco Systems is sitting tight, with 16 offices spanning the region.

    “High wage inflation is there, with some pockets in the area more affected than others,” says Agnieszka Halas, Cisco’s human resources manager for Central and Eastern Europe. “But the econo­mies are showing healthy growth, and from a long-term perspective wage inflation does not affect our strategy. It’s not a showstopper.”

    Based in San Jose, California, Cisco generates $40 billion in annual revenue and employs 66,130 workers worldwide, with 28,700 employed outside the U.S. The company moved into Central and Eastern Europe in 1995, when unemployment in the region was high, wages were low and foreign investment was still nascent. Those conditions shifted rapidly in the next de­cade, but Cisco remains committed to being a major presence in the region. This year, it will train 51,000 students in Central and Eastern Europe in information and communications networking skills.

    “Years ago, some companies invested in the Central and Eastern European region for the sole reason of labor-market price advantage, but those days are over,” says Scott Marlowe, general manager for Hay Group, Czech Republic. “Now companies are looking at the price of talent as the third or fourth factor in the investment decision. Instead, they are looking at the markets themselves, the proximity to other markets and the available talent.”

    Higher labor costs are a predictable development as many of the Central and Eastern European economies mature well beyond their original emerging-market status. But strong economic growth and significant talent pools continue to attract companies that are not tied to labor arbitrage.

    Uncertainties touched off by the global financial crisis and high currency valuations and wage inflation may darken the macroeconomic landscape, but savvy multinationals are increasingly taking a broader look at Central and Eastern Europe’s advantages. Improvements in the labor supply, combined with the European Union’s push for true labor mobility, should capture the attention of any human resources executive looking for fresh talent.

Relative advantages
    Despite market maturation, Central and Eastern Europe remains one of the fastest-growing regions in the world, with annual GDP growth averaging 6 percent in 2007 and forecasts calling for 5 percent growth in 2008. Across Central and Eastern Europe, rising employment and skills shortages have been driving up wages since 2004, when 10 nations joined the European Union, which at the time had 15 member countries. “Wage inflation is a challenge for all multinationals in the region,” Halas says.

    In the context of global investment, however, Central and Eastern European wage inflation is still below the rates reported for other markets with attractive labor pools. For the past five years, annual wage inflation has averaged 19 percent in China and 21 percent in Brazil, compared with 5 percent in Mexico and 3 percent in the U.S., according to McKinsey & Co.

    In the service and IT industries, wage growth in Central and Eastern Europe is comparable to or lower than wage increases in alternative emerging markets. Turnover is high, but significantly lower than in comparable markets in China or India.

    The Cisco business profile in Central and Eastern Europe requires two broad skill sets—marketing, sales and business management; and engineering and tech- nical skills. “The company represents a vibrant environment in all areas of business expertise and technology,” Halas says. “If you paint a picture from the talent perspective, Central and Eastern Europe is a young region with a huge inflow of foreign investment,” especially since the EU expansions.

    For managerial and technical talent, demand continues to outstrip supply. Cisco has responded with aggressive training programs aimed at both skill sets. “On the technical side, Cisco is well positioned to get the best people and also has a good track record of building talent in general,” Halas says.

“Like other emerging markets, Central and Eastern Europe is now experiencing continued labor outflows and some relatively recent inflows from reverse migration. It’s important to look at demographics of the trend and the skill sets captured in the outflow.” —Agnieszka Halas, human resources manager for Central and Eastern Europe, Cisco

    In addition to its Networking Academy, which pulls in potential technical candidates, Cisco is now building entrepreneurial and management training institutes across the region. Cisco also partners with 800 universities across Central and Eastern Europe to build talent and boost growth.

    Throughout Central and Eastern Europe, Cisco operates with local teams. “As you cross borders into different countries or areas, there is a wealth of languages, so we need a local footprint,” Halas says. Regional leaders work from their home countries and communicate through the technology network.

    Cisco is organized into two regions within Central and Eastern Europe. One region encompasses the nations that entered the European Union in 2004, plus Romania and Bulgaria, which joined in 2007, while the second region, which Cisco calls “Europe East,” encompasses the non-EU nations, including Croatia and Turkey. This split reflects business realities within Central and Eastern Europe, where EU membership ensures a level of political and economic stability and market maturation not yet achieved by nonmembers.

    For EU members, accession generated vast changes in state administration and infrastructure and set off a series of privatizations that continue to offer attractive business opportunities. Outside the EU nations, the drive to meet membership requirements has fostered a push for innovation and productivity. Croatia and Turkey, which entered EU accession talks in 2005, have already seen huge jumps in foreign investment.

    Vast amounts of foreign investment within the Central and Eastern European EU member states have deformed their labor markets, Marlowe reports.

    “The multinationals hire large groups of employees in a single job category. This is not normal, organic growth, but abnormal growth,” Marlowe says. “In Prague, for example, a city of 1 million people, a company recently hired on 850 IT professionals. This puts a strain on hiring and distorts salary growth. Multinationals are still implementing here strategies that were thought up somewhere else.

Easing pressures
The strain on the labor supply and wages may ease as true labor mobility rises.

    “Like other emerging markets, Central and Eastern Europe is now experiencing continued labor outflows and some relatively recent inflows from reverse migration,” Halas says. “It’s important to look at demographics of the trend and the skill sets captured in the outflow. For example, in Poland, most of the emigrants were young and relatively lower-skilled workers who moved to the U.K. and Ireland for work in manufacturing and retail, and this created a challenge in Poland. But it did not create a challenge for Cisco.”

    The outflows that sharpened Central and Eastern European labor shortages are now easing as the global economic slowdown hits Western Europe. The U.K. Home Office reported in August that the number of work-permit applications from Central and Eastern European EU member states had fallen to its lowest level since the 2004 enlargement. The number of applicants from Bulgaria and Romania, the 2007 accession states, also dropped.

    In addition, the European Commission has renewed its commitment to labor mobility with a concerted drive to remove barriers to cross-border flows, which should increase inflows and outflows aligned with actual labor market demands in all member states.

    “At Cisco, we see the ease of mobility as a positive development,” Halas says. “The high-tech sector that Cisco operates in has benefited from increased mobility because we can bring needed skill sets into the region.”

    Apart from the impact of lower outflows and higher inflows set off by the downturn, labor shortages and wage inflation will also ease as export-dependent industries in Central and Eastern Europe trim production.

    “With the financial crisis now, there is a lot of uncertainty, which is moving down into the labor markets,” Marlowe says. “Today, employers are more able to resist pressure from their line managers to constantly hire on more employees, and the line managers are in more of a dialogue with HR about labor supply and demand. Before, HR was simply a recruiting machine even though companies were maturing.”

    Because of the skills shortages, multinationals in the region have struggled to meet employee expectations for advancement. “Employees were used to rapid development and salary growth,” Marlowe says. “The pressure on pay has been tremendous, and the issue was what else the company could offer. Over the past two to three months, the pressure has eased as employees and line managers see the financial uncertainty. It is important to note that these economies have never seen recession.”

    Labor mobility varies highly from culture to culture. In Poland, for example, there is a high level of willingness to relocate abroad, while this willingness is much lower in the Czech Republic.

    “We have seen some inflow from returning immigrants in Central and Eastern Europe, and a higher level of the free movement of labor and mobility within the region,” Marlowe says.

    “It is important to note that in Central and Eastern Europe, especially Central Europe, companies are capital-centric in a geographic sense,” Marlowe says. “Language capabilities, mobility and attitudes toward work are very different in the capital cities. If you are investing outside the capital cities, you will encounter very different cultural realities. If you’ve been to Prague, you haven’t been to the Czech Republic. It’s a different reality.”

Evaluating the markets
    Multinationals operating in Central and Eastern Europe should be prepared for some renewed pressure on wages and prices as the 2004 EU entrants move into the eurozone—that is, the union of EU countries that have adopted the euro as their official currency. Until then, HR executives will have to monitor currency fluctuations across the region, and especially in countries such as the Czech Republic where valuations have been especially high.

    “The koruna is not expected to appreciate much more, but HR executives must conduct their labor-cost due diligence and must look at currency fluctuations, particularly in Poland and Czech Republic,” Marlowe advises. “When these countries move into the eurozone, life will be much easier, but most Central and Eastern European countries will see price increases and some wage inflation with the introduction of the euro.”

    Some wage inflation may occur as comparability occurs with the eurozone, but Marlowe believes that there is a tendency to overestimate the impact of comparability.

    “Within the current EU, there are salary differences and employees understand the differences in purchasing power,” Marlowe says. “Purchasing-power knowledge has also brought managers back into Central and Eastern Europe because they see the advantages. Also, managers have more freedom to develop here. In Western Europe, you make one mistake and you are dead. Here, managers have more freedom to experiment.”

    HR executives who are evaluating Central and Eastern European locations should also be aware of sharp political and economic variations within the region, according to Hylke Sprangers, NorthgateArinso’s vice president of operations for Europe, the Middle East and Africa. NorthgateArinso, headquartered in Hemel Hempstead, England, is a major HR software and services provider with 4,500 employees in 32 countries. In 2005, it opened a regional delivery center for Europe, the Middle East and Africa in Katowice, Poland.

    “For us, the importance of Eastern Europe is twofold,” Sprangers reports. “First, it is a big economic market for our clients that have operations there, and second, we want to benefit from the low-cost talent pool. A lot of our clients are moving into the EU [member countries] of Central and Eastern Europe. For example, Cadbury Schweppes opened a new factory in Poland in 2006 and it already employs a much larger workforce than was originally planned.”

    Sprangers advises HR executives who are evaluating the region to first determine whether the company is considering an EU or non-EU location. “For the countries that belong to the EU, there are data privacy issues, unless the company will only be servicing operations of clients in the United States,” he says. “In addition, there is less economic and political stability in the non-EU nations, especially since the invasion of Georgia.”

    NorthgateArinso has not experienced skill shortages in Poland, but Sprangers notes that Polish workers are very mobile and willing to relocate to other countries for work and international experience. “We now see attrition of 10 percent and rising in our Polish center,” he says. “There is some inflow of returning immigrants, but the outflow is also continuing. This is normal within emerging markets.”

    High wage increases are also entirely normal, Sprangers notes.

    “Central and East­ern Europe is a contender for Asia, especially India, where the shortage of technical talent is acute. In India, wage inflation has been running 15 percent a year for five years and attrition can hit 50 percent. Companies investing in Central and Eastern Europe must make a business plan for five to 10 years.”

Workforce Management, November 17, 2008, p. 29-35 — Subscribe Now!