Companies Look to Cut Costs with Hiring Freezes

One expert advises freezing headcount instead

Roy Maurer By Roy Maurer April 2, 2020
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Companies Look to Cut Costs with Hiring Freezes

​Hiring freezes are the top cost-containment strategy being employed by organizations as the COVID-19 pandemic ravages the U.S. economy, according to a new survey by Willis Towers Watson.

The global risk management and advisory firm surveyed 812 primarily larger companies in North America during the week of March 23. It found that 42 percent have already frozen or reduced hiring, and another 28 percent will or might do the same.

The coronavirus outbreak has resulted in shuttered businesses and stay-at-home orders for nearly 90 percent of the U.S. population, severing commerce, stalling the economy and precipitating what's projected to be a costly recession.

"Amid heightened concern over the impact the virus will have on their operations, companies have started to implement some of the same cost-control measures we saw during the last recession," said Adrienne Altman, managing director, North America rewards leader at Willis Towers Watson. "Some businesses had to make instantaneous decisions as locations were shut down and workers were quarantined. Some industries, companies and roles could be focused on remote work and the best ways to get up and running working from home, but others didn't have that luxury. Hospitality and travel employers had to be fast out of the gate having to make difficult choices. Employers' actions will continue to evolve as events unfold."


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Coronavirus and COVID-19

Trying to Avoid Layoffs, for Now

Only 7 percent of surveyed companies have laid off employees—typically hourly-wage earners. However, another 9 percent were planning layoffs, and 28 percent were considering them.

"At this point, it appears most companies are attempting to use layoffs and workforce reductions as a means of last resort," Altman said. "I think we will see more; it's just a question of how much more."

Bank of America, Morgan Stanley and Salesforce are among a select few employers that have pledged not to lay off anyone in 2020. "While layoffs and workforce reductions may become an unavoidable reality, [most] companies are clearly making every effort to protect their human capital during this period of uncertainty," Altman said.

She added that there has been an uptick in furloughs—in which employees must take unpaid time off but often hold on to their health insurance—including announcements recently made by several name-brand retailers.

"The reality is that many workers do not have the ability to work from home," Altman said. "While employers initially said they would try to pay their workers, they are now re-evaluating next steps. The CARES Act provides unemployment support for furloughed employees."

Other companies have slashed salaries among top management, the survey found. "Hospitality and airlines were first to do this, and we're starting to see some retailers do this now," she said.

Delta Air Lines CEO Ed Bastian will receive no salary for six months. The rest of the Delta C‑suite will take a 50 percent pay cut through June 30, while other managers will see 25 percent cuts. Marriott CEO Arne Sorenson said he would not take a salary for the rest of the year, and the hotel chain's executive team would relinquish half their pay. Hilton CEO Christopher Nassetta announced he is also forfeiting his salary, while top executives will receive half-pay, and many of the hotel chain's corporate staff are being furloughed for up to 90 days. Those who are not furloughed will have their pay reduced by up to 20 percent for the duration of the crisis.

Some employers are considering additional cost-cutting options, according to Willis Towers Watson. Roughly 12 percent of organizations have reduced or delayed salary increases, 8 percent have frozen salaries across the workforce, and 22 percent are planning or considering either initiative or both. About 9 percent of employers are offering voluntary unpaid leaves of absence, 6 percent are reducing workweeks, and 25 percent reported that they either will or may take these measures in the future.

[SHRM members-only toolkit: Managing Downsizing by Means of Layoffs]

Hiring Freezes Hurt

Brian Formato, the CEO and principal at Groove Management, an organizational development and human capital consulting firm in Charlotte, N.C., said that businesses of all sizes are bound to suffer through these challenging times, but how an organization reacts to tough times determines its long-term viability.

"Implementing a hiring freeze is a quick and easy way to reduce costs, but it's a practice which I have found to be most damaging to a company long term," he said. "The adverse impact on an organization is just too great."

He explained that typically, a hiring freeze means:

  • All open requisitions for hire are put on hold.
  • No new positions can be created.
  • Open roles cannot be filled if turnover occurs.

"Recruiters are left finding other tasks to carry out, and efforts to create talent pipelines are put on hold," Formato said. "Some organizations create caveats, like only revenue-generating positions or mission-critical positions can be filled. Creating exceptions to the rule only creates further organizational confusion."

According to Formato, some of the adverse effects of a hiring freeze include a tarnished employment brand, battered employee morale and neglected performance management. "Poor performers are not dealt with because the removal of a poor performer will result in one less employee [in a role that can't be filled]," he said.

Try Freezing Headcount Instead

Formato said that reclassifying the action as a headcount freeze—meaning that the organization maintains its current number of full-time equivalent workers—is a better approach.

"This somewhat subtle change can have a dramatic philosophical impact," he said.

That's because the organization continues to advertise jobs in the marketplace, recruit with more focus on attracting top talent and encourage managers to deal with poor performers.

"If the goal is to freeze employee expenses, like salaries and benefits at their current level, then a headcount freeze can achieve the same result as a hiring freeze but in a much more effective manner," he said. "In fact, through effective hiring, an organization might be able to find a new hire who can do the job of two mediocre people. The net result would be a reduction in headcount and cost savings."

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