Talent

12 min. read

Throughout 2021, our quarterly Inside The Buy-Side® research has identified four consistent concerns:

Supply chain disruption
Inflation
COVID-19 variants
Talent

Following our thought leadership in the spring and summer in which we provided perspective, insights, and recommendations addressing the former three topics, this week we are covering employee hiring and retention, identified as the fourth most prominent concern in our Q3’21 Inside The Buy-Side® Earnings Primer®.

The Great Reflection

As noted last month, there were a projected 11.2M U.S. job openings as of November 5, according to Indeed, exceeding 7.4M unemployed workers in the U.S. labor force last month, with the Quits Rate – a measurement of workers leaving jobs as a share of overall employment – registering at 3% in September, a record high, and nearly the same percentage in October. This comes as first-time claims for unemployment benefits, a proxy for layoffs, fell to 184,000 in the week ended December 4, the lowest level since September 1969, the Labor Department said Thursday. These trends have led to what many are referring to as the “Great Attrition” or the “Great Resignation” – or what we prefer to call “The Great Reflection“.

According to McKinsey:

40% of employees are likely to leave in the next 3-6 months
64% of employees considering leaving say they would do so without another job in hand
54% of employees leave because they don’t feel valued by their managers
51% of employees leave because they don’t feel a sense of belonging at work
38% of employers believe attrition is due to compensation

Continuing, a survey by the Conference Board finds that companies are setting aside an average 3.9% of total payroll for wage increases next year, the most since 2008, with those switching jobs between August and October seeing a median wage increase of 5.1% versus 3.7% for those who stayed in their current jobs.

Company Earnings Communication

Throughout Q3 earnings, over 700 companies discussed labor shortages, a more than 27% increase QoQ and greater than 2.5x the level registered just two quarters ago. As a result, wage inflation has followed suit, with nearly 400 companies discussing the topic this quarter.

Sectors seeing the most companies discussing labor shortages are industrials and consumer discretionary, with healthcare, energy and REITs registering the most significant increases QoQ. As you saw in our REIT Earnings Sector Beat, projects are taking an additional 30 to 60 days for some and 10-12 weeks for others.

From companies, some of the most common actions we are seeing communicated are: Upskilling and Reskilling the Workforce

Upskilling and Reskilling the Workforce

Cognizant (Technology, $42.1B): “We’ve also really turbocharged our investments behind training and reskilling, sales and marketing, and we brought in hundreds of more commercially-oriented go-to-market client-facing teams. This has been at the core of our growth acceleration in 2021.”
Microsoft (Technology, $2.5T): “Since the cloud started, I think skilling is an area of acute attention for us. It’s an area that we invest significant amounts of money to go in and help customers skill because it is going to be different. It’s going to feel different. And so, my experience is less about sort of having the people. It’s more around making sure that we’re helping people take the full advantage and understand and learn.”
Leidos (Technology, $12.4B): “One of the reasons we’re attractive to job applicants is that we invest in upskilling our people and building an innovation culture. As an example, in Q3, we held our first-ever Leidos Sphere, a 24-hour virtual technology conference that brought together employees from around the world to share technical solutions. CTOs, solutions architects, and other technologists streamed presentations live from the U.S., Australia, Israel, and the U.K. I personally saw the clear value for participants with real-time answers to questions and lively chat discussions.”

Providing a Flexible Work Environment and Applying Lessons Learned from the Past Year+

Jacobs (Services, $18.3B): “A strategic competitive advantage of Jacobs is the global footprint that we’ve put in place and the technology that facilitates the ability to use it. We were just involved in a discussion on one of our large projects, and it’s a project where we are utilizing 130 different locations around the globe to execute against it. And that is critical for our ability to mitigate the profile and the risk profile associated with gaining access to talent. Whether our talent is in India, Poland, Portland, Dallas or London, or wherever around the globe, it doesn’t matter. [What matters is that] we’re leveraging it importantly. And so that mitigates the risk profile to a certain extent. And when you augment that with our strategy on new ways of working, where we are actually encouraging virtual work when it makes sense for our employees, and we’re kind of structuring our footprint of real estate, which becomes less about a place to have heads-down work and more about collaborative spaces.”
Salesforce (Technology, $260.1B): “We’ve been talking about for 20 months because we’ve all been working from our kitchens or home offices. And everyone’s [asking], will anyone go back to the office? Some banks are saying everyone is going to come back to the office. It’s coupled with a labor shortage, with great resignation, great relocation. A lot of people have permanently moved locations. Number one is talent will move; speak with their feet. And I think because of that, I think flexible work is without question in the future because it’s not up to an individual company to decide what your work policy is because if you say one thing, and your talent has a different opinion, they’ll go to your competitor.”
Upwork (Services, $4.6B): “Even as we’re talking to customers about pulling their teams back into the office, they know some of that’s going to be flexible work. Some people are going be working from home. When they’re engaging with us, they’re trying to figure out how do I make those lessons around remote work permanent with talent solutions that are not about talent acquisitions, but they’re about talent access.“

Elevating Compensation and Incentives for Current Employees and Hiring

Aramark (Consumer, $9.3B): “We introduced what we call a shared sales incentive program. So, when a new account is signed, there is a pool of funds that are available to bonus, if you will, all those who are involved, whether they were an operator or a functional leader, whoever that might be. That strong symbol that we are a team-selling organization has been very well received, and it’s been very motivating for our organization.”
Norfolk Southern (Industrials, $70.4B): “We are pursuing multiple avenues to stem attrition. We’re using a lot of incentives, hiring bonuses, retention bonuses, availability bonuses; we are even buying back vacation to keep people active.”
Trex (Industrials, $16.1B): “We have had to make changes to some of our compensation schemes, incentives, hire-on bonus, stay for 6 months. Things like that, we’ve had to put in place.”

Leveraging Technology and Data to Drive Efficiency in the Face of Shortages

Autodesk (Technology, $58.8B): “While demand is robust, we believe supply chain disruption and resulting inflationary pressures, a global labor shortage, making it harder for our customers to staff new projects and the ebb and flow of COVID are contributing to the deceleration as well as documented country-specific disruption to AEC in China. Our conversation with customers and channel partners reinforces our view. We’re encouraged that embracing digital transformation to drive efficiency and sustainability remains a priority for our customers. Our end-to-end solutions, business model flexibility and platform position us well competitively and enable more customers to enter and remain in our ecosystem.”
Definitive Healthcare (Healthcare, $3.2B): “So when COVID hit last year, telemedicine exploded. And our clients came to us to try to understand who is adopting telemedicine the most quickly and how is that going to change the way that their customers are providing care. We used data we already had and had our data science team analyze that to come up with a telemedicine propensity score. And that showed our clients who was adopting telemedicine and who was most likely to in the future. So, it’s that type of innovation that we can help our clients identify where labor shortages might happen, for example.”
Procore (Technology, $10.8B): “Construction is grappling with a skilled labor shortage, increased labor and material costs and overextended supply chains. It is clear that in an industry that is highly under-digitized, technology provides a clear and accessible path to building more efficiently. Procore has and will continue to help one of the world’s most important industries navigate its short- and long-term challenges.”

Employing a Values-Based Culture to Drive Employee Engagement and Recruitment

Humana (Healthcare, $57.9B): “In some markets, the nursing shortage is resulting in inadequate capacity to meet demand, negatively impacting our ability to grow the top line. We believe the Humana CenterWell brand, supported by our patient-centric culture, will bolster recruiting and retention efforts for nurses. We’ve seen increased nurse satisfaction and engagement in pilot markets where we have deployed value-based concepts, with voluntary nursing turnover improving nearly 10% among home health nurses in 2021. In addition, to unlock sufficient capacity to meet our growth goals, we are implementing broader operational improvements and benefit enhancements while also making targeted investments in capacity-constrained areas to enhance nurse recruiting and retention.”
Lear (Consumer, $11.0B): “We’ve done different things with incentives and different compensation packages to work with different regions around having employees in the facilities. But it has been a challenge. I think it’s going to continue to be a challenge. I think we’re looking at different creative solutions not just compensation, but to make sure that we’re working with our employees around the world to make sure they build value. I mean that’s the big thing is making sure our employees feel valued and that they understand the importance of why they’re there, and we’re listening to their concerns around what they may need.”
Moody’s (Financials, $73.1B): “We see young people – but I think all of our people – want to work at a company that has a purpose and where they feel connected to the mission. And I can assure you that our people are very purpose and mission-driven at Moody’s. We’re doing some exciting things around combating financial crime and addressing and helping the world address climate change and all the things that we’re doing, and the rating agency that plays such an important role.”

Continuing Since the Onset of COVID-19 and the Black Lives Matter Movement in 2020, Focusing on D&I Efforts

Builders FirstSource (Industrials, $14.9B): “We have a commitment to training our organization throughout and continuously, have released our diversity and inclusion first commitment to training, which is the diversity face-to-face module. We’ll also have our second module releasing in January [to address] unconscious bias, and we’ll have an additional targeted training being released at the end of Q1 specific for our managers. We have established our corporate and inclusion council. We are establishing our employee resource groups. Together, these teams will work to create, connect, communicate, advocate, measure and monitor progress upon the plan that we have.”
Northrop Grumman (Industrials, $57.9B): “We have been setting diversity and inclusion measures in our business through over a decade. And our organization now looks like the communities we live and work in our representation and management really does reflect gender parity as well as the strong people of color representation inside of our workplace, and we’re proud of that. We don’t see that as a completion of our work in DE&I. We see that as the foundation for the work that we continue, and we are committed to maintaining that representation, but also building a very inclusive culture inside the company.”
Union Pacific (Industrials, $159.6B): “We also are taking new steps with our diversity and inclusion efforts. Over the past 2 years, we’ve created and delivered new training courses, helping our employees recognize and navigate bias, providing them with tools to understand and take action. We also are hosting a variety of listen-and-learn sessions designed to promote open dialogue and learning among our employees. And this is just the beginning. We have a pipeline of projects and initiatives aimed at cultivating the workforce and culture that we need to succeed in the future.”

What We're Hearing from Investors

Across our Voice of Investor® interviews over the last two months, we’re hearing three consistent themes and focus areas:

Labor and Scale as a Competitive Advantage: Companies with More Control of Labor Should Be Able to Harness Pricing Power

“One point they could discuss that would be helpful to think about from an investor perspective is, given the fact they control the labor and labor seems very tight and they also control a significant supply of materials, can they drive outsized pricing in their core business?”
“They are definitely leaders and have many advantages versus their peers and competitors and one in particular that has served them very well throughout the pandemic has been the ability to shift around labor to where it is needed as opposed to their largest competitor who does not have the technology to allow them to do that. If it is busy in one area and not in another, they can switch up labor and it helps get the job done, so that has been a real asset to them.”
“That is a critical technological component to their business that allows them to evaluate future expansion opportunities and mitigate risks with regard to natural disasters, labor costs and any other challenges they have run into. They can quickly analyze the situation and redeploy labor as necessary, so not only are you able to manage some costs from that perspective but you can maximize the top-line revenue and make sure you are capturing market share in some areas that competitors do not have a great presence.”
“The category they operate in and their ability to drive pricing through labor, especially in such a tight labor market, also allows them to earn a higher multiple relative to peers.”
“They make sure they take care of their people, which gives them a nice advantage on the labor front. They are much bigger than everyone else, so they are able to leverage their scale on procurement, M&A, labor, technology.”

Those with Labor Challenges Need to Mitigate Costs (and Manage Expectations through a Transparent Communication Approach)

“They have to execute. They have to show they have the labor issues and material issues under control, and they can integrate this deal without having any hiccups along the way. It is execution.”
“It is important to give some metrics on labor productivity because that was a big issue. They hired a lot of people in a short period of time and said it takes a few quarters to get the new hires up to speed, so if they could give any numbers around that. They have done that in the past, like per hour or some sort of metric that shows labor productivity is improving. Again, maybe walk through price costs and how that is shaking out. They have had increases across the board in materials and labor, so to the extent price is starting to come through, it would be good to get some level set expectations on how that is panning out.”
“It is going to be difficult for any trucking company to be able to grow their fleet at all over time and they are no different. The truck driver industry is at the mercy of labor cost inflation. How should we be thinking about the metrics they are using?”

Investors Understand This Is a Challenging and Unique Environment and Seek an Honest View on How Companies Are Managing the Journey (Credibility!)

“Across industries everywhere, there is a lot of concern about wage inflation and cost inflation in general. I would like honest update on wages, specifically if they see any change in the labor market as some of the federal unemployment expired at the beginning of September. That is a big topic for people.”
“They have learned how to handle some degree of growth, bringing on people a little better, so how they handle their labor team. Yes, they are running in place, but they did not trip. is complex what they are doing. The industry is complex. They are managing a lot more manufacturing footprint in the face of rising or more elevated challenges/risks, COVID being one of those elements, material supplies being another. Sometimes running in place can actually be okay. You are like, ‘Did you notice there is a storm outside?’ I did. That is what they have been doing.”

We’re collectively facing a talent challenge at unprecedented levels. Talent is a primary component of ESG and the “S” framework. Companies who achieve talent excellence and demonstrate agility amid this disruption can rise above the fray and capture investor mindshare and support. Talent has and will continue to be a part of the investor conversation, particularly with related expenses on the rise.

Seemingly, they understand the trade-off between higher costs and growth-enabled talent. Organizations of all shapes and sizes are at very different points in their talent evolution, but one thing is consistent: investors – and employees – are looking for a transparent view on corporate efforts.