Longevity Is No Longer a Key Factor : A New Trend in Employment Loyalty

If a company doesn’t plan to hang onto its employees for a long period of time, why should it gear its pay and benefits system to reward long-term employment?

He didn’t put it quite that way, but that essentially is the question being raised by a top executive at General Electric, which has begun to examine the evaporation of “career loyalty” between companies and their employees.

Speaking to a management conference at the Human Relations Institute in Florida last February, Art Puccini, vice president for labor relations at GE, told his audience: “The contemporary employment relationship now appears to be rooted in two realities. From the company perspective: the paradox of employees being more expendable, but also becoming individually more important to the company’s competitive success. While from the employee perspective: They are becoming ‘free agents’ responsible for managing their own careers.”

Not Tied to Longevity

These changes, Puccini predicts, eventually will force companies to dramatically alter their compensation systems. In short, pay and benefits will no longer be tied to longevity.

“The basis of employment security is shifting from continuity and advancement within one company to the potential marketability of one’s skills with many companies,” Puccini told attendees at a conference on human resources. “The ties of a long-term commitment in return for promotional opportunities are giving way to a short-term commitment in exchange for the opportunity to acquire highly marketable skills.

“As a result, the employment relationship is becoming more tentative and conditional, mutual loyalty may no longer be sufficient and, in fact, employees’ loyalty may be shifting from the employer to the employee’s craft or profession.

“So whether an employee and a company continue their relationship will depend more, from the company’s perspective, on its competitive situation, its continued need for that person’s skills or the continuity of its management.”

For employees, their satisfaction with work, level of marketable skills and other available work opportunities will determine whether they stay or go.

The trend away from rewarding long-term employees already has begun. More and more companies, in an effort to cope with rising benefits costs and the emerging demographic changes in the workplace, are turning to defined contribution benefit plans that make no distinction between long-term and new employees.

Certain Benefits

For many years, most companies provided employees with benefit plans, which guarantee that the company will provide a certain level of benefits, regardless of the cost. Under the defined contribution plans, the employer agrees to pay a specific amount of money for benefits and if the costs exceed that amount the employee pays the difference.

Puccini notes that while the structure of most company benefit plans rewards long-term employees, “the trend is to move in the opposite direction through the use of defined contribution plans, as well as earlier (pension) vesting.

Eventually, total benefits portability may be provided through legislation or through the development of multi-employer and professional plans similar to those already existing in the entertainment industry and education.”

Many companies already have turned to so-called cafeteria plans, in which the company offers a wide range of benefit choices and gives employees what amounts to a fixed spending account to buy the benefits that best suit their needs. To keep costs under control, these are all defined contribution plans.

Trend Underscored

The trend toward benefit portability was underscored last week when the Labor Department began work on a proposal to provide pension portability, an issue that Labor Secretary Elizabeth Hanford Dole has made a priority.

A major problem facing government policy-makers in this area, according to department officials, is how to avoid achieving portability by effectively mandating defined contribution plans. Details of the draft proposal have not been made available.

Puccini predicts the shift away from rewarding long-term employees will have a particular impact on executive compensation.

Because of new government limitations on benefit and welfare plans and the threat of mergers and takeovers to long-term executive careers, Puccini said, “Special deferred compensation and benefit programs designed to win long-term commitment from higher-level employees and executives will no longer be adequate.”

The way Puccini sees it, the “new workplace realities will eventually drive higher-level employees to demand more in the way of straight cash payments based on their immediate past results.”