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Originally Posted On: https://kurtuhlir.com/labor-hoarding/

 

Significant layoffs often follow a recession, and sometimes companies must make this decision for reasons not due to the wider economy. What most companies don’t know is that letting certain employees go costs them more in the long run. One lesson a select number of leaders realized in previous downturns is that labor hoarding is key to continuous growth during and after economic downturns.

Labor hoarding is a concept that has evolved over the years. But many people, even companies, and especially HR/people teams, don’t fully understand why it’s necessary. However, economists have noted that labor hoarding has become very popular recently among company leaders with proven track records.

I’ve been part of reductions at public companies, venture-backed companies, and small businesses. Sometimes, this has been as a decision maker in the people to keep and those to lay off and at other times simply a board member or advisor. Having seen the impact of these decisions on these companies’ future growth, as well as the data from my research on hundreds of other companies, I have changed view of how leaders should make these decisions..

Companies can save money by holding on to their key employees instead of laying them off. Let’s dive into labor hoarding and why you should consider implementing the practice as we head into uncertain economic conditions ahead.

What Is Labor Hoarding?

Labor hoarding is the practice of keeping extra employees or key leaders at any cost during an economic downturn. This allows the company to better grow through the slow times and grow faster as market conditions improve.

Sometimes legacy finance teams focus on the short term at the expense of the medium-to-long term. It has become increasingly difficult to hire top-performing leaders and even individual contributors, especially those with a proven record with fully-remote large teams.

Companies are quickly learning that they have to choose between 1) a 12 – 36 month lead time to hire the best people or 2) hiring less qualified, lower-performing people. This raises the business risk both in “tightening” to much and in loss of opportunity from outdated reduction strategies (RIFs). It is not rare for some of us to receive 2 – 10 calls per week from recruiters, and I know even some consultants that are booked 24 months out.

Labor hoarding is a modern strategy that allows executive leadership, finance, people teams, and individual group leaders to agree on the best course of controlled risk for the company, even when the company is not as profitable in the short term.

Companies of any size can engage in labor hoarding, and yes, it’s not the most flattering term. When you hoard labor, you hold on to valuable human resources that may not be available in the market after the recession. Moreover, the cost of re-hiring and training new employees can be higher than the cost you incur in labor hoarding.

Many companies engaged in labor hoarding during the recent recession caused by the Covid-19 pandemic. But labor hoarding is not a new phenomenon. The term came up in the U.S. Senate hearing in 1945 when Mr. Romney explained labor hoarding to a senate committee about the tight labor market.

Labor hoarding is becoming more popular as companies face more difficulty hiring the right talent after a recession. Furthermore, it’s not easy to understand what type of employees to lay off.

For instance, choosing to fire a mid-level manager with a high salary may seem reasonable. But, the employees under that individual may quit and follow the manager out the door. The company may lose more capital knowledge and talent than they planned.

That data from the past few recessions shows RIFs (reduction in force) that were planned for 10% actually end at closer to 15% after additional employees left, with the additional employees that chose to leave drastically increasing the risk of the company in the short-term and lowering the ability of the company to grow when the opportunity is available.

Modern-day Paradigm: Labor Hoarding as the Inverse Strategy to Mass Layoffs

Mass layoffs are often a go-to solution for companies seeking to cut costs during a recession. For instance, after Elon Musk bought the company, Twitter laid off half its workforce. Moreover, many tech startups had over-hired, triggering mass layoffs after the global economy stabilized.

The anticipated 2023 recession has also triggered massive layoffs in companies such as Amazon and Meta. Zuckerberg announced that Meta would let go of 13% of all its workers, while Amazon fired over 10,000 corporate workers.

Quiet quitting is another major trend in the labor force. The practice affects 1 in 4 workers, who only do the bare minimum to get paid. Quiet quitting has emerged due to employee dissatisfaction. But quiet quitters are not unproductive or deserve to get laid off because they can be more productive, with the right leadership style in their groups.

There will always be another recession in the future, and companies need to plan for individual declines in their markets or sales as well. These declines will likely trigger massive layoffs. But this could be an opportunity for you to engage in labor hoarding and avoid losing great talent.

Although layoffs cut down on costs in the short term, they bring forth the following challenges:

• The cost of layoffs is higher than expected.
• Recruitment costs are usually high.
• Loss of leadership and other skills when the economy recovers.
• Decision-making is more publicly scrutinized.
• There may be long-term impacts on company culture, employee engagement, impacting both employee performance and employee churn.

Cost of Layoffs Is Higher Than It Seems

Laying off workers comes with some costs that may not be apparent in the short term. For instance, re-onboarding new talent after the recession may be very expensive. Studies indicate that a laid-off worker can cost the company approximately half their wages each week that position is not occupied.

New talent may be reluctant to join your company after the economy stabilizes. You don’t want to be known as the company that lays off its workforce every time there is a crisis or because it overhires. New talent will refuse to join you if your company’s brand is associated with massive layoffs.

Moreover, the great resignation trend has proved that workers are willing to quit as competition for talent stiffens in the market. Thus, you may get new talent, but they could quit on you anytime when the great resignation trend has not ended.

Higher talent competition means you will have to offer a higher salary or more benefits, thus increasing personnel costs when evaluating across years as opposed to the short-term benefit of the reduction. The great resignation trend may also occur if many workers feel disenfranchised. This often occurs when massive layoffs lead to losing key talent the company had not intended to lose.

For instance, a company may plan only to cut its labor force by 10% but lose 50% of its key performers. This ends up with a higher long-term cost due to reduced productivity and inefficiency.

Massive layoffs are costly in the short run because companies are often forced to incentivize their current employees. Companies will have to offer higher salaries or more benefits to get their remaining workers to stay or avoid the problem of quiet quitting.

Additionally, massive layoffs may destroy the trust between you and your workers. Retained employees will know how the company treated those it let go. It will affect their trust and loyalty to the company, negatively impacting their productivity.

Conventional Recruitment Costs Are Usually High

Conventional recruitment costs are higher due to the following:

• Advertising costs.
• Screening candidates.
• Interviewing and training new hires.
• Fees to recruiters, which more companies must rely on with low unemployment rate.

It’s time-consuming to find and recruit new talent. Hiring and recruitment costs often add up, but there are often hidden costs, such as hiring the wrong type of talent for the position.

‘Bad’ hires will cost you more due to reduced productivity, poor morale, and the cost of beginning the hiring process again. Hiring and recruitment costs will tend to be higher based on the skill requirements for a particular position.

Loss of Leadership and Necessary Skills

Mass layoffs often lead to deep cuts that result in the loss of leaders that companies need when the economy recovers. Thus, companies can’t experience growth if they lose vital employees who can help them take advantage of new opportunities.

Cutting too deep affects the short-term and medium-term performance of the company. Let finance and accounting make the decisions on numbers impacting the number of people who should get laid off. But ensure that your HR department has highlighted key team members that you shouldn’t let go. Remember that team members are the organs that are crucial to your long-term success and survival.

Decision-Making Is More Publicly Scrutinized

Corporate decision-making is now under a microscope, and the public often doesn’t take the choice to lay off workers well. This often leads to customer dissatisfaction, especially when the laid-off worker or workers have a good reputation.

 

Companies must justify laying off workers because they risk alienating their consumer base and weakening the value of the brand in the long term. Social media and the internet enable anyone to criticize a corporate decision publicly. Companies that gain a reputation for massive layoffs whenever things slow may find it more challenging to hold onto crucial talent or hire new employees.

It can be more beneficial to engage in labor hoarding than mass layoffs. Regardless of size, companies need experienced and loyal employees to grow despite recessions and bad market conditions.

Impacts on Company Culture

Reductions in force are course of doing business, but they do impact those employees that remain as well. How released employees are treated (e.g. severance, communication of termination, ability to be rehired at a later date, references, etc.) will be known by those that stay. If the need for the reduction and the level of the reduction is not presented to the wider company in a way that is received and understood, people will by nature question the stability of the environment for months and even years.

Now, I hear too often leaders say that we should treat our employees like a family. In my experience, and learning from leaders like former-Disney exec Judson Green, a better view is to consider your company as a professional sports team. It’s impossible to “fire” your mother or cousin. They’re still family even if you do not talk with them. However, the purpose of a company is to perform (that includes earning net income, but that is not the only type of performance). Reductions of team size and the changing of players are required over time, but a wise coach knows that the winning team will always understand the changes and have a single vision for the future. It is the leaders’ responsibility to take the time to bring everyone into that vision.

Advantages That Labor Hoarding Offers Companies

Operating in a declining industry or in tough economic times requires innovative thinking. Labor hoarding is a valuable tool to help you survive a recession and thrive immediately afterward.

Here are some of the benefits of labor hoarding:

Retain High-performing Employees

Labor hoarding allows you to retain key employees during a recession. This doesn’t mean you can’t let go of some of your workers. Instead, you should ensure that the employees you retain are crucial to the company’s success.

Essential employees will be critical to the success of your company’s reduced workforce and how it grows in the future. A Reduction-in-Force (RIF) leaves a bigger workload for your remaining workers. Thus, you should retain workers whose individual contributions will help keep your company productive. I like to look for those high-achieving servant leaders regardless of if they are individual contributors or team leads.

Experienced employees and subject-matter experts (SMEs) provide your company with the proper foundation for growth. Labor hoarding will help your company stay competitive when the market recovers. Keeping key employees enables you to avoid quiet quitting from those remaining and the development of a resignation trend.

Remember that top performers understand the value of their labor and will not hesitate to work elsewhere if they believe the company is too under-resourced. Thus, retaining top performers helps ensure that your company is at optimal productivity during and after the recession.

Eliminates Hiring and Recruitment Costs

Hiring and recruitment costs are quite high and often get underestimated by finance and accounting when there are massive layoffs. The true value of a retained employee is higher than the cost of acquiring a new one who will perform at the same level of productivity.

The saying that acquiring a new client is 5 to 25 more expensive than retaining a current one is true for employees too, according to the research. Recruitment costs grow yearly due to time spent finding the right hire, the cost of a bad hire, and training expenses.

Labor hoarding can help you avoid any legal challenges associated with mass layoffs too. Labor laws have evolved, and you may face lawsuits after a RIF. It’s also cheaper to hold on to extra labor than to fire them and have to re-hire new talent. Treating your employees as players on a professional sports team is a good strategy. Treating them as indispensable cogs that can be easily replaced will not only impact the remaining employees but will drastically increasing your hiring costs in the long run.

Additionally, the great resignation trend creates a natural system where employees always leave. Thus, you don’t have to worry about having extra labor for too long. More People team leaders are recommending cutting less than finance may want and then allowing attrition over the next few months to reduce to a more stable number, to avoid “over-optimizing”.

Avoid Talent Shortage

Talent shortages often emerge when market growth resumes due to high competition. Employers are finding it challenging to hire fast enough to meet the productivity demands of the market once they are out of a recession.

Higher competition for talent makes the hiring process more expensive. Thus, only large companies can afford the higher salaries or enhanced benefits demanded by new hires. Some of the compensation packages I’m hearing for Ruby engineers, proven business unit operators, senior marketing/growth leaders, etc. over the past few years is wild and only increasing for the top 5% and top 1% of people in those and other roles. Labor hoarding helps you avoid the punishing nature of the current hiring processes.

Alison Omens noted that human capital had become a great source of value creation for companies. Replacing talent costs you a lot in terms of institutional knowledge and productivity.

Labor hoarding helps you avoid talent shortages, especially if you want to retain highly skilled employees. Labor supply for specific roles has remained constant for some time as the number of job openings often increases with each new employee. For instance, the Bureau of Labor Statistics found approximately two job openings for anyone seeking work, which we see in the unemployment rate too. And no, that is not driven by just gig workers.

In recent years, many companies experienced labor shortages due to the great resignation trend. Keeping your talent is now more critical due to the increased pressure companies face from employees demanding a better work-life balance.

If your company is already fully remote, do not assume you can avoid these hiring issues. Data shows that even fully remote with great culture are struggling to hire those with proven experience leading teams. If anything, those top leaders that thrive in fully remote, large teams are in the highest demand in every industry.

The Federal Reserve stated that labor demand continues to be strong despite recent economic downturns. Thus, it’s difficult to meet your labor demands or expand your workforce if you lay off many workers during a recession.

Labor hoarding provides immediate functionality and the ability to rebound fast after the economy recovers. You may also find that you will lose employees naturally due to retirement or resignations. Holding on to talent helps you avoid losing them to your competitors.

Better Company Culture

Labor hoarding improves your organizational culture by strengthening the employer-employee relationship. Employees develop a stronger sense of trust if they know you value them enough to retain their labor during slow periods.

I like to say, I’m not hiring people to help me grow by 10% this year or to simply fight for me, I’m hiring people and treating them in a way that they will gladly go to war with me. Having been part of multiple companies that have unlocked hypergrowth, my views on company culture and long-term performance have changed. Every day, I remind my team “Mission first! People Always!”.

Retained employees will be more loyal to your company. This loyalty will enhance the sense of community and unity among the staff. Such workers will keep in mind what you did for them and are less likely to quit during or after the crisis.

Employee Satisfaction

Labor hoarding helps improve worker satisfaction levels due to increased morale. Retained employees feel comfortable and safe at your organization. This is key to keeping them more engaged, thereby enhancing their performance.

Labor hoarding helps you avoid quiet quitting and reduced productivity. Mass layoffs often leave your remaining workforce feeling uncertain about their future. This negatively affects their morale and forces them to seek prospective job openings. Thus, you may get numerous resignations after mass layoffs.

Minimal Disruption

Mass layoffs can cause significant disruptions to how a company operates. It’s not necessarily bad if a company wants to implement numerous changes. But companies on a steady growth trend may experience adverse effects if they let go of a number of their employees.

Hiring new talent after mass layoffs will not give you the same utility derived from previous workers. For instance, onboarding and productivity challenges can create disruptive changes that negatively affect the company’s net income.

Labor hoarding can help you keep core employees who are the foundation of the organization’s success. Retaining the right employees helps you keep their skills and knowledge. This is especially important when disruptive industry changes are due to employees’ knowledge.

Ensuring minimal disruption to your organization is key to fighting off recession and being able to not merely survive but thrive. Retained workers are more experienced and can help you weather various economic storms, especially those that senior leadership may not see coming.

How To Devise and Implement an Effective Labor Hoarding Strategy

Labor hoarding is a successful human resource management and corporate strategy tool when done right. Keeping everyone on the payroll is costly to your short and long-term success.

Here’s how to devise and implement an effective labor hoarding strategy:

Focus on Talent Retention

Work with coaching and mentorship professionals to understand your organization’s true talent needs. Retaining the right talent is impossible without knowing what skills are crucial to the success of your organization.

It’s not that organizations intentionally lie, but one of the things I’ve learned is that meaningful information on what is actually needed and going on in a larger organizations is often unintentionally “filtered”, often with good intentions. Data shows that there is a bias towards positive information and lower resource requirements in the information that flows upwards (towards the CEO) and a lack of what day-to-day looks like from above. Without clear understanding of reality, it can be difficult to make wise decisions. Brining in someone from the outside can often help.

Mentorship programs are a great way to find the right talent to retain during labor hoarding. With a strong program in place, you can let go of certain employees instead of mistakenly categorizing everyone as replaceable.

Consider the following when looking to retain the right talent:

• Cultural inclusivity
• Diversity of thought
• Rewards and appreciation
• Compensation
• Workplace flexibility
• Work-life integration

The top leadership at many organizations, especially large ones, doesn’t know the skilled workers that ought to be retained. Mentorship coaches can help you categorize the talent hierarchy at your firm.

Laying off part of your workforce may be demoralizing to the remaining workers. Mentorship and coaching programs help retained employees stay on successfully at the firm.

Be Budget Conscious

You can reduce other operational costs to help you retain employees. For instance, reduce employee work hours or furlough them in the short term. In addition, if your company still has offices, you can implement a work-from-anywhere strategy for high-performance teams.

Some layoffs are inevitable and can be beneficial to your company. But letting accounting and budgetary factors take the sole lead in deciding which workers to lay off can be catastrophic for your company’s growth. These teams are critical in defining the path forward as PART of the decision-making team.

Create a cost analysis model for laying off employees and explore alternative solutions that can help reduce expenses. Often, mid-level managers can be the most beneficial in finding ways to 1) reduce additional costs substantially and 2) find alternatives to growth. Include them when you are able and they will aid in cost cutting that top management cannot see.

Create or Update Your Recession Plan

Combatting mass layoffs is easier if you have a recession plan in place. One foundation of a great recession plan is a great investment in human capital. This overlaps with having a succession plan in place for all parts of your business.

Create clear communication channels with all employees and let them know the company’s short and long-term plans in case of a recession. Do this during good times, when at all possible. This will help make any downsizing process effective while ensuring the company’s brand image doesn’t suffer.

Utilize retained employees more effectively through re-training during tough economic times. Find ways to maximize the skills and knowledge of your existing workforce to meet more labor demands with fewer workers.

Labor hoarding with a clear recession plan can help your company grow during and after a recession without adding any new workers. In addition, a recession plan makes it easier to make permanent or restructuring changes that will help the company in the long run. You will benefit even more if the economic slowdown turns into a severe recession, as you’ll already have a roadmap to iterate on.

Provide a Soft Landing

Providing employees that are let go with a soft landing by helping them find jobs or offering new employment paths within the company. This enhances the success of labor hoarding by improving the morale of the workers you retain.

The majority of companies make big mistakes at this step. They often get so concerned with cutting costs that they offer minimal severance packages to save a little extra.

Significant layoffs negatively impact the remaining staff regardless of whether they are necessary for the life of the company. Providing former employees with a soft landing helps you retain existing talent long after the recession has passed. It also improves worker satisfaction and helps simplify the downsizing process without legal challenges.

How you treat your former employees will influence how your company gets perceived by current and prospective talent. Thus, attracting new talent is more manageable after a recession with an excellent reputation.

So, Should You Practice Labor Hoarding?

Yes, you should practice labor hoarding regardless of your company’s size. How to merge this strategy with the short-term financial needs of the business is the only question. It is more of a question of if it affects a single key employee or a percent across the company.

Mass layoffs can help a company cut down costs in the short term. But they can also inhibit your growth and long-term survival if you lose top talent.

Recessions are often followed by significant economic growth. Labor hoarding helps you reap the reward of keeping your talent by helping your organization bounce back. On the other hand, mass layoffs can cause productivity lags and inefficiency for years into the future. Moreover, you will struggle to find the right talent for the open positions.

Labor hoarding helps you avoid incurring hiring and recruitment costs. The talent competition in recent years has created a talent shortage in most industries. Thus, one way to know if you can hoard your labor is to ask yourself if you would find the same quality of workers once the recession ends easily.

A looming recession should not make you enact rash decisions. Instead, create a recession plan and make your human capital the foundation of that plan. Seek mentorship and coaching expertise to understand what talent to hoard and who you can fire if necessary.

FAQs

Here are some frequently asked questions about labor hoarding.

Why is hiring so hard and costly?

Increased competition for talent has made the hiring process quite complex and costly. It’s also challenging to find the right fit for a position. Successful training and onboarding are time-consuming, and there is always the risk of making a ‘bad’ hire.

It appears that upwards of ⅓ of knowledge-based companies (e.g. software, real estate brokerages, fintech, etc.) will permanently move from office-based to fully-remote. While this saves an incredible amount of costs and is favored by many employees, there are few business operators and leaders that have experience leading fully-remote teams. Companies are learning that many of the methods used by those in leadership do not translate to fully-remote teams, and these companies are looking to retrain or bring in operators skilled at high-achieving, collaborative remote teams.

Can small businesses accommodate labor hoarding?

Yes, small businesses can accommodate labor hoarding by cutting down on the hours their employees work or finding other ways to reduce costs. Look at all of the options before making cuts that may not be wise.

Are there any disadvantages of labor hoarding?

One drawback of labor hoarding is higher expenses during economic downturns. Retaining the wrong type of employees can also be demoralizing to other employees. This will adversely affect productivity and limit the company’s growth after the recession.

Why are larger companies considering labor hoarding?

Larger companies are considering labor hoarding due to the difficulty and cost of hiring new talent. Larger companies can afford labor hoarding as they look beyond the recession and the cost savings of mass layoffs.