What Companies Still Get Wrong About Layoffs
Today it’s difficult to read the news without seeing an announcement of layoffs. Just this week, Morgan Stanley announced it will reduce its workforce by 2%, Buzzfeed said it would cut headcount by 12%, and PepsiCo said it plans to cut “hundreds” of jobs. The same is true at Redfin (13%), Lyft (13%), Stripe (14%), Snap (20%), Opendoor (18%), Meta (13%), and Twitter (50%). So many companies have initiated layoffs recently that tech and HR entrepreneurs launched trackers like TrueUp Tech and to Layoffs.fyi dedicated to monitoring the staff reductions across the tech sector.
Traditionally, employers resort to layoffs during recessions to save money. Companies continue to cling to the idea that reducing staff will provide the best, fastest, or easiest solution to financial problems.
As if layoffs aren’t painful enough, many companies make matters worse by handling them poorly. Handling layoffs in a humane way is important for the morale of both the impacted and retained employees, it will impact the company’s ability to hire strong talent later, it affects litigation risk (people who feel mistreated are more likely to sue), and, of course, it’s the right thing to do.
Layoff Myths and Mirages
Contrary to popular belief, there’s not much evidence that layoffs are a cure for weak profits, or, to use the current euphemism, that they reposition a firm for growth going forward. It’s very difficult to sort out the relationship because firms that are laying off are almost by definition in trouble. The research evidence has not found any support for the overall idea that layoffs help firm performance. There is more support for the idea that where there is overcapacity, such as a market downturn, layoffs help firms. There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump.
Employers also often underestimate the cost of layoffs in immediate financial terms, as well as in the lingering burden it places on remaining resources — both financially and emotionally. There is a huge problem in HR generally that the stuff that is easy to put on a spreadsheet outweighs the stuff that isn’t.
The toll of layoffs is high. In many industries, layoffs beget lower productivity and profits. When sales are slow, for instance, many retailers cut staff. But several studies show a correlation between bigger staffing and substantially higher sales.
Layoffs destroy trust
Eighty-five percent of respondents rated job loss as their top concern in Edelman’s 2022 Trust Barometer. Layoffs break trust by severing the connection between effort and reward. The premise of a layoff is that if it weren’t for the economic conditions facing the firm, employees would keep their jobs as long as they perform them well.
The fact that this is a psychological contract rather than in most cases a legal one is beside the point. In the domain of trust, what matters is that employees are being asked to willingly be vulnerable to the power their company has as an employer, and trust that the company will act in ways that don’t violate their trust. Research finds that, once betrayed, this trust is hard to recover.
Forgetting to be human
In the process of trying to do everything “right,” some managers forget to be human. It’s amazing how often people rigidly follow a script during notification meetings for fear of saying something wrong. It’s even more amazing how often they forget to mention the niceties, like the fact that they appreciate everything the employee did for the team or affirmation of the employee’s abilities. Layoffs are emotional and raw; it’s critical to show empathy when delivering such painful and often scary news.
It’s also critical to help employees maintain their dignity. That’s why having a security guard escort the employee out the door should be avoided, except in the rare cases where it’s truly needed.
Failing to plan ahead
Founders and executives at high-growth companies are often caught unprepared for layoffs. Many assume the only possible direction is up. With pressure to grow, it’s easy to hire too many people too fast, and later need to lay off employees quickly. And, even under conditions of sustained growth, layoffs can become necessary due to acquisitions.
Successfully managing workforce changes within today’s landscape ultimately requires evaluating your actions against the backdrop of trust. Your company will weather the storm of layoffs more successfully if you can maintain trust with three groups who will determine your success in the future: employees you let go, employees you retain, and employees who don’t yet work for you.
You have a great opportunity to be better at this than other companies. Keeping trust at the centre of your decision-making can lead to surprising, beat-the-odds success, as the above examples from Honeywell and Nokia show. Centring trust also offers leaders a reminder: Your actions will have consequences that are more visible than they’ve been in the past and you will be judged as trustworthy — or not — based on them.
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