It seems like more layoffs are announced every week. One of my clients completed a big round of involuntary layoffs and now offers voluntary packages. In some departments, employee morale was so negative that productivity was at rock bottom. Employees were caught off guard because the company went through layoffs just a year earlier. This time, they are more severe and widespread.
Why are layoffs happening? It seems like businesses are making soft profits and experiencing slow growth. Economic factors and indicators suggest things are not going in the right direction. Some writers are blaming high interest rates and inflation. It seems many factors are involved, some or maybe many of them are fear-based.
Is it a good business practice to lay off people to salvage profitability?
My client is rumored to be an acquisition target, and it’s time for management to strip out all the “fat” so that the EBITDA number is as big as possible. More EBITDA means a bigger sale price. If the buyer is willing to pay a multiple of 20 or more, every dollar that falls to the bottom line will get the seller 20 times that amount.
When confronted with a need to boost profits, is it best to cut jobs?
Almost all senior leaders are compensated extremely well. Their variable compensation is usually tied to different income statements and balance sheet dimensions. The bonuses they make for making their companies financially successful are often more than what their mid-level managers make in a year. When a company is sold, all executives receive compensation that will last for years. They may be out of a job, but their bank account is loaded whenever they assist in making the company profitable and ready for sale.
The saddest part of the situation is its impact on people and their families.
Forbes August 19, 2024 article “The Great Tech Reset: Unpacking the Layoff Surge of 2024”:
“According to Layoffs.fyi, 384 tech companies have laid off more than 124,000 employees in 2024, adding to the 428,449 tech workers who lost their jobs in 2022 and 2023.”
“The handling of these layoffs has sparked significant criticism. In many cases, companies have left employees in the dark for weeks or even months, fostering a toxic atmosphere of fear and uncertainty. It’s a stark reminder that, despite claims that employees are their greatest asset, companies often sacrifice their workforce first in times of crisis—even when posting record profits. For example, Microsoft laid off 1,900 workers just five days before reporting a 17.6% increase in revenue to $62 billion, while Amazon dismissed a thousand workers despite a 14% rise in revenue to $170 billion. To make matters worse, some companies are rumored to be reducing severance packages right before layoffs, further eroding trust.”
Toyota and other Japanese companies have used a no-layoff policy to generate trust with their workforce. They are careful to staff their workforce with a certain number of ‘temporary’ employees who are contracted to work until the workload lessens or the profits fall short. During economic hard times, Toyota will let its temps go and keep all its employees. Yes, it’s still a human being, but it’s a contracted worker who knows coming into their job that this could happen.
Employees give their best effort when they don’t have to worry about losing their job.
If you get a chance, read this article in the Harvard Business Review: What Companies Still Get Wrong About Layoffswritten by Sandra J. Sucher a professor of management practice at Harvard Business School. She is the coauthor of The Power of Trust: How Companies Build It, Lose It, and Regain It
Here is the summary: “Research has long shown that layoffs have a detrimental effect on individuals and on corporate performance. The short-term cost savings provided by a layoff are often overshadowed by bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation — all of which hurt profits in the long run. To make intelligent and humane staffing decisions in the current economic turmoil, leaders must understand what’s different about today’s larger social landscape. The authors also share strategies for a smarter approach to workforce change.”
Even though I generally disagree with the broad use of layoffs, especially those companies that experience a financial hiccup and then lay off people, there are times when layoffs are necessary. Whenever they are done, they must be done in a way that enables the short-term gains to be maintained following the layoff. Sucher writes: “Workforce management requires simultaneous strategies. Layoffs are best used when you need to restructure or make permanent changes. In a temporary downturn, furloughs and in-company reassignments, underpinned by effective performance management, may be a better option.”