Economic & Business Focus: The War for Talent Is Over

How much compensation is necessary to attract employees? Experts suggest much less today than at any time in recent history.

Budgets and human resources strategies shaped by the tight labor market of the late 1990s have outlived their utility. CFOs must act now to realign policies with reality.

When the war-for-talent mentality arose, the economy was generating 300,000 to 400,000 new jobs every month and labor markets were tightening for almost every occupation. Unemployment dropped to 3.8 percent in April 2000, signaling full employment. Companies competed for "employer of choice" status by recasting work environments and boosting salaries and benefits.

Less than a year later, the economy started to shed jobs almost as quickly as it had added them. Between the April 2000 employment peak and March 2003, 2 million jobs disappeared. Now 15 million workers are unemployed or underemployed. "We've seen a cosmic shift," says Alan Johnson, managing director of Johnson Associates Inc., a New York City-based consulting firm. "In the late 1990s, we went from the view that people are reasonably fungible to the idea that 'people are our only asset.' It was overblown. And now, continued talk of a war for talent is like stepping into a time warp. Companies are inundated with resumes, and that's not going to change anytime soon." It's time to scrutinize pay and staffing levels and upgrade talent, he says.

For people in the human resources management industry, the war for talent was a good thing. With companies' HR focus squarely fixed on recruiting and retaining scarce employees, the key proponents of the war mentality -- recruiting firms, staffing agencies and consulting companies -- made a lot of money, and human resources departments watched their status rise.

Many in the field of HR management acknowledge that the economic downturn has cooled labor markets, but they insist that underlying demographic trends point to new labor shortages on the horizon. The hiring challenges of the late '90s will resurface as baby boomers begin to retire, so the scarcity mind-set and the policies it generated are still appropriate, they argue. John A. Challenger, CEO of Challenger, Gray & Christmas Inc., an outplacement firm based in Chicago, quips that future labor shortages will be so acute that "companies may become the leading proponents for the advancement of human cloning."

Talk of the war for talent continues, Johnson says, because "it is now part of the common mythology. It has become an accepted truth that people don't question anymore. Consultants obviously have an interest in keeping the myth alive. And human resources has not adjusted its approach in the face of new realities. Human resources is usually quite reactive, and that's what we're seeing here. The argument that baby boomer retirements will create dire labor shortages ignores technological improvements and efficiencies and the dramatic surplus of labor we see today."