Since the end of World War II, the American dream has been largely defined as the ability to attain stable employment with comfortable compensation and benefits. For many, such middle-class promise often meant spending their entire occupational careers with a single company, which afforded enterprise organizations both loyalty and stability from their employees in return for similar loyalty and commitment. As time went on, however, and as attitudes around work began to shift — primarily as a result of changing social norms and technology — the employer-employee social contract evolved, and continues to do so to this day.
Here, Talent Economy editors profile how the continuously evolving employer-employee social contract has affected compensation, management, culture and learning and development.
The most tangible and direct change that has come with the evolution of the employer-employee social contract is the nature by which talent is compensated.
No matter the era, every employment arrangement is going to require some basic level of compensation. However, as the employer-employee social contract has evolved, so has the way employers pay employees. A few primary variables have contributed to this shift and are likely to continue to well into the future.
The first is employee tenure. Today’s employees are less likely to stay with a single company for more than a few years, despite the fact that overall employee tenure in the labor market has increased over time. According to the United States Bureau of Labor Statistics, the median tenure of wage and salaried workers has actually increased over the past half-century. In January 2016, the median employee tenure was 4.2 years, which is nearly a year more than tenure in 1951.
Still, according to the Employee Benefit Research Institute, a public policy firm, young workers ages 25 to 34 have always spent roughly two to three years at a company, gaining experience in their early careers before moving on. It’s those later in their careers that EBRI said recently have begun to move on more quickly from company to company, further adding to the notion that knowledge workers are changing jobs more frequently. Between the early 1980s and early 2000s, workers ages 55 to 64 moved from a median tenure of about 15 years to around 10 years, according to EBRI research.
The perception that employee tenures are shorter means companies have changed their compensation structures to better account for short-term performance. “There’s a movement away from these very long-term compensation structures, not only due to relative power, but also due to volatility and difficulty in predicting fast-changing technological future,” said Andrew Weaver, assistant professor at the School of Labor and Employment Relations at the University of Illinois at Urbana-Champaign. “All of those things combine to push compensation into a more short-term, salary-focused, spot-market wage-type structure.”
For instance, an employee pension — where employers set aside funds to be paid out at a fixed rate to cover employees’ future retirement expenses — once was considered the most common retirement benefit, with employers confident they could make such payments decades down the road. During World War II, the U.S. froze employee wages, forcing employers to use benefits as a competitive tool. This sparked increased interest in pensions and health care. Pensions have since fallen out of favor. According to the Bureau of Labor Statistics, defined-benefit plan (pension) participants accruing benefits fell from 80 percent to 40 percent from 1975 to 2011.
Now that lifetime or multidecade employment is less likely, firms have moved their primary retirement offerings to easily transferrable defined contribution or 401(k) plans. As a result, employees — not employers — are taking on more of the cost and overall financial risk. “There is a general sense that employees bear more labor market risk than they once did,” Weaver said.
The second variable is how employees’ performance is assessed. Historically, strict enterprisewide salary bands determined how employees were paid. That, paired with an employee’s annual performance evaluation, determined if they got promoted and, if they did, what salary raise they would receive. “It was pretty mechanical and pretty industrial, and there wasn’t really much you could do about it,” said Josh Bersin, principal and founder of research and advisory firm Bersin by Deloitte, based in Oakland, California. This, too, has changed. “This idea that we’re going to keep everybody fair and equal is not contemporary anymore,” Bersin said. “There’s a much more strong belief that people need to be paid what they’re worth. In a sense, each individual is like a job market of itself.”
Compounding the personalization of determining each worker’s worth is the recent explosion of tools that have helped employees better examine their value. “Workers are smarter and better informed than they have ever been before,” Bersin said. Websites like Glassdoor, LinkedIn and others now allow employees to determine their market worth based on the troves of salary and compensation data these services collect. It’s simply harder for employers to hide information around compensation.
Therefore, employers must adapt and update their methods for determining compensation. Outdoor retailer Patagonia Inc. now uses software to gauge performance to include peer feedback, which employees later discuss with their managers, according to Dean Carter, vice president of human resources, finance and legal at the Ventura, California-based firm. Rather than using performance ratings, employees enter feedback for each other into a software platform, thus harnessing the power of the crowd, Carter said. Therefore, the manager is not in total control of an employee’s quarterly review; their role is to instead drive insights about individual performance.
In addition to how much employees are paid, today’s employer-employee social contract has evolved to the point where other forms of nontraditional compensation have moved up the value chain.
Another way Patagonia boosts promotions and employee retention is through its paid leave and on-site child care programs. The company said it provides 100 percent of employees’ pay for 16 weeks for new mothers and 12 weeks for new fathers and adoptive parents. After that, the employees’ children ages 8 months to 8 years can attend on-site, integrated child care at a subsidized cost at the company’s headquarters. “The social contract of this now [at other companies] is if you have kids, you figure it out, and it’s not our responsibility,” Carter said.
This effort to provide generous family leave benefits has paid off for Patagonia; the company said 100 percent of new moms return to work after taking leave. For the rest of the U.S., about 80 percent of new mothers return to work within a year, according to U.S. Census Bureau data. “After years of doing this, we have full parity of men and women at all levels of management,” Carter said. Patagonia even said it foresees some children who were raised in its on-site child care program grow up and come to work at the company, start families of their own, and then send their children to the company’s child care program.
Another popular compensation offering given the evolving employer-employee social contract are health and wellness benefits. Software firm Adobe Systems Inc. offers its U.S. employees up to $360 per year for eligible wellness activities, such as gym memberships, activity trackers and running shoes. “Adobe wants employees to feel well so they can perform at their best, both professionally and personally,” said Mason Stubblefield, the San Jose, California-based company’s vice president of total rewards.
These benefits are included in addition to traditional health insurance — a compensation component that has remained widely entrenched over the past half-century. “Unless the U.S. migrates to a national health care system, providing health care as part of the benefits package will continue to have a very important role in the employee-employer social contract,” said Kathy Horgan, executive vice president and chief operating officer for Boston-based financial services firm State Street Corp.’s global human resources division. Research from Glassdoor confirms that when it comes to employee satisfaction with their benefits packages, health insurance is by far the most important offering, followed by 401(k) plans.
Nevertheless, Horgan said benefits staples like health care are required but aren’t enough given employees’ shifting values. “Today’s employees look for benefits beyond compensation — both the tangible and intangible — such as flexibility and various forms of paid time off, access to volunteerism opportunities and a work culture that aligns with their personal values. These all have an intrinsic dollar value,” Horgan said.
Access to volunteer opportunities is an especially valuable compensation offering nowadays. Companies that give back in this manner don’t have to outbid the market in terms of salary, because they’re offering something their desired talent pool seeks and puts an economic value on, said Perry Yeatman, founder of Your Career, Your Terms, an online resource for career-focused women based in Washington, D.C. “It really is about can you match my values, my beliefs? Can you make me feel like I’m making the world a better place every day? Do I believe in what I do?” Yeatman said. If business leaders can get their culture, mission and purpose right, and then communicate it, that can act as a source of compensation advantage. “You can argue that’s not compensation,” Yeatman said, “but I would argue it absolutely is a fundamental thing that [employees are] putting a hardcore value on.”
Despite the compensation changes that have come amid the evolving employer-employee social contract, not all industries have felt a positive shift.
The manufacturing sector is one such industry whose employer-employee social contract has suffered at the hands of globalization and technology. With the continued rise of automation and globalization, many manufacturing firms have struggled to offer competitive and rising wages to workers. Adding to that pain has been a decline in investment in skills training for workers displaced by automation, according to University of Illinois’ Weaver. “In all, it’s a package of lower skill investments, lower wages, less commitment on both sides to a long-term employment relationship,” Weaver said.
This points to a final driver of the evolving employer-employee social contract influencing compensation: geography. Larger cities with a more robust pallet of skilled talent, and which have many companies for people to choose from, offer a more dynamic social contract likely to favor the employee. But for firms based in more sparsely populated rural areas, the social contract offering isn’t as lucrative.
“If you’re in a small town where there’s only one employer, you better be loyal,” said Deloitte’s Bersin. “You might have a very strong social contract with that employer.”
The fact that more of today’s workers are more likely to be short-term employees has also changed the nuances of the management relationships they have
In the immediate post-World War II era, when employees were more likely to stay with a firm for longer tenures, managers could afford to take a wait-and-see approach. “They got away with not actively managing their people, because time and the corporate system would eventually take care of it,” said Bruce Tulgan, founder of management consulting firm RainmakerThinking Inc. in New Haven, Connecticut. But in an era where job tenures are now measured in months, not years, managers need to take a more active and engaged approach. “If you want a productive team you’ve got to get them up to speed quickly and give them the support, resources and tools to perform,” Tulgan said.
Tulgan mentioned the United States Marine Corps as an example of how to manage in a fast-paced, short-cycle culture. “The Marines turn ordinary people into extraordinary leaders in a very short amount of time,” Tulgan said. They do it through a combination of intensive boot camps, coaching and leaders who set clear expectations and teach repeatable solutions. And all of these lessons can be translated to the workplace. “Any team that has strong training and a highly engaged coach will do better and work harder than their peers,” Tulgan said.
For today’s talent, methods like these may lead them to stay with the firm longer. They just need to be able to envision a future with the company, said Chip Espinoza, management consultant and co-author of “Managing the Millennials: Discover the Core Competencies for Managing Today’s Workforce.” “They will work 24/7 if they feel like you are invested in their future,” Espinoza said. “But if they feel ignored or undervalued, it doesn’t matter how sexy your company is, they will have an exit strategy.”
This can all be a tough transition for old-school managers who view job-hoppers as unworthy of learning and development time and investment. But this shortsighted approach will only drive employees away sooner and limit their productivity while they’re on the job.
To be effective in this environment, managers need to change the way they think about loyalty, according to Yih-teen Lee, associate professor of managing people for IESE Business School in Barcelona, Spain. “Loyalty isn’t just a measure of time, it is measured by how committed a person is to their work, and how engaged they are in achieving the goals of the company,” Lee said. When managers view loyalty through this lens, managers can set more realistic expectations and more accurate development paths. “It’s not an issue of whether or not you invest in their development, it’s how you provide that training and support to meet their needs and the needs of the team,” Lee said.
Brannigan Thompson, senior vice president of talent and leadership development for Voya Financial Inc. in New York, argues that the job-hopping millennial is an unfair stereotype that has more to do with the company culture than employee loyalty. “If companies find employees who match their culture — not just the job description — and make them feel like their work has value, they won’t leave,” Thompson said. At Voya, the average tenure is more than 10 years, Thompson said, even among the firm’s younger staff. Thompson attributes this to the company’s “culture fit” approach to hiring, lots of advancement opportunities and flextime options, as well as ample paid time off to volunteer in the community.
Even if great employees do leave after only a few years, in today’s fluid and flexible talent economy, they are rarely gone forever. “That’s important for managers to remember,” said RainmakerThinking’s Tulgan. The old-fashioned definition of employment as full-time, on-site, uninterrupted, long-term and exclusive, is becoming increasingly irrelevant. A 2015 report from The Workforce Institute at Kronos Inc. and WorkplaceTrends.com showed 46 percent of millennials would consider returning to their former employer, compared to 33 percent of Generation X and 29 percent of baby boomers.
“Managers have to recalibrate their thinking to reflect this shift,” Tulgan said. “It’s all about what that worker needs while they are together.”
Managers won’t just naturally adapt to this new world of work, Espinoza said. “If HR wants to keep turnover down among this generation, they have to teach managers how to support and engage them.” He urged companies to consider whether their leadership development programs are relevant to a younger employee base and to look for high performing leaders who can act as coaches, helping their peers learn better skills for managing millennials.
The changing employer-employee social contract has also affected the nature of organizational culture. Thanks to a tightened labor market, employees now feel empowered to demand more from their employers, and they’re asking for more out of their firms’ cultures by way of things like increased flexibility, transparency and fairness.
Creating employee-focused company cultures is good for employers as well, according to Bonnie Endicott, director of people at Dallas-based Southwest Airlines Co., because it means that employees are finding new ways to stay engaged in the mission of a firm. “Employees want to feel that a company cares about them, and that they’re not just means to an end,” Endicott said. “I think they always wanted to be valued and not just means to an end, but folks are more vocal about it now.”
One way this has played out is that companies are putting new emphasis on career development, Endicott said, although not necessarily in the traditional way. The idea that all career growth is upward is outdated, Endicott said. Today, more companies are encouraging employees to make lateral moves to keep them engaged and improve their future outlook within the company. “Career ladders are gone. They’re the old-school thinking,” Endicott said.
Replacing traditional vertical growth tracks with more horizontal options affords employees the chance to learn new skills. At Southwest, Endicott cited an example of moving from working as a customer service agent to taking an entry-level job in the finance department. One benefit to this arrangement is it keeps employees at the firm. When employees are looking to leave a firm, Endicott said, giving them a lateral move provides them with a new experience to keep them engaged and feeling as if they’re growing in their careers.
Some argue that, thanks to the rise of technology that has made the employment market more transparent, the employer-employee social contract is more balanced than ever, with each side finding equal value in the arrangement. Nick Sanchez, chief people officer at New York-based human resources software firm Namely Inc., is one proponent of this idea. “Now, because of the advent of technology and data, there’s a lot more transparency for people in these relationships. It’s a win-win for both employers and employees.”
Transparency has become a core cultural component to the employer-employee social contract at Namely. For example, the company makes an effort to be upfront about its employee experience in the recruitment and hiring process. “We really try to have a transparent interview process,” Sanchez said. He then added an example interview question to highlight its use of transparency: “I know your friends have probably told you about the high-growth tech startup environment, but what does it really mean to work in a start-up environment?”
Once someone is hired, Namely puts each new hire through a goal-setting process that includes discussion of the employees’ short- and long-term goals, then does what it can to help employees reach those goals. This level of transparency benefits both sides. “People come to the table with much more of an open conversation both in recruiting and when they’re actually employed,” Sanchez said.
Namely also uses transparency to shape its culture by adopting a cascading goals system that doesn’t leave anyone out of the loop. Each quarter, the CEO sets companywide goals and managers create their individual team goals tied to the company’s goals. From there, each employee works with their manager to set individual quarterly goals. All of these goals are public to the entire company so that everyone knows what is most important to their colleagues every quarter.
Not only does transparency help to mobilize employees to accomplish the company’s goals, but it can also help employees feel more energized in their own careers. Workers today want to know how the work they’re doing ultimately develops them in their career. “They say the great coaches in the NFL coach their assistants to someday be head coaches in the NFL,” said Bryce Williams, president and CEO of Dallas-based wellness technology firm HealthMine Inc. “And I think you’re starting to see that in the better companies in the workplace.”
Another cultural element propelled by the modern-day employer-employee social contract is employees’ desire to be more collaborative. Whereas more traditional reporting structures once dominated a firm’s innovation pipeline, today’s firms are turning to more collaborative tactics. Take Cisco Systems Inc. The San Jose, California-based company recently began holding companywide “hackathons” called the HR Breakathon to inspire employees to come up with new ideas for the firm, said Francine Katsoudas, the company’s senior vice president and chief people officer. The firm’s first Breakathon was in February 2016. It had 821 participants across 120 teams from 39 countries and 116 cities, and participants submitted a total of 105 ideas. The top four have already been implemented at Cisco. “We needed all 73,000 employees to feel like they were innovators and that they could take risks and make bold decisions here at Cisco,” Katsoudas said.
Not only do such innovation challenges help the company find solutions to problems and new ideas, but they also help retain employees, Katsoudas said. “As an employer, thinking about that and having that frame of mind makes you better,” she said. “It allows you to figure out how can I give the employee the best experience while they’re here.”
The employer-employee social contract has also dramatically influenced how companies treat talent development. As technology makes predicting future skills a challenge, fewer companies are finding learning and development investments valuable. But this doesn’t mean learning and development is something business leaders should ignore.
“If you think back to the second Industrial Revolution, companies had to take on the burden of upskilling the workforce for the new concept of a job,” said Ravin Jesuthasan, managing director of Chicago-based research and advisory firm Willis Towers Watson. “Companies like General Motors and Ford essentially became social institutions as they provided jobs and training for life.” This historical phenomenon repeated itself again during the 1950s. “The ’50s heralded another period of steady, sustained growth in the U.S. that accelerated the ability of companies to plan and develop their workforces,” Jesuthasan said.
Today’s rapid growth in the technology sector, paired with widespread economic uncertainty, has unraveled such an arrangement. Even as the employer-employee social contract has been turned on its head, it remains a significant driver of the future of firms’ employer value propositions. In fact, in professional services firm Deloitte’s 2016 “Global Human Capital Trends” report, “a new social contract” is named as one of the key factors in reshaping the employer-employee relationship.
Some disagree. “The employer-employee social contract has done more than just shifted,” said Bill Sanders, managing director at Roebling Strauss Inc., a San Francisco-based strategy consultancy. “It died — and economics killed it.” Not only are many of today’s employers unwilling to train for the technical skills that many employees lack, but they’re often forced to first prioritize the education of more basic business skills. “Most companies (incorrectly) assume that new hires coming in have advanced technical skills and they find themselves stuck being remedial educators in skills like communication, problem-solving and decision-making,” Sanders said.
Part of the challenge employers have in investing in employee development these days is the ability to predict what skills will be relevant even one or two years out. It is much tougher today to identify the types of skills employees will need down the line, thanks to an increasingly fluid market for skills propelled by advancements in technology. This makes it more difficult to commit to training and educating their current workforce.
This shift in the approach to development exists alongside a sense that employers are struggling to find the talent they need to support rapidly changing businesses. “The perceived skills gap is because companies have stopped training and developing people internally,” Peter Cappelli, professor of management at the Wharton School of Business at the University of Pennsylvania and director of Wharton’s Center for Human Resources, said in a 2016 study by the Economist Intelligence Unit.
This speaks directly to the changing nature of the employer-employee contract. “Before the 1980s, 90 percent of vacancies were filled internally and 10 percent were hired outside. Now 65 percent of vacancies are filled outside,” Cappelli said. The root cause is budgetary. “Training budgets fell by 20 percent from 2000-2008 and HR departments were gutted,” Cappelli said. For employees, many felt they were unfairly required to come equipped to perform a job on day one.
Still, some firms are finding innovative ways to use development to bridge that skill gap.
In a recent case study in the Harvard Business Review, author John Donovan, chief strategy officer at telecommunications firm AT&T Inc., outlined the firm’s new “Workforce 2020” initiative, with the goal of identifying how to internally source more digitally based skills. As a result of the initiative, the company has spent more than $250 million on employee development programs, the HBR case study said. Moreover, internal data shows 140,000 AT&T employees are actively obtaining skills for newly created roles with the expectation that they’ll change roles every four years. “You can go out to the street and hire for the skills, but we all know that the supply of technical talent is limited and everybody is going after it,” Scott Smith, AT&T’s senior vice president of human resources operations, said in the case study. “Or you can do your best to step up and reskill your existing workforce to fill the gap.” The majority of the reskilling effort at AT&T took place through online learning, according to the case study.
Perhaps the most important driver keeping employee development top of mind is that it may be keeping employees from leaving. By reducing training programs and focusing on hiring employees equipped with technically advanced skillsets, employers may be missing a golden opportunity to motivate and retain their talent. “Recommitting to employee training programs would be a great first step,” said Ahu Yildirmaz, vice president and head of the Research Institute at ADP, a global business services firm based in Roseland, New Jersey. This is especially the case among millennials, the largest generation in the workforce. “Millennials are more concerned with career advancement than with money,” said Nicole Cunningham, head of recruiting and employee experience at Knot Standard, a New York-based custom menswear firm.
Also, employers need to be sure that they’re using the most innovative resources in training technology to educate their employees. “In this digital age, we have apps that can provide timely feedback for coaching and can track who is developing and exceeding expectations,” said Kris Duggan, the CEO of BetterWorks, a Redwood City, California-based enterprise software firm. “The new contract puts the onus on the employee to keep up to date and on the employer to provide the tools and coaching, know who is growing, and reward based on that.”
The age of automation and artificial intelligence is also influencing how employers devote resources to learning and development. “Technology has eroded any sense of employer responsibility,” Roebling Strauss’ Sanders said. In some industries, if you can train or program a machine to perform a task that an employee used to have to be trained to complete, that may be the employer’s favored solution. This emerging reality can be seen across job categories. Consider self-serve ordering at fast-food restaurants, self-serve checkouts at supermarkets and even in programmatic ad buying in the advertising industry.
Ultimately, employers need to think broadly and creatively about the best way to accomplish their goals when it comes to maintaining a proficient learning and development culture within their firms.
“There needs to be a plurality of means for getting work done today,” Willis Towers Watson’s Jesuthasan said. “The old days of hiring someone to fill a job and training that person to continue to be productive based on the belief of steady, linear progression is long gone. Leaders need to constantly assess the best way to get work done.”
This article originally appeared in the Spring 2017 issue of Talent Economy. Click here to view the digital edition of the journal.
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