The art of wooing blue-collar workers

By Keith Button

The Great Resignation – the nationwide shuffling of workers seeking better jobs or better work/life balance – has hit the manufacturing sector particularly hard, forcing private equity firms and their portfolio companies to rethink their human capital strategies.

The increase in manufacturing workers quitting their jobs is more than double the increase for the private sector overall, according to US Labor Department statistics. For the three-month period ending in January 2022 – the most recent statistics available – the manufacturing quit rate was 61 percent higher than the same period two years before, pre-pandemic, compared with a 27 percent increase for the private sector.

Currently, the biggest challenge for manufacturing companies is a lack of workers to run their production lines at full capacity, says Bhairvee Shavdia, principal of HCAP Partners, a lower-mid-market PE firm in San Diego. Manufacturers are losing business because they can’t operate with full staffs.

Step one: raises

In this employment environment, PE firms can increase profits for their manufacturing portfolio companies simply by helping them attract and retain workers, which will increase output, Shavdia says. That starts with increasing worker pay.

“We have seen right across the board with the Great Resignation, people really homing in on turnover in a way that they have not historically. We’ve seen wage increases across the board, particularly for low-income-earning staff,” she says.

For MiddleGround Capital, a lower-mid-market PE firm in Lexington, Kentucky, last year all of its portfolio companies raised their entry-level minimum manufacturing wages to $15 per hour, up from about $13.75, which led to four months of larger pools of job candidates and better-quality candidates, says Mike Bridge, director of operations and ESG leader for the firm.

“The ultimate outcome is we want to improve job quality and then we want to see better financial results because we think that they are correlated” Bhairvee Shavdia, HCAP Partners

But while the new minimum is competitive with fast-food jobs, “$15 per hour is starting to be old news as well,” Bridge says, with Amazon and Walmart in some cases paying $20 per hour. Now, the PE firm is starting a “25 by 25” initiative to raise the minimum pay across its portfolio companies to $25 per hour by 2025.

“It does cost money to do that. But we’re still able to increase EBITDA because of the retention improvements and the labor pool that’s coming in,” Bridge says.

HCAP takes a similar tack, with a thesis that investing in human capital produces better business outcomes and better financial outcomes for portfolio companies, employees and HCAP’s fund investors, Shavdia says. “The ultimate outcome is we want to improve job quality and then we want to see better financial results because we think that they are correlated.”

Providing perks

For manufacturing workers, improving job quality might involve providing opportunities to move up with company-paid education, training or mentorship programs and promotions from the manufacturing floor to jobs in sales or management, Shavdia says. Employee stock option plans can help build an ownership mentality in the workforce.

Then there are the small kindnesses that can make a difference: One of HCAP’s portfolio companies recently gave out $50 gas cards to its workers to help out with the recent gas price hikes.

Palladium Capital, a New York PE firm, tracks how well the workers at its portfolio companies are paid by measuring the gap between the highest and lowest paid employees at each company and then trying to close the gap, says Genie Cesar-Fabian, a partner and head of sustainability and ESG for the firm. “We’re trying to ensure that employees are safe and well-paid, because happy employees are productive,” she says. “And if you take care of an employee and their family, they’re going to remain loyal.”

Another way to build loyalty is through company equity. One industrials company in Palladium’s portfolio recent implemented long and short-term incentive plans that provide the opportunity for equity in the company and for a year’s worth of salary upon a change of control in the company, if certain terms are met, Cesar-Fabian says. “That can be life changing money for families that are not in the top income bracket.”

One of the best ways to help the work-life balance for an hourly worker in a core manufacturing job is to improve basic operations, Bridge says.

“I used to work at Toyota, and the thing that people dread the worst is that overtime call,” where the message would go out with two hours left on their shift that they would need to work extra hours, he says. “But if the line runs well, you don’t need that. So, they get to go home and they’re not working the weekends.”

HR in demand

Improving the work environment also helps, allocating money to revamp break areas, cafeterias, bathrooms and lighting, or to improve food offerings, Bridge says. “We want things to be bright and clean so that it’s inviting. The days of the dark, dingy factory are over; That is not what the workforce of today wants to come in and go and work in. So you got to make your factories attractive places to work,” he says.

Senior-level human resources professionals are in great demand by PE firms to help their portfolio companies cope with the Great Resignation, says Todd Dauphinais, managing partner of Dallas-based Clavis Capital Partners, a lower-mid-market PE firm. “You can’t find a really good C-level HR person these days. They’ve all gotten snapped up,” he says.

“This is a tough equation to solve, with a younger workforce that is much more focused on quality of life and work/life balance than in older workforces. So HR is a huge challenge right now” Todd Dauphinais,
Clavis Capital Partners

Since the start of the pandemic, Clavis has been investing a lot more in HR, spending more time on it and recruiting HR talent across its portfolio “to help us figure out what are the right work-life balance issues; what are the right pay structure issues; what are the right work from home versus onsite issues,” Dauphinais says. “This is a tough equation to solve, with a younger workforce that is much more focused on quality of life and work/life balance than in older workforces. So HR is a huge challenge right now.”

Work-from-home arrangements are adding to the challenge, even for manufacturers, with engineering, drafting, designing and other back-office jobs that aren’t tied to the manufacturing floor. “In order to retain and attract the talent that we’re looking for, we’re just going to have to live with some portion of our workforce being remote,” Dauphinais says.

Working remotely raises a fairness issue for the workers who do have to work onsite, and it makes it more challenging to instill a strong corporate culture in the workforce, Dauphinais says. “One of our screening requirements is that the company that we’re investing in has some kind of unique or strong culture. How do you maintain that when half of your workforce is working from home? And how do you keep them connected to a corporate culture?”

Part of the answer may lie with investments in more online learning management and training, and developing a better understanding of how to train, develop and advance employees who don’t interact in person with the company’s leaders, he says.