A new picture of the economy is emerging, one that may threaten large organizations when it comes to talent.

Companies keep cutting workers during the recession, and indications are they won’t rehire many during a recovery. A report this month from consulting firm Watson Wyatt Worldwide finds that 43 percent of firms expect a permanent decrease in staff size in three to five years compared with pre-economic crisis levels. Twenty-nine percent expect a permanent increase in staff size, and 28 percent expect no change.

What this means is a large pool of “unintentional entrepreneurs” is forming and will grow. Many high-quality people may choose never to return to the large companies that cut them loose and now show disdain toward hiring them.

Earlier this year, Wired magazine editor-in-chief Chris Anderson saw an economic tectonic shift in the works. Bigger corporations, he argued, have to make bigger, riskier bets with lower payoffs. And amid fast-paced change, larger organizations are likely to become less flexible given increased regulation.

“[T]he next new economy, the one rising from the ashes of this latest meltdown, will favor the small,” Anderson wrote in May.

Many top employees could be headed to new startups. Earlier this year, the Corporate Executive Board research firm found that one in four high-potential employees plan to quit over the next 12 months. As disturbing, the report found that disengaged workers are 31 percent less likely to quit than they were in 2006.

No wonder the study found that engaging employees was the top priority for this year among global heads of HR.

The recession could be propelling the workplace toward a future envisioned by experts polled by Workforce Management last year: clusters of core employees and satellites of transient talent helping with short-term needs.

What is a Global 1,000 company to do? In general, large firms will want to get their culture headed in the right direction—toward a team orientation and history-making mind-set described by authors Dave Logan, John King and Halee Fischer-Wright in their 2008 book Tribal Leadership.

But in the wake of heightened distrust toward business and the apparent rise in employee disengagement during the downturn, U.S. companies may first need to establish a new kind of compact with workers.

More than a specific contract with an individual or bargaining unit, I’m talking about the overall principles that guide a firm’s relationship with employees. In the last three decades, the compact has shifted from one grounded in a degree of economic security for workers to one more about arm’s-length, transactional ties with employees. Layoffs became ubiquitous and health care and retirement risks were pushed onto employees in the quest for higher profits.

But it’s becoming clear that this treatment of workers has its limits. An employee-employer bond built for lasting success, it seems to me, would include a bias toward sustained connections, transparency, shared decision-making and concern for the “whole” worker—including their overall economic security and the well-being of their community. These principles should lead to trust, engagement, productivity and even greatness.

Creating such a 21st century connection with employees is a major undertaking. But especially if small becomes huge in the economy of tomorrow, large organizations will need to think big today.

The recent murder of a steel plant manager by workers in China has lessons for both American businesspeople and Chinese officials.

The killing, according to The Wall Street Journal, occurred when employees at Tonghua Iron & Steel feared their jobs were in jeopardy. A group of the workers apparently beat Chen Guojun to death in an office.

Chen worked for a privately owned company promising to modernize Tonghua Iron & Steel. The company had just come to an agreement to take control of Tonghua Iron & Steel from the government, the Journal story indicated.

The idea of workers and management at odds over jobs and restructuring plans isn’t new to Western businesspeople. What may be surprising, though, is the Chinese reaction to the tragedy. According to the Journal, the official Xinhua News Agency criticized local government officials, asking: “Wasn’t the Tonghua incident really a matter of failing to consider the interests of workers during the restructuring process?”

And in response to the plant protest, with Chen missing and feared injured, the government said the deal for Chen’s firm to take over the plant was off.

In the U.S., the Xinhua statement comes across as excusing murderers. And the axing of the takeover plan seems like capitulation to thuggery.

What those reactions miss, though, is the deep-seated collectivism in China. While Americans are prone to focus on the individual act or acts of violence, Chinese are more likely to see the role of the wider social context. The restructuring of state-owned industries in China has been proceeding for years, often with little regard for workers who lose their jobs.

The Journal quotes Li Xinchuang, vice chairman of China Metallurgical Industry Planning and Research Institute, a state think tank that helped draft the government’s policy for the steel industry. Prior to the Tonghua riot, restructurings “were concerned only with benefits of local governments and companies,” Li says. “But the interests of employees should draw a lot more attention.”

I observed this contextual, social sensibility during a reporting trip to China a few years ago. It’s something Western firms must be aware of if they are to succeed in China. And I think it is something American business leaders—often obsessed with individual pay-for-performance schemes—would do well to learn from.

But there’s also a lesson for Chinese officials in the murder of Chen Guojun. Protests not all that different from the one at the steel plant have become commonplace in China this decade. Public demonstrations are among the only ways average citizens can fight back against perceived injustices, given the lack of meaningful democracy in China.

I hope Chen’s death helps Chinese leaders see how vital more democracy is.

The latest reading on employer reactions to the recession brings more mixed results.

While most organizations are maintaining or increasing their workplace flexibility, creative cost-cutting efforts that can preserve morale—and ultimately profits—appear to have gotten short shrift, according to a new report from the Families and Work Institute.

The study of 400 U.S. employers finds that 81 percent of organizations have maintained their workplace flexibility options, and an additional 13 percent have increased them. Only 6 percent have reduced such programs.

In addition, 26 percent of employers say they have used flexible workplace options to minimize the need to lay off employees.

Still, layoffs have been common, according to the report, which involved surveying organizations with 50 or more employees in May. Just over three-quarters of employers have taken at least one step to cut labor and operational costs in the past year, and of them 64 percent reported layoffs.

Layoffs may be necessary and smart in some situations. But they also risk hurting a company’s esprit de corps. Polling firm Gallup has found that organizations with a layoff or downsizing saw the level of “actively disengaged” employees rise by 3 percentage points, to 24 percent.
 
Given the connection between engagement and business success, it’s disconcerting that companies haven’t worked harder to hold on to workers. Just 19 percent of organizations cutting costs in the past 12 months tried increasing telecommuting to save on occupancy costs, for example. Twenty-two percent increased their use of compressed workweeks, which also can limit occupancy expenses. And just 27 percent reduced pay.

Pay cuts can depress workers, for sure. But in the context of saving jobs, they can tap into a broader mood of shared sacrifice.

The same goes for reduced hours. It’s hard to get a sense for how widely companies have been trimming hours from the Families and Work Institute report. It finds that among employers cutting costs in the past 12 months, 29 percent have tapped voluntary reductions in hours, and 28 percent have used involuntary cutbacks. But the categories weren’t mutually exclusive. And the institute doesn’t provide a figure for the total percentage of firms using some form of reduced hours as a cost-cutting strategy.

Overall, the new report adds to a muddy picture of employer actions and employee engagement during the recession. Further complicating the situation, morale isn’t just a function of company practices. It is shaped also by broader trends around opportunity, security and risk for workers in America—meaning health care reform and the overall economic health of the country and world play a role.

Still, there’s a consistent message for employers: Those organizations that treat workers well in these tough times likely will be among the leaders as the economy picks up.

Last week I flew Virgin America for the first time. I was wowed by the hipness but found the customer service bumpy—which I suspect is a function of a young operation pushing the boundaries of employee independence.

Stepping onto the plane, Virgin immediately impressed me with the mood lighting, sleek black-and-white seats and interactive entertainment system. The flight attendants on my trip to Las Vegas were fun. At one point, the head of the team advised us not to listen to one of his colleagues.

My trip back to San Francisco that evening also featured an engaging Virgin employee. The gate agent kept telling us that Virgin was the “greatest airline—ever,” with just enough irony in his voice to make the phrase amusing rather than arrogant.

But aboard the plane, Virgin’s service took a nose dive. The lead flight attendant spoke in a cardboard monotone, sounding like someone reading a script for the first time. What’s more, the officer speaking from the cockpit deck flubbed his introductory remarks.

He said there would be some bumps on the way out of Las Vegas owing to heat from the desert rocks, but it should be a “safe” flight the rest of the way. Obviously he meant to say “smooth”; we wouldn’t be taking off if conditions were unsafe.

But for the substantial portion of the populace with some fear of flying—including me, I’ll admit—it was an annoying slip-up. Not the sort of thing that puts one in a relaxed mood.

This uneven performance from Virgin employees isn’t surprising when you consider the airline’s history and its vision. This division of Richard Branson’s Virgin Group is just 2 years old, which is a short time to work out the kinks of a complex service business even when you have a sister airline company. That’s especially true given that Virgin America intends to “bring great service back to the skies” in an unconventional way.

Traditional airlines such as United and American have relied largely on formulas for interacting with passengers. Such systems may limit the damage a low-performing employee can do, but the consistency and tight parameters can be maddeningly inhuman. Remember comedian David Spade’s “BUH-bye” skit?

Virgin America appears to be taking the opposite approach. In keeping with Virgin Group’s philosophy of empowering employees, the upstart airline seems to be giving its people great latitude to do their jobs.

Consider the message on Virgin America’s careers page: “If you have got guts, passion and that independent spirit, then you might be the kind of person we’re looking for,” it reads. “If you have the thirst and creativity to make this the most-loved airline in the sky, then we promise to make this a company where inspired people like you will always love to work.”

Virgin America’s focus on independence and creativity in its workforce amounts to a social experiment in the skies. And there’s evidence it’s working. For two years running, the airline has taken the top honor in the domestic airline category of Travel + Leisure magazine’s World’s Best Awards.

“Are you Virgin enough for Virgin America?” the career page asks provocatively. There’s bound to be some awkwardness as employees figure out their own ways to service customers well. But I wouldn’t be surprised if Virgin’s approach to people makes it an ever-smoother operator.

Recent grim economic news amounts to a test for companies regarding their workforces.

Will firms take a short-term, panicked approach, axing people and valuable programs to shore up earnings over the next several quarters? Or will they act according to a long-term vision, where they live up to claims of treating people as “their greatest asset” even at the expense of short-term profits?

The stakes are big, and could well determine which firms emerge as the places with the most employee engagement, the best ability to attract talent and the greatest sustainable performance.

Signs of a double-dip recession or protracted downturn include the June employment situation. U.S. job losses in June outpaced those in May, reversing several months of improving payroll job declines.

It’s hard to judge how employers have handled the economic troubles so far with respect to their people. On the one hand, there’s evidence firms rushed to cut employees—72 percent of firms surveyed by consulting firm Watson Wyatt Worldwide in April had laid off employees or otherwise reduced their workforce.

But there also are indications of sound responses. A May report from consulting firm Towers Perrin (which plans to merge with Watson Wyatt) found that 74 percent of employees agree their company’s structure facilitates efficient operations, up from 66 percent in the last quarter of 2008 and 58 percent in the first quarter of 2008, “suggesting the latest rounds of restructuring have been done thoughtfully and in a manner that doesn’t automatically demand doing more with less.” In addition, company interest in furloughs—which can preserve morale if used instead of a layoff—has grown.

Towers Perrin found that employee engagement globally held steady between the fourth quarter of 2007 and the first quarter of this year. But polling firm Gallup found a slight drop in engagement among U.S. workers between July 2008 and March 2009.

And the Corporate Executive Board research group found that the percentage of employees globally displaying high levels of discretionary effort dropped sharply between 2005 and the first quarter of 2009.

By now it’s pretty clear that engagement can be a key to company success, and a management model focused on engaged, involved employees seems likely to be the best bet for tomorrow’s fast-paced global economy.

In this light, trimming jobs from already lean firms is risky. Gallup has found that organizations with a layoff or downsizing saw the level of “actively disengaged” employees rise by 3 percentage points, to 24 percent.

It’s possible to avoid an engagement drop with a layoff, says Jim Harter, chief scientist for Gallup’s workplace management and well-being practice. Experts including Harter suggest management explain the rationale for any downsizing to employees.

Some companies may have to cut people in the coming weeks or months just to stay afloat. There are no easy answers in this ugly economy. But it may be time to suck it up and hold on to the employees that firms profess to value so highly. The long-term payoff—in engagement, in reputation and in performance—could be much bigger than the short-term pain.