Many people assume that a hiring freeze is the obvious course of action during an economic downturn—or when a company is experiencing/anticipating financial strain. And these financial concerns initially add up: the estimated cost to hire an employee is three-to-four times the job’s salary, according to Society for Human Resource Management (SHRM). Thus, in the short term, a hiring freeze may provide the financial respite a company is seeking.
However, when looking at the bigger picture, a hiring freeze can also lead to:
- loss of productivity and revenue
- the slowdown of goals and projects
- retention issues with current staff
- a negative impact on deadlines and employee morale
- a potential loss of market share
Before deciding on a hard stop on hiring, consider the actual costs, including the impact on your recruiting pipeline. (Remember, it’s easier to nurture pipelines than to warm them up after they’ve gone cold.) The ripple effect of freezing your hiring may just outweigh the short-term benefits. Understanding the impact of a freeze can help you optimize your recruitment strategy and help leadership discover how fresh talent actually impacts your business.
What is a hiring freeze?
When a company decides to stop all recruitment and hiring activities, a hiring freeze occurs. This is usually a response to adverse economic conditions or an internal crisis. This may be temporary or long-term in extreme cases. The perception is that a freeze offers short-term savings that can help a company stay financially sound and avoid furloughing or laying off existing employees.
While hiring freezes are often seen as a viable solution for money-saving, the real impact often indicates otherwise.
According to Silicon Valley HR thought-leader Dr John Sullivan; “Hiring freezes are common during downturns. However, they are often an economic mistake that hurts revenue generation and product development. Their ‘unintended consequences’ are seldom identified, tracked, or quantified in dollars by talent leadership.”
Vacancy has a cost
The cost of vacancy is a figure that expresses the financial impact of unfilled positions. According to Executive Coach and Master Team Builder, Brian Formato of Grove Management: “The two words that I have found most damaging to a company’s long-term viability are ‘Hiring Freeze.’ Implementing a hiring freeze is a knee-jerk reaction.” Brian continues, “In most organizations, labor costs are one of the highest cost centers. Implementing a hiring freeze is a quick and easy way to reduce costs, but recruiters are left finding other tasks within an organization to carry out and efforts to create talent pipelines are put on hold. Organizations should never, under any circumstances, implement hiring freezes.”
It’s typically harder to hire the right talent for tech jobs which take an astonishing 62-day industry average to fill (according to Hired). Calculating the cost of vacancy helps recruiters measure budgets and mitigate damage and loss of productivity.
Calculating the cost of vacancy
We’ll preface by reminding you this calculation is a general guideline for determining vacancy cost—every company is different. In its simplest form, you can calculate cost of vacancy like this:
Lost revenue & gross profit
Working backwards, we can calculate revenue lost. The average employee revenue is annual revenue divided by the number of employees. Then multiply this average revenue by the average number of working days in one year (260). This yields an employee’s daily revenue.
To estimate the revenue specific to a position, use a predetermined multiplier to help quantify the impact of the role. To determine the level of impact for the role, multiply that number by the employee’s daily revenue. This reveals the daily revenue specific to the position, which you’ll then multiply by the estimated time-to-fill (62 days).
Voila, you’ve just calculated the revenue lost to a vacant tech role!
The impact of vacant positions
It’s difficult to tie a specific vacancy cost to a standard formula as each company is unique. But identifying the cost of unfilled positions regularly generating revenue is a bit easier due to the unmet quota of the empty role. This falls under hard costs and includes overtime pay, contractor fees, and turnover expenses. For non-revenue generating tech roles, it’s tougher to quantify the loss in morale, productivity, and project goals as these are the soft costs of vacancies.
A hiring freeze may give your organization short-term financial respite, but before you consider imposing a freeze, we recommend looking at alternative measures like leveraging interim (contract) workers, work redistribution, and reassessing schedules and timetables. Look for opportunities to shave costs instead of personnel.
Meet the Author
Representing the top technology companies in the U.S., UpRecruit is a full-stack hiring marketplace that connects tech talent with innovative opportunities. Their easy-to-use interface allows for direct and discrete communication between candidates and employers, and because they automate 80% of what recruiters do, connections are more efficient than with any traditional recruiting agency.