Yes, Layoffs Cost More than Regular Turnover and Save Less than the Flexible Alternatives

Monday, during an interview on Public Radio International's The Takeaway, I discussed flexible alternatives to minimize layoffs because, the research shows, managers may think that firing someone who makes $50,000 a year saves $50,000 a year, but really it's costing them between $75,000 and $125,000. 

Using flexibility, such as reduced schedules/salaries, adding unpaid vacation days, furloughs/sabbaticals, etc., is not only the least costly approach to reduce labor expenses, but it preserves the profit-generating productivity and engagement critical for recovery—personally, organizationally, nationally and globally

This conclusion in based on the detailed comparative cost/benefit analysis between voluntary turnover, layoffs and flexible downsizing that I conducted in preparation for The Takeaway interview and can be found in the table below (sorry for the size, still figuring out how to embed tables).  My primary sources for the analysis were Dr. Wayne Cascio's book, Responsible Restructuring, and a variety of articles and blog posts in which experts agree the cost of voluntary turnover ranges from 150% of salary to 250% of salary, with a detailed listing of costs by William Bliss, of Bliss & Associates.     

As I said in the interview, some layoffs may be necessary especially in industries that are restructuring; however, as the comparative cost benefit analysis below illustrates there are actually even more costs associated with layoffs than voluntary turnover.  These are considered by business to be one-time, non-recurring costs, however, they are costs nonetheless. Therefore, it's not surprising that research shows layoffs are a short-term fix with little or no long term profit payoff:  

  • 2001 Layoffs and Job Security Survey conducted by the Society for Human Resource Management found that only 32% of the responding companies said layoffs had improved profits.  And even the massive layoffs in big companies like the one’s we are hearing so much about today, had not produced increased earnings years later.
  • Another survey of the S&P 500 from 1982-2000 showed that profitability did not necessarily follow downsizing even two years later

Some may argue that voluntary turnover ratios don't apply to layoffs because they include rehiring costs.  Well, that would be true if the companies that are laying people off weren't also hiring.  And according to the research, in many cases companies continue to hire.  The same SHRM study of layoffs cited above found that of the companies that had laid off employees, 45% rehired the laid off workers full time, 17% rehired laid off workers as consultants and 56% hired new employees. 

Finally, what is a manager who must reduce labor costs supposed to do?  The analysis shows that flexible alternatives reduce labor expenses while avoiding many of the layoff related costs, including the costs of hiring.  The comparative cost/benefit analysis clearly shows—if you are not being forced to cut jobs because of a restructuring of your business or industry and you want to avoid or at least minimize job cuts, flexible alternatives to layoffs are the best bottom-line alternative.

Where  do you begin?  Check out "Getting Started with Flexible Downsizing—Manager and Employee 'How to'" on my Work+Life Fit Blog.  |

Need inspiration?  Go to the list of Downsizing Flexibility Champions I am tracking or the Families and Work Institute's list of what companies are doing to help their employees during the recession. 

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2 Comments

  • Jessie Towns

    I think that flexible working hours or unpaid vacations are far better than loosing ones job. I am very insecure that our company hasn't looked at this as a solution which means that I stand the chance of loosing my job altogether. This has led to some healthy life choices which should help us if I did loose my job. We have canceled the cable TV and the cell phone contracts and bought simple Tracfones instead. I was amazed to find out how much I could save by going to prepaid and will stay with them even if things improve. We don't eat out anymore which is better for our health anyway and overall I think we are better off but I still feel insecure and would still vote to take an unpaid vacation instead of loosing my job.