Fast Company

Market Rewards Layoffs, Discourages Flexible Downsizing as an Alternative

“Stocks Surge on Layoff Announcements” was the headline on the front page of the Washingtonpost.com this week as major U.S. companies announced 55,000 job cuts.  At the same time, The Conference Board projects that approximately two million more jobs may be lost in 2009.  I can’t help but wonder:

  1. What role does the market play in encouraging organizations to move right to job cuts without first considering flexible downsizing?
  2. Is the need to please the analysts what’s best for organizations, individuals and the economy in the short-term and long-term?
  3. And do these analysts even know what they are talking about? 


First, the direct link between layoffs and the market is irrefutable when you consider how shares of the following companies responded after job cuts were announced on Monday:

“Sprint Nextel gained 1.8 percent after announcing it would lay off 8,000 workers.  Home Depot announced plans to eliminate 7,000 positions, or 2 percent of its workforce, and close its EXPO Design Centers.  Its stock was up 5.5 percent…”

The article in the New York Times announcing 62,000 job cuts worldwide starts out, “Employers have tried to nip and tuck their labor costs by reducing overtime, shortening the workweek and freezing wages, but now, they are reaching for the saw.”  But did they really try alternative approaches?  Experts like me as well as numerous reporters have been struggling to find concrete examples of wide scale flexibility to achieve at least part of corporate labor cost saving goals.  The reality seems to be that most companies are going right to layoffs. 

It’s not surprising that business leaders experiencing downturns in their business cut jobs, especially when their peers are doing it.  They get very publicly rewarded.  But as Wharton’s Peter Cappelli explained in my post last week, this “herd mentality” doesn’t make a lot of sense when you look at the real costs of downsizing. 

This brings us to the next question, is cutting jobs to meet the short-term expectations of analysts really what’s best for organizations, individuals and the economy in the short-term or the long-term? 

For many reasons, the answer is no.  Here’s a quick and dirty cost/benefit comparison.  What is the impact of job cuts, versus the impact of reducing schedules, sharing jobs, transferring to consulting status, or offering sabbaticals?  The comparison is based on the 5% salary/schedule reduction versus 5% layoff scenario Dr. Cappelli presented in his article HR Executive online article:

5% Layoff:

Benefits:  Immediate reduction in salary and benefit costs
Costs:  Severance packages; potential increased legal liability; determining who will go; reduced morale; more work for those left behind; uncertainty encourages others to leave; reduced productivity; lost investment in talent recruited over the past few years. 

5% Salary/schedule reduction:

Benefits: Immediate 5% reduction in salary expenses; no severance packages; less liability; a sense of shared sacrifice to boost morale; remaining employees not overburbened with productivity-killing workload; retaining investment in talent and training made over the past few years; and factoring in the risk of not having enough talent in place to hit the ground running when the economy recovers. 
Costs: Still paying benefit costs

This analysis doesn’t mention the potential boost of consumer confidence when people know that while they may make 5% less, they still have a job.  And economists continue to point out that consumer confidence will be the key to the economic recovery.

Finally, do the market analysts who have so much influence over the actions of corporate leaders really know what they are talking about? 

According to Dr. Cappelli, “The financial community isn’t especially aware of alternatives (to layoffs) and the benefits associated with them, and their focus is very much on the immediate financial performance, not how the companies will respond when business improves.” 

I happened to have been a credit analyst, and I also graduated from an MBA program that produces many of the top financial analysts.  My personal experience confirms that unless there has been a radical shift in the world of financial analysis over the last ten years, there’s little to no emphasis in the process on quantifying the cost savings and benefits from flexible downsizing outlined above.  It’s a lot easier to calculate the impact of an immediate layoff: “50 employees cut, at an average cost of $100,000 per person, for a bottom line savings of $500,000.”  If I’m wrong, I urge analysts to let me know. 

Do you think the response in stock price would have been the same if the headline read, “Ajax company announced that 15% of its workforce reduced their schedule and salary by 25%; thereby, reducing salary expenses and the need for severance packages, limiting potential liability exposure, increasing morale from a shared sacrifice, not overburdening fellow employees and maintaining productivity, retaining their past investment in talent, and setting themselves up to react to a recovery.”  The optimist in me would like to think the answer is “yes,” but the realist says sadly, “no.”  And therein lies the problem. 

The evidence seems to confirm that the market does play a direct role in influencing corporate leaders to choose layoffs over more flexible strategies for achieving their labor cost savings goals.  That's not to say that some job cuts aren't going to be necessary, but it's not the only downsizing strategy.

As the announcements of major layoffs increase, we need to challenge the assumptions used by analysts that reward decision-makers for layoffs over a more creative, flexible approach to managing talent through this difficult period.   Now, who’s going to say something?  

How can we get the market to reward a flexible approach to labor cost savings that helps companies respond to the downturn without cutting jobs? 

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3 Comments

  • Mary Lorenz

    I continue to be baffled by the massive layoffs that continue to happen despite experts telling businesses not to. I'd be curious to hear those who weathered the last few recessions weigh in. I wonder, if past recessions caused them to cut people in order to see an immediate impact on the bottom line, did they later regret the decision/end up paying more for those downsizing costs overall when the economy recovered?

  • Mary Lorenz

    I continue to be baffled by the massive layoffs that continue to happen despite experts telling businesses not to. I'd be curious to hear those who weathered the last few recessions weigh in. I wonder, if past recessions caused them to cut people in order to see an immediate impact on the bottom line, did they later regret the decision/end up paying more for those downsizing costs overall when the economy recovered?

  • Mary Lorenz

    I continue to be baffled by the massive layoffs that continue to happen despite experts telling businesses not to. I'd be curious to hear those who weathered the last few recessions weigh in. I wonder, if past recessions caused them to cut people in order to see an immediate impact on the bottom line, did they later regret the decision/end up paying more for those downsizing costs overall when the economy recovered?