As Recovery Simmers, Limit Lagging Layoffs with Flexible Downsizing (Not Just Furloughs)

Great news... 90% of economists in a recent survey by the National Association of Business Economics predicted the recession will over by the end of 2009!  But hold the champagne.  These same economists saw unemployment rising as high as 10.7% in the second quarter of 2010, plus:

Historically, jobs lag behind a recovery as employers wait until the last possible moment to ensure the rebound is sustained.  As a recent Hewitt Associates study of 518 HR leaders found, even though most believe an upturn will start by year-end, many are "contemplating additional cuts."

In other words, we are not out of the woods in terms of layoffs; therefore, it’s a perfect time to revisit flexible downsizing strategies to minimize job cuts.  As I’ve pointed out for more than a year in numerous posts (20 Reasons to Promote Flexible Alternatives to Layoffs) , reduced schedules/salaries, furloughs, unpaid vacation, job sharing, sabbaticals, telecommuting and compressed workweeks allow companies to manage labor and operating costs without having to let as many people go (for specific examples check out the recently updated Downsizing Flexibility Champions Honor Roll).  If a recovery is starting to simmer, it makes even more sense to try to hang on to your people, rather than scrambling for talent when business begins to pick up.

According to a recent Watson Wyatt survey, U.S. employers increased their use of reduced workweeks and mandatory furloughs; however, as with any innovative approach to tackling a problem, there are challenges to the wisdom of these flexible alternatives.     

Concern #1:  Employees won’t go for it.  
When I started writing about flexible downsizing to reduce job cuts in early 2008, the first response was, "Sounds good, but employees won’t go for it."  So, I decided to find out by including questions in our nationally-representative 2009 Work+Life Fit Reality Check survey of full-time employees conducted by Opinion Research Corp at the end of March (+/- 4% margin of error).  

We found that 9 out 10 full-time employees said they would be willing to accept a change or reduction in their schedule, or take a pay cut to avoid layoffs. Here’s the breakdown of the specific flexible downsizing options from which respondents could choose (there was no statistically significant difference between men and women):
78%     Four-day workweek, but the same amount of hours worked
59%     Add additional unpaid vacation days to the year
59%     Take one to two weeks unpaid leave, known as a furlough
48%     Share your job with another individual
47%     Reduced hours with reduced pay
41%     Work on a project basis as a contractor
41%     A pay cut, but the same amount of hours worked
31%     Take a month or more unpaid sabbatical
5%       None of these

Are people going to jump for joy when their schedule changes or if they make less money?  No, that’s unrealistic.  But, I find there’s a pragmatic understanding that these are extraordinary times.  And most people, perhaps begrudgingly, will make trade-offs to keep their jobs. One conclusion from the data is that not everyone is interested in the same option.  Therefore, organizations might want to include a broad range of cost saving flexibility in any downsizing strategy and let managers and employees choose the options that work best for the individual and the business.

Concern #2:  You don’t save money and you will lose your top talent, therefore, the answer is to cut poor performers.    
To understand these arguments against salary reductions and furloughs, read "Taking the Easy Way Out—Cutting Hours to Reduce Costs is Not the Answer" on the fistfuloftalent.com blog, and "Employee Furloughs Can Be a Bad Alternative to Layoffs" on the www.ere.net website.  Their primary points are that 1) salary reductions and furloughs are an excuse to avoid the tougher yet necessary step of layoffs, and 2) your top talent won’t tolerate flexible downsizing and will leave for greener pastures, so it’s better to lay people off and not ask for a shared sacrifice.  

Review the many thoughtful responses to these posts in the comments section on each site.  You will see a majority agree with me that these arguments against salary reductions and furloughs miss the point for the following reasons:

  1. NO ONE IS SAYING THAT YOU AREN’T SUPPOSED TO LAYOFF POOR PERFORMING EMPLOYEES.  Sorry for the brief outburst, but the assumption that advocating for the use of flexible alternatives to cut costs somehow condemns all layoffs is simply not true.  Targeted cuts of under-performing employees are necessary; however,…
  2. We’re hitting flesh and bone: Many organizations are now to the point where they’ve cut the under-performing fat and are starting to target solid performers.  Assuming you are not in an industry undergoing a fundamental restructuring, flexible downsizing strategies let you keep at least some of the good people whom you would otherwise have to lose, which makes sense given the predictions of a potential rebound.
  3. Layoffs mean more work and stress for those left behind, even top performers.  Yes, with furloughs, high performing employees take a pay cut and need to temporarily step-in and cover for others when they are out.  But with layoffs, those who remain may make the same amount of money, but they are permanently covering for people who are no longer there.  This is an indirect pay cut and is causing a documented rise in stress for many.
  4. Of course, how you implement a flexible downsizing strategy matters.  I provided implementation tips in a recent BusinessWeek article, "Making Pay Cuts Less Painful," by Michelle Conlin.  I also shared some "how-to" steps in Marci Alboher’s Working in the New Economy Yahoo blog.  The way you implement any organizational change matters.  It’s the key to minimizing the negative impact and recognizing the operational benefits, especially related to top performers.  There are other ways, beyond salary, to compensate and reward your most valuable people.  And you need to give back even a percentage of lost compensation as soon as you can or, yes, people will leave.
  5. Layoffs cost more—directly and indirectly—than flexible downsizing. The cost-benefit of lay-offs versus flexible downsizing is something I’ve given a lot of thought to in previous posts (here and here) and I have to say I disagree with the push back that you lose more money with pay cuts, furloughs, etc. and save more money with lay-offs.  I’m open to having my opinion challenged, but so far nothing I’ve seen has changed my mind. CV Harquail writes in the Authentic Organizations blog that "CEOs leave money on the table when they choose layoffs."  In fact, an interesting post in The New York Times’ Moral of the Story blog by Randy Cohen takes the cost a step further and argues the potential immorality of layoffs.  

 

Concern#3: It doesn’t work for exempt, salaried employees and gives them an hourly mentality.  
Yes, identifying a give back of hours worked to match a reduction in salary is easier with non-exempt workers.  However, it can still be done with exempt staff but the process will be as much art as science.  For example, a team takes a 10% pay cut.  The manager sits down with everyone to figure out what a 10% reduction in time at the office might look like for that particular group.  Say the group works an average of 50 hours a week.  Each person determines how they could reduce their time by 5 hours a week.  Depending upon their job and type of work, some might choose to come in an hour later everyday, others might choose to leave an hour earlier, or take a half day on Fridays.  The key is that the team decides together and then supports each other.  

The question I’ve gotten in response to this suggestion is who’s going to do work?  My answer:  First, if you have so much work that people who are being asked to take a 10% pay cut can’t reduce the amount they are working by 10% then I would seriously reconsider why you are pursuing layoffs or salary cuts in the first place.  That being said, maybe your issue isn’t a reduction in workload but price pressure that’s squeezing your margins.  Even then, this is a perfect time to eliminate redundant meetings, and unnecessary face time, and work.  Having a team get together and figure out how they can reduce their hours by 10% prompts overdue innovation and process improvement.  And even if they only get a 5% reduction in workload and time in the office, at least it’s something.

Concern #4:  Legal and benefit impacts make flexible downsizing difficult.  
Absolutely, there are legal and benefit considerations associated with many flexible-downsizing options; however, with some awareness and creativity none of this issues are insurmountable (here, here and here).

A recovery may be on the horizon, but employment doesn’t have to be a lagging indicator that rises above 10%.  With an alternative approach to managing costs, employers who are starting to cut into the muscle and bone of their operations can hold on to the talent they will need to hit the ground running—and, who knows, maybe make the recovery happen sooner.  

Learn more about the "how to" of flexible downsizing: 
Join me, Sandra O’Neal, Principal, and Ravin Jesuthasan, CFA Managing Principal of Towers Perrin for the World at Work webinar, "Flexible Downsizing—Striking a Balance Between Cost and Workforce" on June 23rd from 12:00 to 1:00 pm EST/ 9:00 to 10:00 PST where we will:

  • Cover lessons learned as we examine the results of labor cost controls during past recession
  • Discuss the wide range of flexible options and the cost/benefit of each
  • Share an understanding of practical applications and considerations for the use of flexible options, and how to execute a wide-range of flexibility strategies.  

 

Click here for more information or to attend.

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