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June 10, 2002 Issue

When Hiring Bonuses Go Awry

The jobless rate hit an eight-year high - 6% - in April 2002. Few organizations have scrambled for employees. With such news from the business journal and television news experts, one might question why anyone would offer hiring bonuses. Are there not enough workers to meet the reduced labor market demand?

The answer, surprisingly, is no. Yes, IBM, GE, XEROX and other giants of industry laid off thousands of workers. However, many of these were quickly absorbed into the expanding pool of available jobs. While we did experience a recession, unlike in others, the core economy remained stable.

At the end of 1992’s recession, the economy grew at a 1.8% rate. This was not adequate to keep payrolls from falling by 457,000 after the recession ended, pushing unemployment to 8%.

In contrast, this year’s economy grew at 5.8% in the first quarter. March 2002 payrolls increased instead of declining. New jobs reported in April grew by 122,000. Private-service companies, 80% of all private organizations, added 132,000 new workers in April. To top all of this, the Labor Department reported in May that U.S. workers’ hourly output rose at an annual rate 8.6% in the first quarter. At the same time, the labor cost to companies to produce each unit of output plunged to a 5.4% annual rate.

According to a Harvard study, the growth of “prime-age” employees between 1980 and 2000 was 19 million. Between 2000 and 2020, they predict this growth to be 3 million. In 1980, 22% of the labor force had a college degree. In 2000, it jumped to 30%. It is predicted that this rate will slow over the next 20 years to a 32% level by 2020. This study points to the growing shortage of available college educated workers required by a growing number of companies to remain competitive and to offer the services required.

Watson Wyatt reports that in the 1970s the annual labor force growth was 2.6% for the decade. In the 1980s, this dropped to 1.6%. The 1990s saw a further decline to a decade-long growth rate of 1.2%. So far in the 2000s, the labor force growth is at 0.8%. Watson Wyatt predicts this trend will continue into the 2010s, where we will see a labor force growth rate of 0.4%.

Dramatic changes in worker demographics add to what is becoming the new round of labor shortages. Each year brings an increasing number of baby boomer retirements. Generation X and Generation Y are not replacing these retirements.

Recent studies point to a reversal in the past trend of women joining the workforce early, while considering family and other non-work related issues later in the career. There is a growing trend for females entering the workforce to opt for non-work related activities. Efforts by major corporations to open their doors via diversity programs may be too late. Some have noted that boomers with a boomer perspective designed these programs, based on what they think Xers and Yers want.

The re-introduction of the recruitment bonus has begun in full force in the healthcare and construction / engineering industries. Every Sunday there are more and more help wanted ads with organizations promising $5,000 - $10,000 in cash, new cars, or two months off every year.

At one healthcare organization in the Northeast, tuition reimbursement caps have gone from $2,000 to $10,000.

One engineering organization offers a combination recruitment and retention bonus for newly graduated engineers. Upon employment, they receive $5,000. After the first year, they receive $7,500. After the second year, they receive $10,000. The employee is required to sign an agreement to stay with the organization for 5 years or forfeit all the dollars paid.

Hospitals in one major metropolitan area attempt to outdo each other in the area of recruitment bonuses. It’s the “I can do anything you can do better” attitude. Remember, this is in an industry with national average operating margins below 2% due to decreasing government expenditures.

Based on predictions for the future, this scenario may get worse. Many organizations justify the expense of these bonuses based on the alternative costs of paying current staff overtime or having to hire external replacements from agencies. Agency rates for Registered Nurses reach $60 per hour. Agency engineering rates top the $100 per hour mark. Many organizations believe there is a benefit in providing bonuses, especially if the employee must pay the bonus back if they leave. In addition, there is a belief that providing the bonus and having more non-agency staff is good for morale and discourages others from leaving their positions and joining the agencies.

With the potential of filling vacancies by buying talent come many drawbacks.

First, there is reinforcement of the hired-gun syndrome. Workers come to believe that their services are for sale to the highest bidder. They put up with an organization until their obligation has expired and take the next offer. All the efforts of attempting to create an organization where we ask employees to participate as owners becomes irrelevant. These employees learn they need to keep their noses clean, walk the corporate talk to a point, and move on. Their attitude towards the mission and vision of the organization is that of tolerance.

A second drawback is the creation of second-class citizenship for the most loyal and potentially best performing employees. These are the employees who absorbed the goals, objectives, and spirit of the organization. They sit on the sidelines and watch the hired guns continue to be rewarded for adequate performance and short-term tenure. There is resentment, even when the organization explains it had to pay the bonuses or production, business objectives, and the ability to remain viable would be in jeopardy. Employees hear this answer, but damage may have been done to once loyal staff.

A third concern is the recent occurrence of buying out the contract. There is a growing trend among competitors to make counteroffers to current recruitment contracts. An employee is given a $5,000 recruitment bonus and promises to remain employed for three years. After one year, a competitor offers this worker employment. The worker accepts and the competitor gives the worker a new bonus of $5,000 and pays off the outstanding bonus. The employee has made $10,000. An employee with a skill in high demand could continue this indefinitely, or at least until they become exhausted with moving from one place to another.

Are there alternatives?

First and foremost, organizations today need to look at the use of recruitment bonuses as they not only impact their ability to meet demands, but also in terms of their internal staff. One alternative is to offer finders fees to internal staff for referring a worker to the organization. One organization splits the fee between the new recruit and the internal employee.

Another alternative to recruitment bonuses is to couple it with a longevity recognition program. If we are providing $5,000 to new recruits, there should be something of similar value available to those who have remained loyal and productive over the years, such as an increase in pension contribution, a decrease in health insurance premium payment, or additional time off. Regardless of the alternative, never forget the value and contribution of top performers and the most loyal staff. They are the ones that make the difference in an organization’s survival.

The myth that the shortage of workers is over has been clarified. The next three editions of Astronology will focus on the short-term impact of the new worker shortage. First, we make 2003 compensation budgeting forecasts. Then, we address the issue of recruiting and retaining top performers during organization reorganization. The third issue explores the most successful organizations in terms of human resources and how they are ready to tackle future worker shortages.

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ISSN Number 1549-0467