A friend of mine called the other day to share a story from the executive suite that made him dream of selling hot dogs on the streets of New York. I told him that it was not the first time I had heard the tale, especially in these days of our sputtering economy. I imagine it won’t be the last.
The usual suspects were at the monthly review meeting for the North American division of a multinational firm with about 25,000 employees in the U.S. and Canada. They included the president, the CFO, general counsel, the SVP of marketing, the CIO, SVP’s from two lines of business, and the SVP of HR. The company had been performing reasonably well through the recession. Revenue growth was flat and profitability was slightly below projections.
On this particular day, the CFO was first on the agenda. After a review of the month’s numbers, he made the following statement:
“As all of you can see, we are only slightly behind our projections this year. All things considered we have weathered the storm reasonably well. The challenge we have for the remaining six months of the fiscal year is that if we want to make sure we get full bonuses, we’ll need to make a 5% headcount reduction. A 2.5% reduction will get us to 80% payout, but a 5% reduction should get us to 100%.”
The overwhelming sentiment in the room was to move forward with the 5% reduction. After he attempted one small protest that was quickly rebuffed, my friend (not the HR exec incidentally) sat quietly and wondered how he’d look under the blue and gold Sabrett’s umbrella.
Layoffs. To make sure the executive team received their full bonus payout.
Companies have always cut back on the number of workers during challenging economic times. There are circumstances where it is necessary for survival. But for the last 30 years, it has become part of the standard operating playbook of American corporations even when they remain profitable. There are many companies where RIF’s, restructurings, and downsizings have become a quarterly event.
Now, as reported by Jeffrey Pfeffer in the latest issue of Newsweek, there is a growing body of evidence to show us something we’ve always suspected intuitively.
Layoffs don’t work . . . unless, of course, the only goal is to secure bonuses.
I encourage you to read the article, and even better, read the research studies themselves. Here are a few bullet points from the piece. The facts are astounding.
- Companies that announce layoffs do not enjoy higher stock prices than peers—either immediately or over time. A study of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects.
- An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing.
- Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement.
- Another myth: layoffs increase profits. Even after statistically controlling for prior profitability, a study of 122 companies found that downsizing reduced subsequent profitability and that the negative consequences of downsizing were particularly evident in R&D-intensive industries and in companies that experienced growth in sales.
- Layoffs literally kill people. In the United States, when you lose your job, you lose your health insurance, unless you can afford to temporarily maintain it under the pricey COBRA provisions. Studies consistently show a connection between not having health insurance and individual mortality rates.
- A study in New Zealand found that for people 25 to 64 years old, being unemployed increased the likelihood of committing suicide by 2.5 times.
- A recent National Bureau of Economic Research working paper reported that in the United States, job displacement led to a 15 to 20 percent increase in death rates during the following 20 years, implying a loss in life expectancy of 1.5 years for an employee who loses his job at the age of 40.