Published on March 19, 2020 | William E. Brewer, CCP, MBA
With uncertainty in the economy, many companies turn to laying off a portion of its workforce to reduce labor costs. After all, labor is often the largest expense to a business. However, it is very short sighted for a business to jump to layoffs (or reduction in force) as an answer for a downturned economy. When the economy is down, some business decision makers have a difficult time looking ahead towards recovery. It is as if these decision makers believe the down economy will never end. There will be a recovery and your business will need to be prepared for it. Through some simple research, businesses will learn that layoffs do not result in improved profits. Also, layoffs do not position a business for future growth.
To clarify terms, a layoff or reduction in force (RIF) is a separation from employment with no likelihood or expectation that the employee will be recalled because the position itself is eliminated.
On the topic of profitability and layoffs, I came across a note on a study that “examined a large specialty retailer found that conformance quality (how well an employee executes prescribed tasks) has a higher impact on profitability than service quality (defined as the extent to which the customer has a positive experience) … stores that cut staff were unwittingly cutting profits, and yet the practice was standard. Why? ‘An emphasis on minimizing payroll expenses and an emphasis on meeting short-term (often monthly) performance targets,’ the study found. Another consequence of understaffing at this retailer was lowered morale, a finding echoed in other studies.”
When a position truly goes away, such as something disruptive to the industry or business, the permanent closing of a job type would make sense in which those holding the job should be trained to a new role. When that cannot be done and the position is being permanently closed, the layoff would make sense. An example we have all seen is the growth in advertising revenue yet print publications continue to decline causing many jobs with print publications to truly go away.
In looking at severance payments alone, if each person laid off receives an average of about six months’ worth of severance pay and outplacement services, it will take six months to start saving money. Recessions can last 12 to 18 months, and when demand picks up, it is common for a business to have to start hiring people about a year or so after its layoff. Thus, undoing the savings it began realizing six months earlier.
In going through a layoff, most understand the direct costs of:
· severance pay,
· payment of accrued vacation or paid time off,
· supplemental unemployment benefits,
· outplacement services,
· pension and benefits payouts,
· administrative processing costs, and
· costs of rehiring former employees.
However, a layoff has indirect costs. These indirect costs could include:
· recruiting and employment costs of new hires,
· low morale,
· risk-averse survivors,
· decline in share price following a layoff announcement,
· decreased productivity among survivors,
· increase in unemployment tax rate,
· lack of staff when economy shifts back,
· training costs,
· increased voluntary terminations from survivors,
· opportunity costs of lost sales,
· potential for legal action from upset employees,
· potential strikes by unions in some countries,
· loss of institutional memory and trust in management,
· and brand equity costs / damage to the company’s brand as an employer of choice.
Here are some ideas that could be part of a business leaders’ arsenal that can help a business steer away from terminating the people who show up each day to get the work done:
· Reduce your workweek. Going from a five-day workweek to a four-day workweek reduces payroll by 20 percent. The company reduces its need to rehire with an upturn in the economy. Employees stay on the job, supporting their families, in lieu of being out of a job.
· Extend time off. Instead of offering two weeks of paid vacation, offer additional weeks, two of which are paid and the other weeks as unpaid but excused time off.
· Incentivize employees to save money. An example, I came across an idea where for every $1,000 identified to be saved, there was a one-time 20% incentive. Your employees will feel empowered and they can be an excellent source in identifying money saving ideas.
· Offer sabbaticals. “These extended periods of time away from the office are different from long vacations in that managers challenge employees to step away from the office, take a pay reduction, get some training or learn a new language, and then come back at full pay with more skills. Sabbaticals are successful with established, high-performing professionals.”
· Hiring freeze / do not replace attrition.
· Halt renewing contracts with existing non-employee workers.
· If you need to increase staff for a short-term time in the middle of an economic downturn, consider bringing in non-employee (contract) workers.
· Retraining employees for new positions.
· Shutting down the business for short periods of time.
· Offer job sharing.
· Offer early retirement.
· Reduce pay.
· Freeze pay.
· Reduce or eliminating paid overtime.
What about the weak performers already in the company? An economic downturn is a poor excuse to remove weak performers. Independent of an economic downturn, a company should have already taking the correct steps to move the employee’s performance to a level that at least meets expectations and if the employee fails to improve within a reasonable timeframe, that employee should have been removed from the business. Ideally, the failing employee will recognize through a performance improvement plan process and resign. When this does not happen, the company should initiate the exit and not draw out the time of having an under-performing employee weakening the organization.
As an adjunct professor teaching HR management, I have highlighted examples to my classes of well branded companies that took another path in lieu of layoffs. Some of these examples include Southwest Airlines, Joie de Vivre Hospitality, and Apple.
Going through the 9/11 downturn, Southwest Airlines had a strong focus on its employees and a no-layoff focus which is among the core values that is part of the company’s human resource strategy. A layoff would weaken this strategy, so a layoff approach is not seen as an option for Southwest Airlines. During the same time period, other airlines took a layoff approach. Those airlines emerged from the downturn with a damaged employee and customer reputation (loss of trust and loyalty) where Southwest Airlines emerged strong in comparison.
Southwest Airlines reduced costs leveraging its workforce that was very productive and flexible. Their high productivity turned into cost savings. Some of this cost savings was passed on to consumers who were also looking to reduce their own costs during the economic crisis. Southwest Airlines was also able to leverage that job security for its employees into creative thinking leaving the employees feeling comfortable that there would be no repercussions for making mistakes. The company maintained its positive image keeping them as an employer of choice when the economy turned upward again. Southwest Airlines also used its cash reserves to sustain the company through the poor economy as they had a large reserve with no debt. During this time, they delayed the purchase of new aircraft and stopped its plans to renovate the company headquarters. During the Great Recession, Southwest Airlines repurposed its recruiters to customer service / customer facing roles tapping into their people skills strengths.
Another example was Joie de Vivre Hospitality, one of the largest operators of boutique hotels in the United States. During a recession period, they focused their efforts on making the line-level, hourly wage employees feel safe and secure in their jobs. Senior executives took a 10% pay cut and salaried employees took a 2 ½ yearlong pay freeze which allowed the line-level, hourly employees to receive benefits and an annual wage increase.
As Apple was heading into the Great Recession, Steve Jobs had said, "We've had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren't going to lay off people, that we'd taken a tremendous amount of effort to get them into Apple in the first place -- the last thing we were going to do is lay them off. And we were going to keep funding. In fact, we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time."
At Honeywell in the 2008-2009 recession, the leadership team agreed to ensure that any restructuring during that period would be permanent, not purely based on the recession and would be tied to what was best for business efficiency and profitability over the long term. In addition, they agreed that restructuring decisions would have no impact on Honeywell’s ability to outperform in recovery. Another tool Honeywell used was the use of furloughs. This helped Honeywell save on compensation costs, reduce rehiring needs, and gave some level of comfort to employees who know the furlough will be for only a short period of time.
***** ***** ***** ***** *****
Source: LinkedIn Pulse