The Fraying Employment Contract

Layoffs, cuts in compensation, and lack of opportunity are creating a disgruntled workforce that's more likely to jump ship as soon as the economy rebounds, says research from the CEB

By Brian Kropp and Tiffany Fountain

Over the last year the economic downturn has caused many employees to experience a high degree of uncertainty in their careers.And turmoil at work has left them with the sense that their employers don't care about them. A recent survey of 50,000 employees by the Corporate Leadership Council (CLC), a program of the Corporate Executive Board, indicates that 42% of employees don't believe their employer looks out for their best interests.

The downturn has fundamentally changed the employer-employee relationship for the worse. Layoffs, compensation cuts, rapidly contracting career opportunities, and dissolved pensions and retirement plans are only a few examples of what underlies the breakdown in the employment contract. Not surprisingly, employee engagement has suffered: The number of employees putting forth the highest levels of effort on the job has decreased by 50% since 2007, according to CEB research.

Rifts in the employer-employee relationship not only create employee performance issues but also increase an employee's likelihood of leaving an employer. Right now this might not seem like a problem because tightened labor markets discourage employees from quitting their jobs. However, recent evidence suggests that the economy is recovering, and economists predict that the labor market lags the broader economy by six to nine months. With recovery comes increased job opportunity that will lure disengaged employees into the labor market.

just waiting to jump

This presents organizations with a unique challenge—and opportunity: how to ensure that the best employees don't leave when the job market improves. But more pressing is that high-potential employees, who do have job opportunities at other organizations, are twice as likely to be looking for a job at another company right now, compared to the broader workforce.

The employer-employee relationship is defined by the benefit(s) each receives from the employment contract. For the employee, this employment value proposition (EVP) is about the rewards, opportunities, and experience gained by working for a particular employer. Components of the EVP lost value with the economic downturn and in turn drove down employees' engagement at work. Improving engagement and preventing employee departure when the job market expands means rebuilding the value part of the EVP.

Most organizations have focused on what is commonly believed to be the two most important aspects of the EVP: the organization's stability or compensation. The focus on stability seems logical; turmoil within the organizations disenfranchises employees and thus managing perceptions of the organization's instability could solve the problem. But CLC data show that an organization's stability is not only one of the least powerful aspects of the EVP for improving employee engagement but is also difficult to manage.

Stability takes a long time to reestablish once it is lost, and an organization cannot hide its health from employees or job candidates, who have access to information about an organization's performance through numerous sources. The best an organization can do is set accurate expectations and avoid making promises about the organization's current and future stability. While compensation is certainly a driver of attraction, not suprisingly it is the most important thing that job candidates care about, it is less effective at driving the engagement levels of employees. Competitiveness on compensation is what matters at driving engagement, not simply increasing it.

rebuild peer networks

However, there are several areas that make sense for employers to focus on to improve employee engagement and the EVP overall. One is the employees' working environment. A collegial workplace and qualified coworkers are 22% and 17% more important, respectively, to improving employee engagement in 2009 than they were in 2006. When employees face an uncertain future with their employer and stress in their day-to-day work, they want to at least enjoy the environment they work within.

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