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Hiring During an Economic Cool Down - Beware of the "Low Bid"
Chris Young February 18, 2008 — 2,003 views
Many have heard the following advice when hiring a contractor to perform construction or remodeling work on one’s home – “Beware of the low bid.” These words of advice can also be applied to managers hiring new employees during sluggish economic times such as the ones we seem to currently be in.
While we won't know for certain that we are currently in a recession for some time , many economists feel that we are headed towards or currently in a recessionary period of the business cycle, and the analysts and traders on Wall Street are certainly behaving as if this were the case.
So what does this have to do with the warning to beware of the low bid?
Let me explain… when an economy enters a down-turn or even worse a recession, unemployment typically rises as organizations limit their growth and cut back on hiring. During such economic conditions job seekers typically find it more difficult to find gainful employment and are much more willing to accept a position that pays below what their experience, education, and skills would demand during better economic conditions. This is especially true when one has been out of work for some time and needs any type of employment to pay the bills.
Under substantial financial duress many candidates will indicate a desired salary for an advertised position that is considerably less than the going market rate for the position. For example, a mid-level accounting position that requires a CPA and five or more years of related experience might be expected to pay upwards of $55,000 annually. However it is not unheard of to see a qualified CPA who has been out of work for several months indicate in his or her cover letter that they desire a salary of only $45,000 annually – almost 20% lower than what the market would typically pay for this position.
Let’s call this individual Sue.
While Sue’s resume and her willingness to work for $10,000 less than the organization expected to pay can be exciting for a hiring manger under continuous pressure to do more with fewer and fewer resources, hiring Sue can have some very negative ramifications for this organization.
It is important to remember that recessions and downturns in the economy are generally short-lived – averaging about 11 months in duration over the past five decades. The economy will eventually pick up speed again and organizations will once again look to expand and increase hiring. With an increase in the number of accounting positions available, Sue may no longer be content just having a job and may resent earning $10,000 less than her peers in similar positions.
In fact, there is a high likelihood that Sue will be quite unhappy with her current salary… and hey, who can blame her! Nothing kills employee morale more than knowing that one is being underpaid.
So what is Sue do?
If Sue likes what she is doing, enjoys those that she works with, and respects the organization she works for, she will probably ask for a raise to bring her salary up to that of her peers. If Sue has performed well and her employer values her skills and experience, Sue may get the raise she asks for and Sue will stay where she is and our story ends there…
However it is more likely that Sue’s employer will not be willing to put out such a large pay increase for one of a number of reasons. Perhaps there is a policy limiting the percentage that one’s pay may be increased during the course of year to say 10%, or maybe pay raises are only granted during a certain period of the year, or there just isn’t money in the budget to give Sue such a large raise. If this is the case it is likely that Sue will resign and look for another job paying what the employment market dictates she is worth.
Sue’s departure will result in a number of negative outcomes for her employer. The first to come to mind is the high price of employee turnover which the Society for Human Resource Management estimates to be 1 ½ times an employee’s current pay and benefits. At such a rate Sue’s departure has likely cost her employer at least $60,000.
Seeing Sue leave for better pay may “rock the boat” in her old organization and persuade others to take a look at their compensation and consider employment elsewhere if they don’t feel they are being paid adequately. This can cause even more costly turnover. Employee turnover can seriously harm employee morale, reduce productivity and negatively impact the customer’s experience with an organization. This can lead to a vicious cycle of low morale, lost customers, and even more turnover.
The old expression, “Penny wise and pound foolish,” couldn’t be more fitting in this situation. The allure of a $10,000 savings has probably cost Sue’s employer many times that amount in turnover costs, lost productivity, and damaged customer goodwill. To be fair, Sue is partly to blame as she knowingly took a job for less than she knew she was worth. However it is hard to find fault with Sue for trying to make ends meet. Ultimately the blame must be placed on Sue’s employer for failing to recognize something that was too good to be true and not foreseeing the likely outcome of hiring sue for such a substantial discount..
The lesson of this story should be clear – avoid hiring an individual for considerably less than their qualifications, skills, and experience would normally demand on the open labor market. The economy is likely to turn around in the near future and when it does what was once a “great deal” can quickly become a costly blunder.
Now go maximize possibility!
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