The Monthly Memo with CEO Chad Oakley: May 2023

In our new recurring podcast segment, Charles Aris CEO Chad Oakley examines trends in the talent market and what role the current unemployment rate plays in the overall hiring environment:

Read the full transcript:

Hello, everyone, and welcome to the monthly memo from Charles Aris Executive Search where we share the latest trends in talent and recruiting. I’m your host, Chad Oakley, CEO of Charles Aris, and today is May 15, 2023.

So, today’s topic on the monthly memo is making sense of all these mixed messages in the marketplace. Here’s what I mean by mixed messages. On one end of the spectrum, we have company after company after company announcing layoffs, a trend that has been going on now for months. And on the other end of the spectrum, the U.S. unemployment rate remains at its lowest level in over 50 years. So, what’s going on? Right? How can you have both of these events occurring at the same time? It doesn’t seem possible, and yet the numbers don’t lie.

For most of you, I expect that right now, you’re a little nervous. Whether you’re a hiring authority or a candidate, all this talk about a pending recession probably has you on edge right now. And let’s face it, probably with good reason. I mean, wow, what a difference a year makes. Go back 12 months from today to May of 2022. At that time, the United States was experiencing perhaps the greatest candidate-driven market in modern history. companies of all shapes and sizes were begging, and I mean begging, their most mediocre employees to stay. And the crazy part is those mediocre employees, along with also the very talented employees, unfortunately for most companies, were still leaving, and they were leaving for upwards of 50% pay increases, which we saw routinely, which is totally unprecedented and completely unsustainable, and definitely unhealthy for the economy. To borrow a phrase from former Fed Reserve Chair Alan Greenspan, the talent market was experiencing ‘irrational exuberance.’ The inmates were definitely running the asylum.

As a recruiting firm, Charles Aris was truly overwhelmed with search requests like we had never been before. For the first time in our company’s 54-year history, we had to implement a 40-day delay on all new searches, which I suppose can be viewed as a great problem to have, but it was definitely a problem, and it came with a lot of stress. Thankfully, and I really do mean thankfully, we started to see a pullback starting in December of last year. Jerome Powell and the Federal Reserve had declared inflation their number one enemy, and they made it very clear that they were going to raise interest rates to tame inflation, even if that meant driving the economy into a recession.

Today, at Charles Aris, we believe that we are right in the middle of this transition, a transition from what I might call a 100% candidate-driven market where we were last year to what we believe is going to be a 75% company-driven market. And what I mean by that is that companies will have the majority of the power versus last year when candidates had all of the power. But there are some of these strange mixed messages coming from the market right now, and we get asked about these mixed messages a lot. So, let’s break it down a little bit.

On the one hand, as we talked about before, you have report after report after report of companies conducting layoffs; you can’t go a week without multiple major companies announcing sizable downsizings. In 2023 alone, let’s think about some of the companies that have made announcements. SAP has announced 3,000 job cuts; IBM almost 4,000 job cuts; Disney has announced 7,000; Microsoft 10,000; Google 12,000; Amazon 27,000 job cuts. numbers like these are always disconcerting. On the other hand, the monthly labor report continues to be incredibly robust.

Just a few weeks ago, the Labor Department reported that we added another 253,000 more people to payrolls in April, which is a very respectable number in any economy. And the unemployment rate that same month fell to 3.4%, which is the lowest level we’ve seen in over 50 years. So, what the heck is going on? How can we reconcile both of these events occurring at the same time? In order to understand this, it’s really important to remember just how many people these companies hired during the pandemic.

You may have forgotten this crazy statistic, but you remember how many people Amazon alone hired in 2020, the year of the pandemic? 500,000 new employees. 500,000 in one year. That is nothing short of remarkable. Just like a lot of companies hired a lot of people that year. And it’s also important to remember that the very best run companies in the world in a normal year terminate the bottom 5% of their performers, and they replace them with a whole new batch of talent. And then the next year they terminate the next bottom 5% and then replace them with new talent, etc., etc. But how many people did companies terminate during the pandemic? Zero. As we said before, companies were begging their most mediocre employees to stay, and we saw that until at least the fourth quarter of last year. The best way to describe what companies were doing is talent hoarding. We just have some catching up to do in the layoff department, which is what we’re witnessing right now.

We’re two years overdue on removing that bottom 5%. So, you hear 27,000 layoffs and you think, ‘whoa,’ that is a big number. But when you think about it across multiple years, it’s a small percentage of the number of jobs that have been added. Take those companies that we mentioned earlier: SAP’s 3,000 job cuts. Well, 3,000 sounds like a big number. That’s just 2.5% of its global workforce. IBM’s 4,000 job cuts amount to a measly 1.5% of its workforce. Disney’s 7,000 equates to 3.6% of its workforce, etc., etc., etc. All these layoffs that have been announced this year are a small percentage of their total workforce.

Looking at it from a slightly different angle, maybe a more pessimistic angle, we probably still have a long way to go in the layoff department before we’re done, as companies need to catch up for what they normally would have been doing all along. The good news for those people being laid off is that as of today, at least, they are being rehired by other companies pretty quickly, which is what’s keeping that unemployment rate so low. They are being hired by those companies that perhaps couldn’t hire them during the height of the pandemic because they couldn’t match the compensation from those bigger, more profitable entities. But when you’ve been laid off, you get more realistic about your compensation expectations.

So, while we continue to see low unemployment rates, we’re definitely seeing a slowdown in the level of increase in compensation packages, which is exactly what Jerome Powell and the Fed were hoping would happen to help tame our inflationary woes. That’s where we are today. But what about tomorrow? What does the future hold?

As I mentioned before, we’re right in the middle of a shift from a candidate-driven market to a company-driven market. The layoffs unfortunately will more than likely continue. And we strongly believe that the unemployment rate has hit bottom and will start to reverse course.

Companies are shifting from talent hoarding to talent top grading. In other words, mediocre employees are no longer safe like they were last year, and companies have started to top grade mediocre employees with better, stronger talent, at least for those roles that they plan to replace talent with. And that, of course, is slowing down as well. So, what do we all need to do in a company-driven market? Now the answer is pretty simple: over deliver. The bar goes up in a down economy for pretty much everything, talent included, and those people who are able to meet that higher bar, as always, will be just fine.

I hope this monthly memo has been helpful for all of our subscribers at Charles Aris Executive Search. This is CEO Chad Oakley saying thanks for listening, and we’ll talk again next month. Happy recruiting everyone!