PE firms sweeten the pot to boost talent retention

For the fourth quarter of 2023 – the most recent statistics available – the average monthly quit rate was 1.7 percent for US manufacturing workers, down from 2.6 percent for the same period two years earlier, according to the US Bureau of Labor Statistics.

But with a national unemployment rate of just 3.8 percent and job increases across industries in January, the labor market in the manufacturing and industrial sectors is likely to remain tight for the foreseeable future, says Tom Woelfel, senior director of impact at HCAP Partners, a lower-mid-­market PE firm in San Diego.

“It feels like the economy is pretty strong and that overall this is going to be the norm, at least for the next year or so,” Woelfel says. “Workers still hold a lot of power in terms of the economy, and that’s different than maybe what it had been in the past.”

Appealing to younger workers

Private equity-owned manufacturing and industrial companies are finding that younger workers are a tough audience for their labor attraction and retention efforts. While older workers are more concerned about stability in the organization and trustworthiness of senior management, younger workers demand answers about what good the company is doing in the world and what the company is doing for them, says Ted Bililies, partner and managing director at management consultant AlixPartners in New York.

“It’s like the JFK quote, or the reverse of the JFK quote,” Bililies says. “I’m not going to ask what I can do for my company; I want to know what my company is going to do for me.”

And through social media, younger workers are telling each other. They want an employer that is attentive to their health care, mental health and career needs, giving feedback on how they’re doing and showing pathways for advancement, he says.

In the war to attract and retain talent, companies need to explicitly show the younger generation how they help their employees progress through tangible career milestones, whether it’s from rising pay from $20 to $40 per hour, or titles, or training via apprenticeship or mentoring, Bililies says.

Companies are also trying to engage younger workers and make their work more interesting by deploying technology with aspects drawn from gaming and social media, says Allen Merriman, a partner and senior operations manager with AlixPartners in Boston. For example, workers might learn how to troubleshoot a piece of equipment on a computer tablet with an interactive video, or the equipment operators might upload their own videos to create a crowdsourced library for instruction or troubleshooting.

“Workers still hold a lot of power in terms of the economy, and that’s different than maybe what it had been in the past”

Tom Woelfel 
HCAP Partners

Another approach companies can take with benefits is to meet the “pain points” of prospective and existing employees, Woelfel says. For example, some of HCAP’s portfolio companies are considering how they can help employees with refinancing and contributing to paying down their student loan debt or setting up “sunny day funds” that employees can contribute to and then draw on in an emergency instead of tapping their 401(k) retirement savings. The firm has also set up a philanthropic fund that offers $1,500 grants for employees going through financial hardship, such as in the case of a natural disaster or a medical situation, and other PE firms are setting similar funds, he says.

When asked about their priorities, older workers say they value better health care benefits; younger workers who don’t have kids yet value pet insurance, Woelfel says. Some employees value work schedule flexibility even more than higher pay, such as those who need to occasionally pick their kids up early from school. Employee culture committees can organize initiatives to create bonding or cohesion among team members, while employee resource groups can help workers with similar backgrounds – such as a women’s committee or military veterans – to share workplace experiences and support each other.

Building culture

While there is still an overall shortage of talent for manufacturing and industrial companies, company workforces have become more stable and the period of rapid raises and job hopping seems to be over, with regional exceptions, Merriman says. As long as workers see that their pay and benefits are competitive, they now seem to be placing more importance on the quality of the job and the work environment, he says.

Woelfel agrees: For many employees, the work environment is just as meaningful as the paycheck, so employers need to focus on building and maintaining company culture.

“How do you create that kind of feeling within your business where everyone is valued, where there’s dignity in the work that folks are doing day in, day out, and where you are really celebrating the contributions of your team members and hearing their voice when they’re seeing something in a business that needs attention and taking that seriously and using that to run a better business?” he asks.

It’s important for every hourly worker to know that they have influence on success of the business, and for manufacturers to be fully transparent in sharing performance data, says Michael Psaros, co-founder and managing partner of KPS Capital partners, a $21 billion manufacturing-focused PE firm based in New York.

“There is an immense amount of pride, from the shop floor to the boardroom, involved in manufacturing. Once you become part of it, it’s pretty special”

Michael Psaros
KPS Capital partners

KPS typically develops 10-20 key performance indicators that are under the direct control of each worker or the worker and their team for each shift, Psaros says. The worker can then see in real time, for example, whether a particular machine is having downtime issues or how their shift is performing relative to other shifts, and why. The PE firm also shares information on the overall profitability of each business with its workers, often for each individual manufacturing plant.

Workers also need to know that the owner is investing in their manufacturing or industrial facility, not only in equipment but in “world-class industrial hygiene” for air and water, lighting, quality changing rooms and even the parking lots, Psaros says.

“Our investment in that facility means job security. That means a chance to win; it means the chance to succeed,” he adds.

Safety performance – and workers knowing that the owner cares about their safety – also has a huge impact on the employees, both from a psychological and cultural standpoint, Psaros says.

A visitor can pick up on good company culture from employees who seem proud to work there, such as if they’re wearing company-branded swag, says Todd Dauphinais, founding principal and managing partner of Clavis Capital Partners, a Dallas PE firm focused on middle-market manufacturing and industrial companies. Bad culture is even more obvious, Dauphinais says, as judged by a dirty workplace or, as he noticed once during a visit to a prospective acquisition, the tendency of all the employees to shy away from the CEO and avoid eye contact.

Investing in human capital management

PE firms can improve their investment returns – and not just the well-being of their employees – by installing formal human capital management at their portfolio companies, Woelfel says. Through employee surveys and other HR data, HCAP’s portfolio companies can track how improved job quality scores translate to revenue growth, he says. Also, better job quality means lower employee turnover rates and lower costs for recruiting and hiring.

Today’s companies need an executive-level chief people officer who is not just a recruiter and HR policies person, but who spends time thinking about career development, evaluation, retention and culture, Dauphinais says. “That person has become a very key part of all of our leadership teams,” he says.

A contributing cause to the waves of post-covid quitting was the mass of retirements of salaried managers and the loss of their people skills, which companies weren’t prepared for as inexperienced, less-skilled managers took their place, Merriman says. The most common reason for quitting is that the worker doesn’t like their boss, and many new bosses who lacked people skills were unlikable. Now, more companies require their managers to listen and respond to workers, and to value them and their input, he says. “Private equity investors are asking their CEOs and operators: How engaged are your employees?”

Another key to retaining workers is “training, training and more training” in the first six months of an employee’s tenure, Psaros says, and his companies often offer retention bonuses to workers after six months. “The labor that our portfolio companies employ has to be able to function in a digital, automated, highly dynamic, highly flexible work environment,” he says.

Ultimately, when it comes to human capital management strategies, manufacturers have an advantage over companies in other sectors, Psaros says. That’s because of the esprit de corps that manufacturing workers experience and the satisfaction that comes from physically producing something from raw materials – a tangible, tactile finished product.

“There is an immense amount of pride, from the shop floor to the boardroom, involved in manufacturing,” he says. “Once you become part of it, it’s pretty special.”

Money matters

Compensation is still an important piece of attracting and retaining workers.

As a case in point, Clavis Capital Partners owns a pipe and fittings distributor for the oil and gas industry in the West Texas area, where the labor market is so tight that workers will leave their jobs for another one that pays 50 cents an hour more, and turnover is so high that the company has to hire twice the number of employees that it expects to retain, says Todd Dauphinais, Clavis’ founding principal and managing partner.

Where management’s focus previously may have been on cutting overtime expenses, now the focus is on keeping the good employee by paying more overtime and avoiding the expense of hiring 200 people to fill 100 jobs, Dauphinais says. “Once you get them you’ve got to pay them,” he says.

More PE-owned manufacturing and industrial companies are now offering equity-sharing plans for lower-level salaried employees, Bililies says. They’re also extending their bonus pools to include hourly workers, usually based on hitting performance targets at the manufacturing floor level, Merriman says.