Tuesday, July 6, 2010

Instead of a Layoff

Those who have read my book, articles, or blog posts know that I do not believe in laying off employees to cut costs.  The long-term damage to the organization resulting from a layoff often outweighs the short term savings in payroll costs (see exhibit 1)

I will admit, though, the last few years has shown that the complete collapse of a company's products or services can dictate drastic cuts as a means for survival.  The questions that need to be asked before implementing something as destructive as layoffs include:  (1) how long do you expect the downturn to last; and (2) has everything possible been done to prevent a layoff.  In other words, a layoff should never be among the first cost-cutting steps.

Even during the last few years, the worst economic period since the Great Depression, there were several well-known companies that did not layoff employees.  Scottrade, AFLAC, Devon Energy, and The Container Store are among the organizations that have never implemented a layoff.  Imagine the loyalty and trust created within these companies by resisting headcount reductions during such a severe downturn in business.

Everyone has a stake in the company.  When a company has a history of layoffs, though, people feel powerless, disconnected, and expendable.  The organization's leaders send a very clear message that employees are not important when jobs are cut in response to a crisis.

Some of the steps every company should take before considering a layoff include:

  1. Shortened Work Week:  Although akin to a pay cut, a shortened workweek forces everyone to participate without the loss of jobs.  Also, receiving time off helps compensate for the reduction in pay;
  2. Unpaid Holidays:  Similar to the shortened workweek, implementing unpaid holidays allow more flexibility in choosing the extent and timing of the cut back;
  3. Hiring Freeze/Attrition:  Although an obvious step, I have worked with companies that laid off in one part of the company while hiring in another.  Any positions that are critical to fill should be done by transferring and training existing employees;
  4. Elimination of Bonuses:  Nobody should receive a bonus during a period that people were laid off.  I was in a meeting several years ago with a large division of a Fortune 100 company where managers decided to implement a layoff in order to protect their bonus accruals - a totally unacceptable action;
  5. Elimination of Dividends:  In spite of what many people believe, the resulting damage to the organization caused by a layoff does not protect shareholders.  By protecting its workforce, companies are actually actually protecting future returns for shareholders.  Studies have shown that companies that resist deep cuts during downturns recover much more quickly than competitors (in terms of earnings and share price);
  6. Focused Kaizen Activity:  Improvement activities should be focused entirely on reducing costs (while improving or maintaining existing quality levels).  Kaizen activities focused on cost reductions will prevent employees from being idle during downturns and assure that the savings achieved will be sustained once business returns;
  7. Pay Cuts:  As a last resort, pay cuts should be implemented to save jobs from being eliminated.  I believe in implementing across-the-board percentage cuts with executives being asked to volunteer a larger percentage.
When people see that company leaders are doing everything possible to navigate a crisis without layoffs, they will become much more motivated and engaged in the organization.  The espirit de corps that results will make the company stronger and ready to take advantage of the recovery much more quickly than others that opted to cut workers as an initial step.


Anonymous said...

Well put. I have discussed the costs of layoffs and better options in several blog posts http://management.curiouscatblog.net/tag/layoffs/

Gregg Stocker said...

You have some very good posts and make some excellent points on your site.

Thanks for the comment.

Anonymous said...

Gregg – I have cited your post (with proper attribution) in my own blog at http://helpgov.wordpress.com/2010/08/06/time-to-sack-public-sector-employees/. Thanks for the great thoughts.

Unknown said...

I agree totally with all your points. I especially like the focus on Kaizen to reduce costs which in turn reduces the pressure to cut headcount. Even in these scary times I am finding that employees are still willing to get involved (essential part of Kaizen) as long as the organisation shows it cares about them.