Fermin Diez is head of market development for Mercer’s Asia Pacific region. In his career with Mercer, he has also served in leadership roles for Mercer’s human capital business in Australia, New Zealand and Latin America. In this interview, he discusses why companies need to be concerned with managing and retaining their talent in difficult economic times, how they should identify key Fermin Diez talent and how even those with limited financial resources can retain their best people.

Q: In the past year, what types of actions have organizations taken with respect to their workforces, and how do these actions compare to those taken in past recessions?

Fermin Diez: We have seen a real difference this time in how companies have managed and maintained their workforces. In past recessions, companies immediately turned to layoffs. This time, layoffs were only one of a suite of actions that were taken, because companies had learned from past recessions how important it is to maintain employment – or at least keep their best people. As a result, companies initially tried to cut salaries, mandate holidays and slash bonuses, allowing them to trim their costs without cutting their workforce.

Of course, we still saw workforce reductions. While we think organizations may be done with layoffs at this point, salaries and bonuses have yet to recover. One topic of discussion within many organizations right now is: Are we going to give back what we took away in terms of salaries and bonuses? This raises serious issues for companies, because while about a third of companies cut salaries during the past year, another third held them steady and the rest actually gave raises. So, now the market is a bit distorted, with greater spread. Companies that continue to peg their better people to the market median may find that those people can do better by leaving than by staying.

Q: What is the impact of downsizing on an organization and its remaining workforce?

FD: Several things happen when you downsize. First, it’s very distracting for top management to think about whom to cut and how to cut, as well as what work is going to get done and what isn’t. It is a very inward- looking exercise at a time when top management really should be looking outward toward its customers and their needs.

Second, when you downsize, your employees also get distracted. They feel badly about colleagues who’ve been laid off and worry about whether they’re next. They also may feel resentful of having to do more work for less money. In addition, doing layoffs in waves creates a permanent sense of anxiety, which can hurt the business. If communications are not handled well, it can undermine employees’ trust in the company. As soon as these employees can find a way out, they will.

Third, downsizing can hurt the organization’s client relationships, not only because some of those relationships will disappear with the employees who have left, but also because the employees who remain no longer feel very committed. In the end, depending on how it is handled, downsizing can cause long-term damage to the employer.

Q: Why is there an even stronger need to manage talent after a downsizing?

FD: Companies need to remember that, regardless of economic conditions, their best talent always has options. Even today, not every company is having a hard time. Some of my clients in Asia are still growing at double-digit rates, which means that they need to grow their workforces by at least 10 percent. They are looking for the very best talent, who right now are likely feeling undervalued by their current employers.

The main thing companies need to do to secure their longer-term success is to identify their key talent, hold on to that talent, and do the best they can to develop that talent. If money is a problem and the company needs to cut salaries, the best option is to cut them an additional 2 percent or so – which won’t make a substantial difference to employees – and reinvest that money into training or recognition that communicates to top performers that they are valued.

It’s also important to ensure that the company’s employer brand suffers as little as possible. So, if you can take that 2 percent and reinvest it in things that add to the culture of the organization and to employees’ quality of work/life, it would be money well spent. Use the total rewards approach to say, “If I can’t increase salaries and I’m also reducing benefits, I will focus on training, development, careers and work/life issues to make sure that I not only have a good, engaged workforce during the crisis, but am also ready to hit the ground running when the economy picks up.”

Q: Why does talent retention become so critical?

FD: There are a few reasons. First, the global economy isn’t universally bad. For example, China and India are still growing and the Middle East is experiencing tremendous growth. So, it’s a myth that in a bad economy the reward for doing a good job is keeping your job, because people do have options.

Second, while the flight risk during the worst of the crisis is low, it increases faster than the recovery of the economy. We’ve already heard clients say that as soon as they have money to spend, they’re going to use it to hire new people to prepare for growth. And remember, they’re not going to look first at the people who are now sitting at home to fill those new jobs.

Employers also need to be sensitive to how employees feel as the crisis goes on. A lot of people will identify with the company initially and understand that they have to take a hit along with everybody else. But when the company is no longer struggling, those same people will want to see the rewards for their loyalty, which may be hard for companies to give and, as a result, may make people difficult to retain.

Q: How can companies identify their critical talent and retain them through this crisis?

FD: There are two ways to think about it. One is from a growth perspective. Who are the people you think will be in higher leadership positions five years from now? Who will be the solid performers who you need in place? Who are the people whose departures would not greatly affect the company if they left? If you don’t have enough resources, you have to be very clear in making these distinctions, so that you can direct your resources toward the talent you will need to grow again.

The other way to look at it is in terms of risk. What is the risk that a specific individual will leave? And what is the risk that if a specific role is left vacant, it will harm the company? Answering these questions helps determine not just which people are critical, but which roles are critical. We advise our clients to take both approaches: Identify the key people and the key roles to make sure the organization is covered.

There are many ways in which you can do this. You can do it through compensation by giving key people retention grants, salary increases or bonuses – some companies offer everyone occupying a key role a pay rate at the 90th percentile of the market. Another way you can cover your key people or people in key roles is to give them the appropriate training, promotions and opportunities to work abroad. Different companies take different approaches, but the objective still remains the same: Identify your key people and then treat them differently in terms of salary, bonus, long-term incentives, training, promotions and the types of assignments you give them.

It’s also critical to recognize that these key roles will be different for every organization. They will depend on what the organization does, its business strategy and its value chain – and they won’t necessarily be the top roles in the organization. Also, key talent may be different in times of growth versus times of crisis. While the people who can think strategically – the leaders – are often the ones companies need most when business is booming, it is the operationally focused people – the managers – who are most important in helping companies navigate through tough times. So, companies need to think about who they need today to get them through the crisis and who they’ll need tomorrow to get them out.

Q: What talent management strategies are companies focusing on as a result of the economic upheaval?

FD: As we’ve discussed, many companies have fewer resources available to retain and motivate the people they need to get through the crisis and then to spearhead the uptick. So, what we’re seeing is much more rigorous assessment of top talent and critical jobs. Companies are making much more focused talent interventions in terms of who to pay and give bonuses to and, even more important, who to train, promote and give the overseas opportunities to in order to ensure that the ones they value actually do feel valued.

Communication to these people has also become just as important. Companies are overcoming the taboo against telling people that they are considered high-potential employees for fear of creating expectations. At this point in time, companies need to let their best people know, in no uncertain terms, that they are valued and needed, so that even if they don’t have the money to give to these employees, they are at least using every nonfinancial element of the total rewards package to ensure that their high-potential employees are retained and motivated.