The Re-calibration of Human Capital Markets

Consistent with the dreary news of the state of Detroit's local economy that I had mentioned in a previous post, there was a recent article in the New York Times that outlined more specifically of the bleak or non-existent future for white-collar workers in Detroit. 15,000 white-collar job cuts occurred last year, and up to 3000 more are anticipated by May, this time without the cushion of generous buyout packages. Another article in the Financial Times reported that GM would cut executive salaries by 10% with other managerial levels seeing between 3 to 7% cuts, a phenomenon which is occurring all over the state.

It seems quite possible that we'll see similar cuts, even if not at the same scale, around the country if not the world. I was talked to a couple of friends who live nearby this past weekend and asked them if they knew anyone who had been let go or have been unemployed for some time. The wife mentioned that for the most part her immediate circle of friends were thus far unaffected but she knew of at least one friend who worked in the financial services industry where "half their friends were unemployed and looking for work."

A recent msnbc.com article also hints at greater "underemployment", where people want to work full-time are forced to work part-time, the effect of which is similar when overqualified people are forced to take lower paying jobs simply out of need for survival. I wonder if, as I anticipate, the job market continues to get worse along with the economy, that we'll see a significant re-calibration of the human capital markets or put another way, will companies en masse proactively begin to slash salaries to account for an oversupply of qualified professionals in light of shrinking demand?

There's a scene in the movie Wall Street where Bud Fox (played by Charlie Sheen) is in his apartment presenting his new strategy for Bluestar Airlines to some union reps. One of the parts of his pitch is: "Don't sell a seat to a guy for 79 bucks when he's willing to pay 379." In that same vein, why would a company pay a person $120,000 when he's willing stay at that job for $100,000? Would Chief Financial Officers be interested in conspiring with Chief Talent Officers to play a game of "chicken" with its workforce, essentially telling colleagues, "We're going to slash your salaries 15% across the board because we know you don't have any other options. If you don't like it, quit. There are twenty people out there who would kill to have your job."

As for the fear that unmotivated employees will slack off as a form of protest? Response: People aren't so prideful that they're willing to perform poorly enough to put themselves at risk losing their jobs in such a terrible job market. As for the fear that employees will bolt as soon as things get better? Response: As long as companies are proactive in bringing salaries back up and offer forms of "loyalty bonuses" once things get better, they'll bank on employees having short memories and all will be forgiven.

It's an unpleasant scenario, but I'm sure CFOs have thought of this. And if they haven't, are they really acting in the best interests of the stakeholders?