Investment in Employees


Labor markets with ample inexpensive industrial labor do not require much investment to recruit or select. They demand sheer physical labor, which can usually be learned in a few hours.

In contrast, knowledge work requires high levels of intellectual capital. But this can take years to hone, is expensive, and is hard to find. To cope, management often finds itself caught in an undulating cycle of continually investing time and money to recruit, train, retrain, and retain capable staff, depending on which way the economy is heading. If management lets people go during a downturn, only to discover it needs similar employees later, the cycle begins again. So do the math. In the end the costs are far greater than if the organization had controlled firing and hiring initially. The financial effects are shocking: The one-time cost of replacing a laid-off knowledge worker may equal as much as two to three times the annual salary of the original employee.

In addition to finding knowledge workers, who are in short supply, training new hires also takes money and time, sometimes as long as several months to a year. Productivity is low during such training periods, both for the new employees and those training them.

Finally, losing human capital often means losing “mission-critical” skills that enable a company to implement its strategy and distinguish itself from the competition. For example, Ritz-Carlton delivers superior customer service and accommodations to appeal to travelers, who are then willing to pay premium prices. Federal Express bases its reputation on the capability to complete speedy on-time deliveries to beat other delivery services. Employees must possess a particular set of skills to maintain Ritz-Carlton’s and Federal Express’s competitive advantage. If they leave the company, voluntarily or involuntarily, the company’s ability to execute its strategy is compromised.

So what has really changed? Individual skills and competencies that knowledge workers need in the information economy require far greater intellectual content, more time to develop and maintain, and are more ephemeral than those of workers in the industrial economy. If companies accept these facts and regard employees as human capital, they will view them as less expendable.

Historically, employees were considered short-term variable costs. As revenues and profits dropped, the immediate reaction was to cut employees. Today employees should no longer be considered short-term costs. The human capital they contribute is key to the company’s long-term survival. They should now be considered long-term assets rather than expenses, whether the economy heads up or down.

At the same time businesses have to be profitable. So in a business crisis company heads find themselves caught in a headcount dilemma, with the need to cut costs while retaining valuable human capital.




The Headcount Solution. How to Cut Compensation Costs and Keep Your Best People
The Headcount Solution : How to Cut Compensation Costs and Keep Your Best People
ISBN: 0071402993
EAN: 2147483647
Year: 2002
Pages: 143

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