From Recession to Recovery: How Far, How Fast, How Well Prepared?

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 What was the impact of the recession on large and midsize companies, and what are their recovery expectations for the coming year? According to a Towers Watson survey conducted in early January, employers’ predictions for 2010 are mixed but guardedly optimistic — with a majority of organizations planning a renewed growth focus and some judicious hiring, while over a third will continue to make targeted workforce reductions.

The survey, which had 118 U.S. respondents and 459 globally, asked employers to report on changes their companies made during the financial downturn and to predict the business climate for the coming year. About half of the respondents predicted further gains in productivity, and nearly a third expect higher employee engagement for the coming year.

Although the new data show signs of economic improvement, “business as usual” is far from “just around the corner”:

• While 85% of respondents plan modest hiring for new positions in 2010 (92% in the U.S.), over a third expect to make targeted workforce reductions (down from 58% in the U.S. since the financial crisis began).
• 41% of U.S. survey respondents reported that it’s easier to retain talent now than it was before the recession began, but 51% agree that talent retention will be more difficult a year from now.
• Over half (55%) of U.S. respondents reported that productivity rose over the past year compared to pre-recession levels, and nearly half (48%) expect it to continue to rise throughout 2010.

Even the fact that productivity has increased during the recession, however, is a mixed blessing, as it contributes to slower, more cautious hiring. Consequently, the question of how lean companies can remain without faltering — especially as the demand for products and services rises — remains open. The recession’s impact on employee engagement, for example, has been decidedly mixed:

• 28% of U.S. respondents believe that engagement is higher than before the financial crisis; however, an almost equal number (30%) report that engagement is lower now.
• However, for 2010, more U.S. employers expect engagement to rise (39%) than to decline (5%), and global predictions are similar.

So while some gains in employee engagement may have been made, that could change if employees begin to burn out under increased market pressure and workloads. The recession’s toll on employees has already been significant, especially in the U.S., where it appears that employees weathered the economic downturn and market turmoil by contributing less to their retirement savings plans, reducing their equity exposure and staying in the workforce beyond their expected retirement age:

• In the U.S., 52% of responding employers said the percentage of employees working past their desired retirement age had increased during the recession, and 31% expect that the percentage will increase again this year.
• 23% of U.S. companies reduced their contributions to employee retirement plans last year. (The global average was 10%.)
• 32% of U.S. respondents reported that their employees’ share of health care coverage costs is higher now than before the recession, and 38% predict that employee costs will be even higher by the end of this year.
• Nearly a third (30%) said that employees in the U.S. have, on average, reduced their 401(k) contributions since the onset of the financial crisis.
• 51% of U.S. employers have seen an increase in employee hardship withdrawals from retirement savings.

While these retention challenges have not escaped companies’ attention — for example, bonus plan funding levels, at 60% last year in the U.S., are forecasted by many companies to be at or near 100% of target levels for 2010 — the pressure may be greater on organizations to control and reduce benefit costs:

• 28% of responding U.S. companies (compared to 35% globally) expect to place more emphasis on ensuring that benefits provide a desired level of security for employees.
• 53% are planning to increase their focus on controlling and reducing benefit costs (compared to 46% globally).
• 49% predict heightened benefit risk and volatility management in the U.S.

While employees are not likely to be able to shake off their security concerns while the unemployment rate remains high and health costs continue rising, some of the pain may be reduced this year as pay budgets inch upward. Pay freezes will be much rarer as well, after a year in which companies reporting a 0% pay increase ranged from 26% (Latin America) to 42% (the U.S.).

While effective cost and risk management will necessarily remain a priority for the foreseeable future, many organizations recognize the need to make thoughtful investments to retain and engage their existing talent as the business climate improves. Leading companies are likely to staff cautiously, reward carefully and invest aggressively in leadership, talent management, career development and other areas that help nurture employee engagement and drive enhanced customer focus and performance in an economic recovery.