By Bill Brewer
As uncertainty abounds in the economy, companies are laying off portions of their work force in the hopes of reducing labor costs. While it’s true that labor is often a business’s greatest expense, rushing to lay off employees or a reduction in force is a short-sighted response to a downturned economy. When the economy suffers, some decision-makers find it difficult to look toward recovery with a sense of optimism. But be assured that a time of recovery will come, and your business needs to be prepared for that. Through some simple research, businesses will discover that layoffs do not result in improved profits — nor do they position a business for future growth.
I came across a note on a study of a large specialty retailer that found “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.”
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 has been eliminated.
When a position, such as something disruptive to the industry or business, truly disappears, the permanent closing of a job type makes sense in that those employees can be trained for new roles. When that isn’t an option and a position is permanently closed, a layoff makes sense. We have all seen the growth in advertising revenue in print media, yet many publications are having to cut positions on a large scale.
In terms of 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 businesses to start hiring about a year or so after the layoffs. This undoes the savings that a business only first started realizing six months earlier.
In going through a layoff, most understand the direct costs of severance pay, which include the payment of accrued vacation or paid time off, supplemental unemployment benefits, outplacement services, pension and benefits payouts, administrative processing costs, and the costs of rehiring former employees.
However, a layoff also has indirect costs. A business must deal with the recruiting and employment costs of new hires, as well as risk-averse survivors with decreased productivity in an environment of low morale possibly leading to increased voluntary terminations. Employees who were laid off could potentially seek legal action, and unions in some countries could go on strike. A decline in share price often follows a layoff announcement, as does an increase in the unemployment tax rate. When the economy shifts back, there’s a lack of staff to contend with and training costs for new hires. And then there are the opportunity costs of lost sales, the 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 to help a business steer away from terminating its most loyal and productive employees:
Examples of Success
As an adjunct professor teaching HR management, I have given my classes examples 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 approach, 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), whereas Southwest Airlines emerged strong in comparison.
Southwest Airlines reduced costs by leveraging its productive and flexible work force. Their high productivity translated into cost savings. Some of these cost savings were passed on to consumers, who were also looking to reduce costs during the economic crisis. Southwest Airlines was also able to leverage job security for its employees into creative thinking, leaving employees feeling confident that there would be no repercussions for mistakes. The company maintained its positive image 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 it had a large reserve with no debt. During this time, the airline delayed the purchase of new aircraft and stopped plans to renovate its 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 is 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 percent pay cut and salaried employees took a two-and-a-half-year pay freeze, which allowed the line-level, hourly employees to receive benefits and an annual wage increase.
When Apple headed into the Great Recession, Steve Jobs 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 2008-09 recession, the leadership team ensured 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 furloughs. This helped Honeywell save on compensation costs, reduce rehiring needs, and give some level of comfort to employees who knew the furlough would only be for a short period of time.
About the Author:
Bill Brewer is a Director with the Los Angeles office of Stanton Chase and executive search and executive assessment firm. He is the North America practice leader for Human Resources. Bill has also led a variety of engagements among the firm’s 16 specialist practice groups. He is a C-suite executive with 25-plus years of corporate human resources experience. Bill has held the Chief Human Resources Officer (CHRO) role with three companies ranging from 3,000 to 20,000 employees. Bill’s earlier background includes The Walt Disney Company and Fluor Corporation. His corporate and executive search career has been focused on building teams with top talent. Bill’s industry experience includes engineering and construction, media and entertainment, healthcare, technology / software, business process outsourcing (BPO), and manufacturing.
Bill is also an adjunct Professor at the University of Redlands. He volunteers as a leader of the Career Counseling Ministry at Saddleback Church and is a board member of the Orange County Compensation and Benefits Association (OCCABA). He also serves as a mentor for the MBA program at the Paul Merage School of Business at the University of California, Irvine (UCI) and as a mentor with the School of Business at the University of Redlands.
 Harvard Business School working paper, “The Effect of Labor on Profitability: The Role of Quality” by Zeynep Ton
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