The Unintended Consequences of Hiring Freezes

Just three days after taking office as 45^th president of the United States, Donald Trump ordered a hiring freeze on all federal government employees. “As part of this freeze,” Trump’s executive order states, “no vacant positions existing at noon on January 22, 2017, may be filled and no new positions may be created, except in limited circumstances.”

While many were likely unsurprised by the action — Trump, a longtime businessman, campaigned on the idea of cutting government expenses — critics quickly said it would hurt the government’s performance.

On the surface, a hiring freeze may seem like an immediate strategy to halt expenses during a trying time. But not all hiring freezes are created equal. For instance, just as a halt in hiring may help stem short-term expenses, the strategy comes with long-term unintended consequences, from additional overtime costs to decreased company morale.

A few years ago, the Ann & Robert H. Lurie Children’s Hospital of Chicago froze hiring for some positions to save money, according to Joni Duncan, the hospital’s senior vice president and chief human resources officer. As a result, managers pushed back, saying they weren’t staffed properly to care for patients, which led the hospital to offer flex or premium pay for existing workers to cover additional shifts. Additionally, some employees felt overworked, which hurt morale.

“In general, I think that hiring freezes may work as a short-term fix,” Duncan said, “but you end up either hiring those same people or sometimes hire more because needs are created during the time that there are freezes.” In other words, although hiring freezes tend to save money in one area, sometimes the strategy ends up costing money in other areas in the long run.

Another such unintended consequence of freezes is the negative message the move may send to employees. If, for instance, employees recently celebrated a company success, followed shortly by a hiring freeze, they could be easily confused as to the true standing of the organization, said Deniz Caglar, principal with PricewaterhouseCoopers’ Strategy&, the strategy consulting business of PwC. “Some additional communication or explanation will be helpful and important to not rattle the organization,” Caglar said.

To be sure, there are many instances where a hiring freeze is useful. It’s just important for leaders to be mindful of when and how they use them. For example, if the goal is to reduce the firm’s headcount, it’s best to freeze hiring in departments with high turnover. Placing a freeze on these kinds of departments reduces headcount faster than those with less attrition, said Caglar

When making the decision whether or not to place a hiring freeze, it’s best to understand what differentiates the organization, Caglar said. Cut back on the areas that matter less to organizational success so there are more resources for those that matter more.

RELATED: Is CEO Pay Too High? If So, How Do We Fix It?

Even in the event of broad, companywide hiring freezes, executives will need to make exceptions. “By putting in a hiring freeze, you might be holding back parts of the organization that are vital to its longer-term success,” Caglar said. A committee of senior leaders can consider exceptions, but the criteria for these should remain consistent in terms of criticality. Leaders should consider if the position is either needed to keep the business running or to differentiate the company. Both are important to organizational health.

For executives looking to avoid a hiring freeze, Duncan of Ann & Robert H. Lurie Children’s Hospital of Chicago advised to first forecast goals and finances, then consider slowing hiring to mitigate costs while keeping up with needs. “Sometimes hiring freezes become a reaction as opposed to being proactive about really thinking about what your goals are going to be,” Duncan said. If business leaders don’t forecast for these goals and instead quickly place a freeze on hiring, they may end up having to pay more in the long run.

If more drastic cost savings measures are needed, and a hiring freeze is the only option, leaders should still consider the hidden costs. “Hiring freezes have long-term consequences for morale, workplace culture and employer brand,” said Josh Wright, chief economist at iCIMS, a human resources software company in Matawan, New Jersey, “so they can affect your ability to recruit for years down the road.”

Lauren Dixon is an associate editor at Talent Economy.

If you want more from Talent Economy, sign up here for newsletters, exclusives and more!