4 Things You Need to Consider Before Going Into a Hiring Freeze

Lean times come to businesses. Whether because of an innovation flop, competition, politics, or assorted forms of force majeure, earnings may not be what CEOs and investors are hoping. As the financial belts tighten to weather the crises, the weather in the HR world can get cold enough to cause hiring freezes. Worse, some companies actually fire people in attempt to warm up their pockets. For some companies, this is an absolute necessity, and CEOs must tearfully (one would hope!) say goodbye to people they simply cannot pay. This is more common with small companies and businesses that run on very tight margins. For many others, however, layoffs and hiring freezes are questionable moves that, despite looking good in the short term, may ultimately cause more harm than good. Here are four questions you should ask before going into a hiring freeze:

1) Is there still work to be done?

As tempting as it can be to save money by getting rid of some employees, or preventing the company from hiring more, it’s important to take a look at the employees’ workloads. After all, lean times or not, you’re trying to make money and create goods/services that people are going to buy, and you need a team to make that happen. Keep in mind that every working person that you let go and every team that you leave understaffed through a hiring freeze means overworking the rest of the employees. While this can function for a short period of time, especially in a company with a good culture and high morale (assume your company’s morale is lower than you think; it usually is!), sooner or later exhaustion and burnout are going to set in, and then the best-case scenario will be reduced-quality work. Worse cases, however, will include balls being dropped and the talent moving on to greener pastures, and these typically come much sooner than leadership expects.

As long as there is work to be done, keep your teams fully staffed even if you need to take a temporary loss, because the costs in lost productivity and lost tacit knowledge and talent if burnout sets in will cost you far more. Remember also that your company needs to be ahead of the work that it needs to do, because the more behind you get, the more likely you are to lose business.

But, what if you are already losing business due to the hardships facing your company, and there isn’t quite enough work to be done? In that case, keeping fully staffed depends upon the next question.

2) Do you have the runway?

If you’re losing business, or if there isn’t enough work to justify being 100% staffed, it doesn’t mean you jump straight to layoffs and/or hiring freezes. Recruiting is expensive, and so is turnover, and those costs are usually more than the short term savings from laying people off. After all, once you’re ready to hire again, it can take time to get the right talent in the door, which in turn means that you could go weeks with work to be done and no one to do it. If that happens, you will have understaffed teams accruing burnout and developing an interest in jumping ship when the talent market is more likely to be tight and your competitors will be drooling over the prospect of snagging your best people. That means you could end up having even more roles to fill, which means even more balls dropping, and even more burnout accruing — not a death spiral you want to risk.

If you find yourself a bit overstaffed, check your burn rate to see how much of your team you can hold on to and for how long. If you have a long enough financial runway, keep everyone and keep hiring to make sure that whatever good talent is on the market is reserved for your company. They tend to be worth their wait in gold (puns intended), and are worth framing as an investment rather than a loss. Otherwise, you will find yourself missing out on good talent and growth opportunities. An added bonus is having the personnel to engage in long-term innovation projects, especially the kind that are high-risk/high-reward and can take your company to the next level (this should be over and above your existing innovation efforts, which you should never roll back on!). If you have the wherewithal, this is the perfect time for staffing your skunkworks.

But, if you’re not sure that you have the financial means to keep your talent, and you are thinking about letting people go or keeping newcomers out, there’s another cost you need to consider.

3) How will this affect morale?

When companies start laying people off and/or engage in hiring freezes, morale almost always plummets. Many leaders expect that the ones who remain feel lucky to have a job and security in such trying times, and surely they do, but they also tend to feel a bit of survivor’s guilt, and also become very risk-averse as they try to maintain the security of their positions. Often, the best way out of a hole is not to hunker down and wait for things to clear up, but to take smart risks and make things happen. Your best talent may know this, and if they get a clear message that they are not allowed to take risks within the company, they may take the risk of finding a new company to work with (and there are always companies who are willing to pay for talent).

In any case, when morale falls your team is going to do everything by the book, and while that sounds like a great proposition, one of the best ways to destroy any system is to follow it to the letter. People may go extra miles, but only out of fear, and that can mean your best people (i.e., the ones you didn’t lay off) wearing themselves out and then leaving when times get better, if not sooner.

You might also be thinking that you can let people go and then bring them back when times get better, but those whom you canned are not going to forget how you treated them, and neither will anyone else. By laying people off, except out of absolute necessity and/or clear strategic shifts (about which you are being totally transparent, as Airbnb was), you are earning a black mark, and it behooves you to look at the vast graveyard of companies that were destroyed or permanently crippled by mass layoffs. The “absolute necessity” of which I speak means belts tightening so much that even the leadership may not get paid. Anything short of that, however, is going to look bad. When the CEO gets a bonus, but the people five levels down are each doing the work of two people, the company is in huge trouble, and may survive a recession only to die in the aftermath.

To wit, the next question you need to ask is:

4) When the lean times end, how far behind will you be, and will you be ready to ramp up?

The line from The Crow sums it up best: “It can’t rain all the time.” You need to think not only about how your company is going to survive the lean times, but how it will grow and thrive when conditions become favorable again. If you cast off your oars to keep the ship afloat in the storm, how do you propose to row when the seas calm? If you abuse your crew to make it to port, how many will stay on the ship, and how many will prevent you from taking on new recruits?

It is mission critical for you to think about the long-term wellbeing of your company, which necessarily means keeping the welfare of your employees top of mind. If you earn a black mark by overworking people, engaging in unnecessary layoffs, or keeping the talent from entering, you will find that your business is ready to ramp up and that there aren’t enough people to make that happen. You will be scrambling to recruit, which can mean hiring lesser talent, paying more money to get good people (assuming they will work for a company with a black mark), or watching balls drop and business go elsewhere.

When you prepare for the future, look short and long.

None of this is to say that layoffs and hiring freezes are never appropriate. When you can’t make payroll, you can’t tighten salaries, and you don’t see a way to recoup on any loans, losses, or investments, you don’t have much choice about your personnel strategy. Under those circumstances, be transparent, be compassionate, and give your departing employees the best parachute possible. On the other hand, a large number of companies really aren’t that strapped, and they can afford to take into account other considerations, like the work load, talent pool, morale, and being able to ramp up after the crisis abates. When they consider crisis measures, they should remember this: How we act in our best times usually isn’t the key to our success; it’s how we handle adversity that seals our fates.

Self-actualization engineer who makes workplaces great places to work. PI at Quality of Life Lab (www.qllab.org). Consultant. Professor. Startup Advisor.