Over the past few years, workers have enjoyed a booming job market with an overall increase to compensation and benefits. The competitive nature of hiring has caused employers to drastically increase their cost per hire. According to recruiter.com, the cost per hire in 2022 increased by 7%, which does not include the inflation rate of 8.1%. Organizations from tech startups, to Fortune 500, and FAANG companies have spent millions of dollars on enhancing total compensation packages. This caused a precipitous salary increase for various roles in the tech and startup space. Seemingly all at once, employers were forced to re-band and modify benefits to match the current market. The unfortunate aspect is many businesses did not adequately plan to incorporate market factors in the equation.
It’s exceedingly rare for a company to require a reduction in force as a knee-jerk reaction to internal or external conditions. In many instances, organizations are able to project losses, anticipate revenue gaps, and identify ways to mitigate shortfalls. That is to say, the need to identify cost savings can be observed months, if not quarters out from potential layoffs. There are many indications to help employees at prospective companies understand patterns in reductions in force practices.
First, many companies experience massive growth beyond which is sustainable in the long-term without external support. While at first it might seem as though the organization is narrowing the scope of positions, it quickly becomes clear that growth is a product of chasing the next funding round. Companies often need to demonstrate an operating loss in order to acquire new rounds of funding. What is the easiest way to burn ramp? Hiring. In addition to the salary paid for new hires, organizations must also account for overhead, benefits, and tax liabilities. In some cases, benefits alone can account for up to 40% of an employee’s base salary. But what happens when funding does not come to fruition?
The next step is a hiring freeze. Having grown multiple times their previous employee base and having no way to sustain future growth opportunities, businesses enact a freeze on new hires. At first it starts out with additional approvals to backfill roles with no impact to the fixed hiring plan. When this step proves inadequate for cost-savings, elements of the fixed hiring plan are placed on hold. These are two major indicators of future reductions in the workforce. If an employer eliminates or restructures discretionary pay, such as bonuses, sales commissions, or similar, that is further indication of potential workforce reductions in the near future.
The sad truth about reduction in force is that employers can identify the need for change months in advance but rarely leverage that time to help employees. Is that to say force reduction is always (or frequently) avoidable? Absolutely not. But some of the same leaders sharing sullen posts on LinkedIn can often help employees by negotiating a “soft landing” for those impacted by workforce reductions. Chief People Officers are typically well attuned to the companies that are hiring and for the types of roles, yet potential partnerships are rarely realized. This is to the detriment of at-risk employees. The reason why we rarely see “soft landing” agreements is because the losing organization risks involuntary terminations that are not on their own terms. One of the main concerns is a mass-exodus of employees from the company.
Companies and executives would be much better served if they had open, honest, and timely conversations with their employees before exercising a reduction in force. There are clear warning signs prior to employee layoffs and leaders should exercise honest engagement with their workforce. A reduction in force does not need to be exacerbated as we’ve all seen transpire over on social media over the past few quarters. Instead, employers and People leaders should work with their employees prior to involuntary terminations. Partner with other companies who are hiring quickly. Provide lead time and share candidly, to the extent possible, potential outcomes and changes due to economic circumstances. Employees can handle the truth and they can certainly manage change better when given time and resources to process the event. Teammates take a chance on a company when they join a new organization. Leaders owe it to those who take the leap of faith to be honest with them when the circumstances have changed. Instead of lengthy LinkedIn posts about layoffs that your workforce did not see coming, try working with employees in advance to help them transition. Your employees, and those reading your post, will find your sentiments much more sincere.
