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Monday, March 18, 2013

Are Corporate Salary and Hiring Freezes Really Freezes?

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I was interviewing a candidate who had not had a raise in over three years.  She was looking because there was a salary freeze.  Her human resources department had instituted the freeze saying it was dictated by the holding company; along with the salary freeze was a hiring freeze.  My candidate’s comment to me was. “the freeze is only when it suits them.  Every time someone threatens to leave, they get a raise [bad form, see my article fromAdweek on counter offers], and every week I see people here at work who were not here the week before.”

Her comment reflected what every employee knows about these freezes.  They are really counter-productive.  What was once a smart business tool has, over time, become abused.

My own belief is that most freezes are artificial for exactly what my candidate said.  A wage freeze should mean that even if you get a new job, that they cannot counter or give more money.  That’s a wage freeze.  And a hiring freeze should mean that even if someone essential on the business should leave, they are not immediately replaced.

I often wonder to myself if those freezes aren’t purely artificial.  They make it easy for a company not to give a normal salary increase when due.  They stifle growth. And they are an excuse for companies to keep financial ratios in line without having to do deep analysis to see if other costs can be cut or curtailed.  Now we all know that if a fee based client (aren’t they all?) wants to add to staff that it will happen regardless of the holding company, and, whether or not their fee is increased to accommodate the new hire.

Freezes are demoralizing.  They force otherwise loyal employees to look for new work.  This is especially true when workers know that their account or their agency is actually doing well.  It hurts doubly when they find out that top management is getting bonuses during these freezes.  Word of those things always leaks out.
I do know about one really good wage freeze.

Years ago at the old Kenyon & Eckhardt agency (merged into Bozell and then remerged into various IPG agencies), there was what I want to call a true freeze.  It lasted about four months, as I recall.  At the end of the four months, everyone who was due for a salary review and increase, was given their review and raise – retroactively to when it was due.  It was a true wage freeze that allowed the agency to get through a difficult period.  It was actually good for morale.  And it made everyone feel good about the agency and its integrity. 

Unfortunately, it doesn’t happen like that anymore. 

5 comments:

  1. Another interesting ploy is a salary freeze with an executive promotion. The trade-off is a bonus based upon profits. One never knows what that magic figure is. The decider delivers it at his discretion. Nor does one know how that bonus pot is allocated. The kicker is, should an agency be merged, the new entity has the discretion to determine one's compensation based upon a salary that is several years in the past.

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    1. Thanks, Claude. That is an aspect I had not thought of. And it is very true.

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  2. I always feel badly for those who deserve a raise and don’t get it. But let’s face it … wage and staffing freezes are facts of life – especially for publicly held agencies which must report quarterly earnings to shareholders, Wall Street, FTSE, et al. And here’s why:

    - Roughly 65% of every dollar in agency gross income goes to direct payroll costs, with another 15% going to overhead & administration. Leaving about 20% in total net income. Then we get to gross profit, EBITDA, and eventually net profit (not a very big number). These ratios in our business as compared to other professional service industries such as accounting, legal, management consulting, architecture, etc. are pretty similar.

    - While specific profit margins may vary within any particular agency on any given account, depending on its mix of client services rendered (most notably digital these days), the overall margin should come in around 25-30%. More is good; less is bad!

    - “Grow or die” is an old agency adage but it’s still true today. And if agency income is flat, wage freezes and other cost containments typically apply. If income is down, staff cuts almost inevitably follow. That’s just the way it is. Not personal; just business.

    All of which is to say to those who’ve earned a raise but have yet to receive it … Better to have a job and wage freeze than be fired! Keep doing what you’re currently doing to the best of your abilities and make a move on your own terms. The economy seems to be ticking up right now, so be positive and stay the course. Better opportunities will invariably follow in the days ahead if you have real talent and remain patient. Hope this helps a bit, Bill Crandall

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    1. Bill: Most agencies would give their eye teeth to have profits before taxes of 18-20%. I believe that most of the holding companies demand about 18%, which leaves pitiful left for the agency to distribute to executives and employees.

      As for having a job and a wage freeze, you are right, but I cannot tell you how many people I am seeing because they have not had increases in two to three or more years. This is both unfair and, in my opinion, not smart on the part of an employer.

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  3. Hi Paul ... Just to be clear for your readers:

    The estimated 20% I mentioned referred to agency total net income, NOT profit (which is typically much smaller.) The difference is significant and should be noted.

    Meanwhile, I would remind all who might be itching to leave an otherwise good job for lack of a raise that the "Great Recession", which started in 2008, isn't over yet. Worst economy since the "Great Depression" most economists say, despite the Dow recently hitting 14,000 (which has nothing to do with hiring or wages.)

    Net: Any port in a storm! Best, BC

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