Report on The August 2007 Survey of Businesses Served by

Professional Employer Organizations

August 29, 2007 National Association of Professional Employer Organizations (NAPEO)

EMBARGO UNTIL August 29, 2007

NAPEO 901 North Pitt Street, Suite 150, Alexandria, Virginia 22314

Phone: (703) 836-0466 Fax: (703) 836-0976 Web Site: www.napeo.org

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The Outlook on Hiring and Pay Many Small Businesses Say They Won’t Hire This Year; and

They Must Scrutinize Job Applicants More Carefully

EMBARGO UNTIL August 29, 2007

It costs as much as 150 percent of an employee’s annual pay, by some widely accepted estimates, to recruit, hire and train a new employee.

Think about that. The federal Bureau of Labor Statistics says almost a quarter of the average company’s workers turn over every year. Let’s assume you’re a typical small business with 10 employees. Each, for the sake of argument, makes $30,000 a year. Every year, two or three leave. That means you’re out at least $90,000 every year.

Yet many businesses spend more time pricing office supplies than they do reckoning the cost of replacing the people who work there. Is it any wonder that more businesses are thinking harder about ways to hire the right people and then keep them? So are we here at the National Association of Professional Employer Organizations, the trade association for companies that do human resources chores for small businesses, including helping them with recruiting and retention.

To get better at getting people to stay, it helps to know why they’re leaving. So, as part of our quarterly survey, in early August we asked 352 of our members’ clients why their employees decamp. We found, not surprisingly, that the single biggest reason was a personal one like getting married. The second most common reason workers left: more pay. But almost as many companies said (and this did surprise us) the main reason people left was that these businesses fired them, more than were laid off, retired or moved away. That indicates a problem at the beginning of the process; a glitch in hiring practices that lets unsuitable employees through the net. Six percent of the applicants that it did background checks on last year covered up something negative about their past, says ADP, a big outsourcing company that runs a professional employer organization. At Kroll, the global risk-consulting company, the discrepancies it finds in screening job candidates for clients rose last year; differences in what candidates said about their education, for instance, jumped from 14 percent to almost 22 percent.

“It’s a big headache for any company to lose trained and experienced workers,” says Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations. “But it’s especially hard on small businesses that don’t have the deep bench of larger companies. That’s why it’s so important for small businesses to stay on top of how they recruit and retain people. It’s one of the biggest problems they face.”

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And it’s not an easy problem to solve. Consider a couple of other statistics that emerged from the survey. Almost a third of these companies believe that as many as half their job applicants lie to them. Eight percent think more than half all applicants do. A fifth of the companies find spelling errors in more than half the résumés they get. Hiring, it’s clear, can be a minefield.

Companies in our survey will get some respite from dealing with these shenanigans this year, but only because the economy is getting shakier and many say they won’t be hiring in the last three months of the year. Through July, U.S. jobs grew by an average 136,000 a month this year, says the Bureau of Labor Statistics; that’s not bad, but it’s more than 50,000 a month less than last year. Judging by NAPEO’s survey and other hiring forecasts, that may not pick up soon. When NAPEO questioned its members’ clients in early August, almost half these small and medium-sized businesses told the trade association they would hold steady in the fourth quarter, neither hiring nor laying people off.

That conforms with surveys by USA Today and the website CareerBuilder.com, which said half the companies they asked in June were not planning to hire, either. The quarterly Manpower Employment Outlook Survey released in June found almost 60 percent of the companies it questioned had no plans to hire and predicted a “cool summer.”

And the National Federation of Independent Business, the small-business lobby, said in July its members are playing it safe, too.

Caution is advisable in uncertain times like these. Yet if the job market continues to slow, it is likely to aggravate problems already percolating in the economy. It’s raining on the markets; credit is tight for the couple trying to buy the house down the street and the wealthy guy who runs a hedge fund; Wal-Mart and Home Depot, the nation’s largest retailers, recently reported disappointing earnings and predicted more ahead. But that’s when it’s most important not to lose sight of the fundamentals.

“A bump in the economy may take some of the focus off hiring and retention,” says Yager. “Since the job market is tighter in tough times, people are less likely to leave their jobs and so managers are less preoccupied with filling slots.” “But it shouldn’t divert their attention. In fact, in hard times, when saving a dime here and a nickel there is far more important to a business, the last thing you want is to be spending a lot of money on hiring people because your turnover is out of control.”

Here, then, is a closer look at NAPEO’s Workplace Today quarterly survey and how small businesses across the country are deciding whether to raise pay, hire more people, revamp their benefits and deal with turnover.

Analysis of the Results

The State of the Job Market for Small Business Question 1: “What are your hiring plans for the fourth quarter?” How strong is the U.S. labor market? Is it another domino about to topple as the economy wobbles under the weight of bad debt and companies gut their plans to expand; as uncertainty grows over retail sales, up to now a major source of economic growth; as shell-shocked stock and bond markets reel and stagger; and as construction of new homes deflates to its lowest level in a decade?

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In the first quarter, says the federal Bureau of Labor Statistics, the labor market grew at its slowest rate in four years. In July, the first month of the third quarter, job growth slowed again and unemployment edged up to 4.6 percent after holding at 4.5 percent for the previous three months. So the job forecast is cloudy, at best, which is why NAPEO asked its members’ clients in early August about their plans for hiring. Almost half – 49 percent, or 172 companies – said they are planning to hold the line and not hire or fire in October, November and December. On the bright side, nearly as many companies – 47 percent, or 163 – said they would hire, and a majority of those companies said they would hire in numbers equal to more than 10 percent of their workforce. After all, the troubled markets and slower retail sales come amidst generally strong economic growth and healthy corporate profits. Only a handful of the companies surveyed – 4 percent – said they would lay off people.

“This all sounds pretty positive,” says Jay Keegan, president and CEO of Adams Keegan Inc., a professional employer organization based in Memphis, Tenn. “And small business is a good bellwether; these companies are downstream from the big corporations that buy goods and services from them, so they’re among the first to feel a downturn.”

The results also conform fairly closely to other recent surveys. A CNN-Money magazine survey released in July found half the 2,400 hiring managers didn’t plan to hire in the coming months, while about a third say they would add people and 5 percent said they would lay people off. “Small businesses owners are plodding along,” said William Dunkelberg, chief economist for the small-business lobby, the National Federation of Independent Business, in July. They “have seen little to encourage them about growth.”

On the other hand, he said, “there are few signs that the economy is ready to slip into an actual recession.” Service companies, a big chunk of the U.S. economy – and the biggest responders to the NAPEO survey, representing more than a quarter of all the companies – were more optimistic than the average. Fewer said they would hold steady and more said they would hire.

Small manufacturers, still a big piece of the economy despite their long-term decline, conformed almost exactly to the average.

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Question 2: “Is it more difficult to fill job openings now than a year ago?”

The unemployment rate dropped slightly in July, just before we took our survey, to 4.6 percent. It was 4.8 percent a year earlier.

With that small a change, it’s not surprising that the largest group of our respondents – almost half, or 45 percent – said they had about the same amount of difficulty hiring this year as last.

But almost a third said it was harder to hire than a year ago. The reasons, of course, differ by industry and region. In Seattle, for instance, home to Google and Microsoft, companies struggle to fill tech jobs, says Janet Harding, president of HRnovations, a professional employer organization in Washington state. Or consider Memphis: For several years, says Jay Keegan, it’s been harder to find low-wage, entry-level workers in Adams Keegan’s southern markets, even as many of these jobs move to other countries.

“We’re seeing a lot of concern among clients,” he says, “especially since the recent emphasis on immigration enforcement means an even tighter market.”

Question 3: “Will it be more difficult to fill openings in the next 12 months?”

Roughly a quarter said no, a quarter said yes, and half the companies said it would be about the same. The 25 manufacturers that responded were more optimistic. Probably because American factories continue to disappear, more manufacturers said they didn’t anticipate it would get harder to hire in the next 12 months, and more said it would actually get easier.

Service companies, however – generally growing rapidly – were more pessimistic. Far more of them anticipate a tough time hiring: 11 percent because their type of business isn’t as competitive in wages and benefits; and 27 percent because there simply aren’t enough qualified people in their industry.

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At the low end of the wage scale, the temporary firm run by Timothy E. Doherty, CEO of Doherty Employer Services in Minneapolis, doesn’t have any trouble filling jobs. But at the high end, says Doherty, “highly trained technical people are getting really scarce.”

How Companies Try to Hang On to Employees

Question 4: “Will you raise base pay for employees in the next 12 months?” Almost half said yes, from 1 to 3 percent on average. A quarter said no and a quarter said they would give raises of 4 percent or more. That’s in the ballpark with estimates by Mercer Human Resources Consulting, which forecast “moderate” raises of around 3.6 percent for this year after talking to almost 230 medium and large employers. Companies are increasingly tying pay to performance to keep expenses low, from the lowliest worker on the factory floor to the CEO, while rewarding only the most valuable employees. This way companies can hold down costs during bad times and share the profits during good.

The manufacturers we surveyed were less generous than the average; more of them said they wouldn’t be raising wages this year. Service businesses were more generous; more of them are giving big raises this year.

Question 5: “How does that compare to the increases your employees received this year, if any?”

Three-quarters of the companies said the 1- to 3-percent average pay raise they’ll hand out this year is about the same as they gave last year.

That’s on a par with national figures collected by the federal government. For the year through July, the Bureau of Labor Statistics reported, wages for non-management workers (four-fifths of the work force) rose 1.4 percent over the last year, from $17.20 an hour to $17.45. (That 1.4 percent does not count the artificial boost from inflation. If you add in the 2.4 percent inflation for the year through July, you get fairly close to the 3 percent at the top end of our range of answers.)

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Question 6: “Have you added or expanded benefits this year?”

Three-quarters said no. That doesn’t necessarily mean they’re not having trouble hiring, however, say experts; it could also be because it’s harder for small businesses to afford even the three basic benefits – competitive pay, medical insurance and a 401k retirement plan – and certain industries, like real estate and construction, are hurting.

Far fewer manufacturers ruled out improving benefits – less than two-thirds – while service companies said they were even less likely to sweeten benefits.

Of the few who did expand benefits, by far the most popular – with around 8 percent each – were sick days, health insurance and dental and vision plans.

Question 7: “Do you plan to add or expand benefits in the next 12 months?”

Almost 60 percent said no; another 35 percent weren’t sure. That left around 5 percent saying they would beef up benefits, mostly sick days and health insurance.

That’s not unusual. The Society for Human Resources Management recently surveyed almost 600 companies and found their benefits little changed, too.

In fact, the only benefit that showed a big increase in SHRM’s survey was providing cell phones to employees. Losing ground, the professional association found, were automobile expenses, individual investment advice, traditional benefit plans, retirement planning services, employee discounts and loans to employees for emergencies.

Benefits are likely to become more competitive, however, especially for small businesses, as the Baby Boomer population starts to retire and the growth in the work force slows. Employers will want to keep experienced Boomers on and compete successfully for the smaller pool of younger workers. An example: One of the few low-wage clients at Genesis Consolidated Services Inc., a professional employer organization based in Burlington, Mass., tries to be as generous as possible with health benefits to compensate for their wages and attract and keep workers.

“In some cases, they’re contributing more to the benefit plan than their employees are receiving in wages,” says Robert J. Burbidge, president of Genesis.

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Which Retention Strategies Work?

Question 8: “Why do your employees like working for you?”

More companies ranked “company culture” first in importance. “Satisfying work” was second and “pay,” perhaps surprisingly, ranked only third, almost the same as “a sense of being involved,” “faith in management” and “company is financially successful.” Corporate culture includes everything from management style to whether the company has a community involvement policy, accommodates working mothers, offers a suggestion box, allows a relaxed dress code or gives certain people private offices.

Experts can disagree about what makes a humane and effective culture. James C. Collins and Jerry I. Porras, for instance, spent six years studying companies with successful corporate cultures and, in their book “Built to Last: Successful Habits of Visionary Companies,” concluded there isn’t a single template. But the successful companies in the book had one thing in common: They thought about and promoted their culture constantly, and hired people who would best fit it. “Companies that actively take culture seriously actively market their culture to candidates,” says Steven Hunt, an author and expert on recruiting. “This attracts people who will thrive in the organization and repels people who would be more effective working elsewhere.”

A congenial culture can help win over a good job candidate even when the competition is offering more pay. One study that Hunt cites showed college grads would accept on average 7 percent less in salary to work for a company whose culture they found attractive. “Another reason to recruit around culture,” says Hunt, “is that while job demands and requirements constantly shift, a defining characteristic of culture is that it remains constant in the face of change.”

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Question 9: “How much turnover have you had in the past 12 months?” It was a relatively good year among the companies answering the survey.

While the federal Bureau of Labor Statistics says almost a quarter of U.S. workers change jobs every year, only a tenth of the 352 companies in our survey reported turnover rates between 21 and 30 percent. The vast majority – four-fifths – reported turnover of less than 25 percent. One possible explanation: The survey sample may be skewed. More stable companies tend to gravitate to professional employer organizations, and vice versa, says Timothy E. Doherty of Doherty Employer Services. Hotels, restaurants, call centers, lower levels of the medical field – all have lots of turnover, and fewer tend to hire PEOs. “And,” says Doherty, “our clients have better benefits, which keeps people around.”

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Question 10: “How does that turnover compare to the previous 12 months?” Two-thirds said it hadn’t changed much this year from last. But turnover is starting to occur earlier in employees’ tenure, says Janet Harding, president of HRnovations. “Because the labor market is tight, companies often oversell the job and the candidate has high expectations about the kind and amount of work and the authority and independence they’ll get,” says Harding. “On the other hand, if people make it through the first year, there’s a far greater chance they’ll last for five to eight years.” Only 1 percent of workers quit during training in their first few weeks, says the employee-retention firm TalentKeepers after surveying 550 major U.S. companies. But that jumps to 15 percent during the first three months and another 25 percent leave before a year into the job. This doesn’t start slowing down until around the second year. When companies are not quite sure job candidates are the right fit, says Harding, but hire them anyway, these new hires wind up leaving 80 percent of the time, often within the first year.

“Employers are understandably anxious to get somebody in there, and they don’t want to wait another month,” she says. “Often that month, though, makes all the difference.”

Question 11: “What is the average tenure of your employees?”

In 1975, half the male workers in the U.S. aged 35 to 64 had been with their employer for a decade. By 2005, it was only 40 percent, says Princeton labor economics professor Henry Farber.

And that’s not turning around anytime soon, something that baffles Prof. Farber. “This is mysterious to me, because I would think companies would want to benefit from having a stable, committed work force in a world that is more competitive than it used to be,” he told the Newark, N.J. Star-Ledger newspaper recently.

Employees of small businesses, based on the NAPEO survey, seem to have even shorter tenures. It’s not surprising: Many small businesses can’t compete with the pay and benefits of larger businesses.

Almost two-thirds of the companies in the survey said the average tenure of their employees was only one to five years. Almost a quarter said six to 10 years.

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Question 12: “Why do your employees leave?” Of the companies that said “personal reasons,” a third ranked it first, by far the most. Second was “better pay,” but only by a nose; also a big reason was firing for performance. (Next was “must leave the area” and lumped together were “laid off,” “retired,” “personality clash” and “left for better benefits.”) These are rough estimates by the companies, of course, but the percentage of companies that had to fire people is still a warning sign. It might mean, say experts, that some of these companies aren’t screening job candidates as effectively as possible.

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Games Job Applicants Play Question 13: How many of your job applicants lie or omit relevant information? Almost 70 percent of the businesses in the NAPEO survey said it happens occasionally to frequently.

It happens to big companies as well as the fork-lift operators. The CEO of RadioShack, for instance, resigned last year after admitting he never got the two degrees listed on his résumé, and his case is not that unusual. Or consider this: InfoLink Screening Services, a background-checking company, which estimated last year that 14 percent of applicants gin up fake degrees or otherwise lie about their education on their résumés. (Men often say they played on the college football team.)

Then there’s RésuméDoctor.com, which writes résumés for job applicants. Of 1,000 résumés it vetted, 43 percent contained one or more “significant inaccuracies,” or what screeners call “red flags.”

“It’s absolutely common,” says Jay Keegan, president of Adams Keegan. “You’re crazy if you don’t follow up on a resume.”

Adams Keegan once interviewed a dozen candidates for a web developer. Typically, Keegan and one of the company’s web developers sit down with candidates and ask them to perform tasks on the computer to verify their résumés. “It doesn’t make sense to spend all the time talking to them,” says Keegan. “You want to know: Can they do the work?” Of the 12, he says, only one lived up to the résumé.

Typically, big companies or companies in sensitive areas like defense or companies that handle a lot of money screen employees the most. But lately more small and medium-sized businesses are using background checks for a different purpose entirely: to avoid costly hiring mistakes. More than 90 percent of the companies surveyed by the recruiting firm Spherion Corp. used some sort of background screening, up from half five years earlier, helping turn this into a multi-billion-dollar business.

Question 14. What percentage of the résumés you receive have misspelled words or improper grammar? Up to half, say 60 percent of the companies in NAPEO’s survey; and another quarter of these companies said more than half.

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“People are getting a lot sloppier,” says Mark Weaver, Colorado general manager for Employer Solutions Group, a PEO. “A good number are formatted poorly.”

“And thanks to email people are more likely to blanket the market with the same generic letter,” says Weaver, “instead of being strategic.”

These kinds of mistakes may seem small, but they can kill your shot at a job, say recruiters, just as sure as a wide tie sporting hula girls or a missing tooth.

“Though a few employers may overlook the simple mistakes, many will not,” says the recruiting firm National Executive Resources Inc. “Do yourself a favor and check, check, check your résumé and cover letter for spelling, grammar or word-use mistakes.”

Question 15: “In a job interview, which characteristics do you find most negative in a candidate?”

Three-quarters of the companies that picked “unclean” ranked it as the worst thing about an applicant. More than two thirds that picked “sloppy” ranked it the worst.

Also unappealing: having had a large number of jobs. Least annoying traits: Too shy (13 percent); overly familiar (17 percent); and not familiar with the company or the job (34 percent.) “The single biggest change I’ve seen in interviews in the last five years,” says Timothy E. Doherty of Doherty Employer Services, “is people coming in wearing casual clothes. I’ve even seen flip-flops, for instance. And where you used to expect a suit and tie, now you get people in khakis and a polo shirt. This is too bad, because first impressions are so critical.”

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Question 16: “If you outsource some or all of your recruiting process to a professional employer organization, what’s the main reason?”

Less than half the PEO clients in the NAPEO survey use their PEO for recruiting. They’re more likely to use traditional PEO services like administering payroll and workers’ comp. PEOs would like to provide more of the more sophisticated and expensive services like screening and recruiting workers, a booming corner of the human-resources business.

Of the 160 clients that use PEOs for recruiting, more than 40 percent said they don’t have the time or the resources to do recruiting in-house. Another 25 percent said they did some in-house but needed help with specialized services such as background checks. The average hiring manager interviews eight candidates for each job, according to a survey last year by recruiting firm Spherion Corp., and many employers think that’s too much, especially owners of small businesses.

Hiring experts say managers can cut down on the number of interviews they need to do if they screen and assess candidates more efficiently beforehand, tasks small businesses are increasingly handing to their PEOs.

“As with human-resources chores, PEOs can do recruiting more cheaply and efficiently than most small businesses,” says Milan Yager of the trade association. “That lets owners concentrate on what they do best – making sales and profits grow.”

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Who Are the Respondents? Question 17: “How many people work at your company?”

By far the most respondents – 38 percent – employ 10 or fewer workers. Twenty-three percent employ 11 to 20, so together almost two-thirds of the companies in the survey employ 20 or fewer.

That fits with the profile of the average PEO client, which employs 15, and means the survey responses are from a fairly representative sample.

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Question 18: “Where is your company headquartered?”

Almost a third of the respondents are based on the West Coast or in Hawaii. Fifteen percent come from the east north-central region: Illinois, Indiana, Michigan, Ohio and Wisconsin. Another 15 percent are in the South Atlantic region: Delaware, the District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia.

Question 19: “What kind of business are you in?”

By far the most were in services (more than a quarter.) Ten percent were nonprofit, and 10 percent were construction. Government and agriculture had the fewest, with less than 3 percent altogether.