Several questions regarding personnel management have arisen amid the complicated economic conditions currently enveloping Russian manufacturing companies: Is it worth reducing employee headcount, and how can one avoid losing valuable employees? Should we cut compensation, and how can we do that without falling below market average? Is it worth investing in education and development, or is it better to put those resources toward something else?
Several questions regarding personnel management have arisen amid the complicated economic conditions currently enveloping Russian manufacturing companies: Is it worth reducing employee headcount, and how can one avoid losing valuable employees? Should we cut compensation, and how can we do that without falling below market average? Is it worth investing in education and development, or is it better to put those resources toward something else?
In the search for answers to these and other questions, Ward Howell’s Heavy Industry and Natural Resources practice together with the Talent Equity Institute surveyed HR directors and top personnel managers from leading Russian manufacturers in the following sectors:
- Ferrous and nonferrous metallurgy;
- Industrial chemicals;
- Machinery;
- Energy;
- Mining.
The Business Situation
The vast majority of leaders believe that changes in the economic situation over the last several months have had no effect on their strategic and even tactical decisions. Major changes were made by companies as an answer to the 2008 global crisis, which changed the market environment and caused a drop in the value of final products. It was that period that radically altered strategic priorities and approaches to work, which resulted in major cuts and the launch of anti-crisis projects. “We were waiting for this crisis and were prepared for it, so it was not as bad as in 2008-2009,” noted one of the survey participants.
The recent events haven’t had a significant effect on how businesses are managed, as over the last few years businesses have been able to increase their margin of safety and resistance to external threats. “This year, we stopped meddling in expenditures and started to focus on growth points,” noted one respondent. Most have gotten used to living in uncertainty. The building blocks for working in such conditions have become:
- working with capital markets;
- creating new modern and competitive products;
- entering new markets, including international ones;
- focusing on the end user.
The vast majority (80%) of companies surveyed over the last few years worked on optimization. Overall, the introduction of lean manufacturing systems and creating a culture of continuous improvement went from being a popular trend to a vital necessity. As one of the respondents said, “it’s the only [acceptable] response to the market environment.” “We are in a chronic state of operational improvement,” noted another top manager.
Management
It’s interesting that most surveyed managers believe that top-management teams successfully cope with these challenges. Here are some important leadership skills that were noted as the most sought-after:
- a focus on long-term improvement without losing enthusiasm;
- “the ability to shoot at a flying target” – the ability to quickly make decisions in constantly evolving conditions;
- the willingness to take on a leadership role in new projects;
- the ability to embody the values of the company, lead by example, and create a positive internal atmosphere;
- the ability to work with government.
The vast majority of respondents noted that managers in the manufacturing industry lack business skills and overall financial and economic knowledge, despite their deep technical competence. This, combined with a lack of the leadership skills mentioned above, has precipitated a serious problem.
About 26% of respondents noted that managers have become more pressured by their workload and their level of responsibility has increased.
According to the poll, the most sought-after professionals included:
- heads of production;
- production system specialists;
- R&D professionals;
- sales managers with experience in international markets;
- EPC project managers;
- procurement and logistics professionals.
About 26% of respondents noted that managers have become more pressured by their workload and their level of responsibility has increased. 19% of respondents confirmed that since the beginning of the crisis, their company’s organizational structure has simplified to more adeptly react to the challenges of the market: “We significantly simplified our structure, and now there are only three levels between the general director and standard employee.”
Professional Personnel Market
Crises frequently “throw” onto the market qualified professionals who are trying to find more effective uses of their talents and become targets for corporate recruiters (which occurred in 2009). However, more than half of respondents (58%) noted that they have not yet seen this happen. Some respondents believe that these professionals will appear a bit later, as the economic situation gets worse. Overall, according to respondents, the leaders businesses need have not gotten cheaper. In addition, top managers expect a significant increase in income when taking a new position due to the risks associated with leaving their current post. “The market isn’t presenting cheap professionals,” noted one survey participant. Regardless, 23% of companies responded that they are actively recruiting for available positions and are offering competitive compensation packages.
Amid the crisis in Ukraine, Russian companies are actively eyeing the Ukrainian market for inexpensive managers, but this appears to be a relatively dormant trend – only 6% of responding companies are currently actively hiring Ukrainian managers.
At the middle management level, about a third of companies noted a decrease in the number of voluntary resignations, as everyone is trying to “hold their place” during periods of uncertainty. Turnover in the industrial sector hovers about 5-7%, slightly under pre-crisis levels.
But we can talk about employee loyalty during a crisis later. More than 60% of companies are not trying to retain their employees for various reasons (due to culture – “those who should be with us will always be with us;” and due to the negative market environment – “it’s pointless to go out on the market now”). However, 40% of respondents are working on employee retention; 13% are proactive about monitoring employees that may be likely to leave. The most popular means for retention is not through monetary compensation; the majority of companies try to motivate unsatisfied employees through changes in responsibility or transfers within the company.
Accordingly, only 16% of companies have started to actively promote middle and top managers; around 60% have not changed their standard practices for moving up the career ladder; and 26% of companies have deliberately suspended promotions due to budget restrictions.
HR Budget
There are also no general trends with regards to HR budgets: while most company departments have not suffered significant cuts, 10% actually reported an increase.
Regarding cost optimization, about one-third of companies cut down on work with providers, instead trying to use internal resources for things such as internal training, recruiting, etc.
The majority of companies did not just not decrease their budgets for development, but actually increased them, focusing, in general, on the top and middle-management level: “As the market will remain difficult [to navigate] in the long-term, we need to develop our [managers].” In many companies, training has become more systemic and focused on achieving specific objectives. As one top manager noted, “all of our development programs are aimed at improving operational productivity.” “We already got the low-hanging fruit, now we need to understand how to educate professionals to a higher level,” added another.
What are industrial leaders being taught? Much attention is being paid to the following applied skills and managerial competencies:
- production systems;
- financial and economic knowledge;
- project management;
- teamwork;
- working in international markets.
Where aren’t companies looking to save? Practically all companies have not cut or have even increased their budgets for social programs.
Compensation Policy
An overwhelming majority of respondents confirmed that they would pay out full 2014 bonuses without adjustments (only four companies had not made a decision about bonus payments for last year).
More than 50% of companies have already undertaken or are planning to implement wage indexation for all employees (the average indexation is between 6 and 12%). About 20% of respondents have a freeze on raises, and another 10% have not decided whether or not they will implement indexation. Another group of respondents said that they are planning on increasing salaries, but only for lower and middle-level employees. Two companies plan to increase salaries just for top managers.
We would like to separately address compensation policies for expat workers in Russia. For them, a hybrid system has been created with compensation in both rubles and hard currency to, on the one hand, make up for exchange rate losses, and on the other, factor in partial ruble costs that have not changed.
Most companies do not plan to change their structure of compensation, though many plan to adjust KPIs. In particular, one participant noted that at the moment “cash flow is more significant for the company, while the main target used to be EBITDA.” (For more on compensation systems during a crisis, see Svetlana Graiche’s article on page [x].)
Shareholder Intervention
As a general rule, shareholders pay more attention to their businesses during crisis, occasionally coming back to operations management (which occurred in 2009).
Traditionally, there is a high level of involvement from owners in operations management of Russian companies – over 30% of respondents responded that an owner played a role in operations management even before the crisis. About a third noted an increase in the primary shareholder’s involvement. 36% said that they adopted an effective system of corporate governance and shareholders are not trying to change it: “We have built a system of corporate governance, shareholders don’t try to climb in to operations from the sidelines.”
What Worries HR Managers
It turns out that there are common threads that are important for many companies, and individual things that are industry or business specific. Most HR directors are worried about a lack of engineering and technical personnel, due to the massive drain of those that want to study engineering among the younger generation.
The second most frequently cited problem is the competency of top managers, their ability to seamlessly react to modern-day challenges, as well as the ability to demonstrate true leadership. Social stability is also a concern for HR directors, specifically how to prevent falls in productivity or morale in difficult conditions.
An Uncertain Situation
We can confidently say that Russian manufacturing companies have not yet adhered to a particular pattern in the current environment. Most of them are optimistic – companies continue to invest in employee development and try to retain their most valuable employees, recognizing that they could be major growth points in the future. Pessimistic companies went into survival mode – their main goal was to stay afloat by cutting costs as much as possible.
Regardless, all companies are aware that a single, long-term goal no longer exists. The strategy remains unchanged in just one regard: it’s necessary to change as quickly as possible.
This article was published in the special edition of the Talent Equity Newsletter, "Heavy Industry. Is there a crisis?".
To see all newsletter editions, see TE Newsletters.
