The Trouble With Layoffs

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.


36 thoughts on “The Trouble With Layoffs

  1. Wow… ya know what’s funny? Today is my last day at work and I was part of a lay off, which is the reason it’s my last day. The possibility that the lay offs might have been in part to secure bonuses did not even cross my mind. For my particular company I’m not really sure how likely it is… but it’s still an infuriating thought despite the fact that I sort of hate my job. Wow…

    1. I am so sorry that you are experiencing a layoff and hope that your company was not only trying to preserve bonuses. Since you are impassioned, I know you’ll channel it into a positive next step in your career. Thanks for linking the post in your blog!

  2. Good post. We should be paying more attention to what is successful empirically, but it is easier, as you said, to ensure executive compensation is delivered.

  3. This post hits pretty close to home. Receiving a layoff notice puts people under a tremendous amount of stress. It is far too easy to announce a head count reduction. It is akin to the government raising taxes. It gets noisy in the room for a short while, but the sheep eventually learn to deal with it.

    I’m sure executives and managers are quickly finding that employees are losing their sense of loyalty for the company and may even be wondering why apathy is waxing as enthusiasm wanes. Layoffs not only affect the individuals leaving the company but those who are left behind as well (except the ones getting the bonuses of course).

    Interesting topic. The costs associated with layoffs can be horrendous and extend far beyond the statistics of wall street.

  4. Good article. It was interesting to read about the effects unemployment has on us – on our life expectancy and health insurance. It was also great to learn more about the motivation behind layoffs.

    It all highlights and emphasizes the need for stronger unions and stronger workers’ movements in this economy. Our inability to organize fight-backs may be life threatening.


  5. Very sad to hear that the exec’s just wanted to secure their bonuses, and I really hope that this was not the case with the majority of layoff’s in the last 18 months. I believe our economy will see a return especially in manufacturing, and with that the need to employ people who can bring value and technology to the table. I think we’ll also see a large number of jobs needing to be filled. I really don’t think that’s a pie in the sky thought.

    For those greedy companies that kept receiving their bonuses, it will all be brought to light and people will retaliate by not patronizing those businesses….i hope anyway.

  6. I completely agree- the problem in corporate America (and most of the world that follow the same kind of capitalism) is absolute focus on quarterly earnings and stock prices at the expense of everything else. Why are bonuses linked to annual financial performance only?

    If you don’t mind I am going to link it to my blog too.

  7. This was particularly interesting to read. Thanks for bringing this up. I’m definitely going to keep this all in mind. I guess it’s also another reason why, when I get there, I’d rather work in a small, individual production team that’s isolated from a handful of big greedy guys. The AIG issue simply sickened me, too.

  8. I was laid off in October 2008. I worked as an information systems specialist for a noise mitigation firm. I got a two day notice; went from making $75,000 a year to receiving $265 per week in unemployment. To this day I can’t find a permanent job; everyone offers three month terminal contracts that would require me to relocate around the country. That’s not a life when you have a young child. After more than a year of looking, I have given up on a career built over decades and will start over with a low paying job in the medical field. Thankfully I qualify for medicaid. For awhile the state gave me food stamps and then cut me off. They won’t give my ten year-old son health coverage.

    When I hear about greedy jerks laying off people to get their full bonus I feel bad for our country. This is not good, and it’s going to backfire in ways we can’t even imagine.

    1. I am so sorry to hear about your struggles, and I appreciate you sharing your story. I wrote this piece with people like you in mind. An article in this morning’s NY Times paints a rather gloomy picture of the speed the economy will recover. The article suggests that much of the reason for this relates directly back to the way the economy functions. The article states that large “companies are increasingly owned by institutional investors who crave swift profits, a feat often achieved by cutting payroll. The declining influence of unions has made it easier for employers to shift work to part-time and temporary employees.”

      “American business is about maximizing shareholder value,” said Allen Sinai, chief global economist at the research firm Decision Economics. “You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.”

      Obviously, the economy and the functioning of American business is complex and multi-layered, and maximizing profitability requires identifying the right level of employees to get the job done. There are no simple decisions here. But that’s the point, isn’t it? Layoffs, outsourcing, and offshoring have become part of the “quick fix” arsenal of corporate execs because they make sense intuitively. They seem like no-brainers. Cut jobs, push work to the retained employees and costs will be reduced. Outsource or offshore work and get 5 employees for the price of one. Makes sense, right?

      Not necessarily. The analysis of layoffs, outsourcing and offshoring shows that these solutions often don’t yield the short, medium or long term cost reductions that companies expect. And worse yet, they create damage to both companies and the greater social context in which the companies operate.

      Maybe part of the solution is to start examining these decisions not just as isolated corporate events, but instead as part of an integrated system that includes the economy, communities and the lives of people–the employees, consumers, customers, vendors, and investors required for company success.

      1. Erik, I’ve added you to my Blog Roll. This post and the thoughtful comments hit home. I’ve been laid off throughout my working life and it does hurt. One thing I’ve found that makes the impact less damaging to self-esteem is to take the approach that any day could be the last day. I think it’s a mental adjustment that’s harder for people to make if they worked in the times before “at will’ employment was effected during the 1980s.

        A good support network of family and friends is important. So is keeping in mind that there’s always the opportunity to do more and do better. I’ve found that’s a defensive way of thinking but it combats getting too comfortable and complacent in a job.

      2. Katie . . . You have some terrific suggestions. Thanks for adding me to your Blog Roll. I love the title of your blog and now more than ever, the song is relevant.

  9. wow erik. your post is very thought provoking. the actual exchange you quote is almost unbelievable – like a made for tv movie. you just can’t believe that conversation happens now, even after the controversy around bail outs and bonuses.

  10. What you have referred in your article is a problem that affects most countries especially those in development. Importantly, what you are indicating about the actions of downsizing in companies that are undergoing an economic problem is absolutely true, and I must tell you that is the worst action they take.
    Entrepreneurs or to commercial engineers always take the shortest route and easy to observe that it is downsizing, but it’s a bad thing because that is not the solution to reduce costs are blind. What should be the action to take when they see that company had a bad fiscal year, they must first reduce physical resources exam. reduce the case to the executives, a change of premises, eliminating negative production lines, eliminating outsourcing, changing to cheaper raw materials, eliminating unnecessarily costs awards, bonuses, eliminating equipment that requires costly maintenance, etc. ..
    Most important is the disease of all governments especially in Latin America, which do not encourage cutting taxes those companies that have had a good or reasonable fiscal year, not create new jobs, in Chile the government from salaries uncommitted when hiring, etc.
    I think your article very educational,……..

    greetings …. sinBalas.

  11. I do not agree with layoffs. I can see from a pure short term outlook that the numbers might look better but for some reason we have forgotten to look long term and trust our guts a bit. I have spent most of my working life in large corporations try to make everything fit in a system to make everybody’s job easier to track. They put their employees in cube farms and do not think how distracting it is to hear a coworker talking about last night’s movie. Productivity is lost through efficient use of space. These systems become so ingrained in companies that the employees are unwilling to question the status quo (“That is the way we have always done it”). Large companies have lost their souls chasing the short term dollar.

    I know I can only change myself and you can only change yourself. What are you going to do to change yourself so you do not have to be laid off again?

  12. Excellent post ! The big question to me is this…aren’t these public companies answerable to the stockholders? Are the stockholders that happy with a ‘flat performance’ or a couple of pennies in the price that a few hundred people’s lives are not important? Something is terribly wrong…!!
    I can see it, and have seen it, in private companies…easy to get away with anything, because there is no one to answer to. I’m also experiencing it first hand. Complete loss of benefits, and salary cuts. While the execs are out buying new cars and taking cruises.
    I’d like to link to this one from my blog….it’s very relavent.

  13. Thanks! This helped so much! I’ve read several
    rather confusing websites lately, this cleared up a lot confusion I had.

  14. I too am on my last day of employment due to layoff, and it is all to do with my boss looking good for his superiors on the budget.

    It sucks, and sucks big time, but what can I do? Nothing. Just grin and bear it for now.

  15. I hate layoffs. It creates so much social ills and problems for people trying hard to make a living. Companies should learn how to maximize every employee capability to make more profits, rather than cutting costs by laying off to increasing or maintain profits.

  16. Have you ever considered adding more videos to your blog posts to keep the readers more entertained? I mean I simply read via the entire article of yours and also it was quite great but since I’m more of a visual learner,I found that to be more helpful well let me know how it turns out! I love what you guys are continually up too. Such clever work and reporting! Keep up the perfect works guys I’ve additional you guys to my blogroll. This is a superb article thanks for sharing that informative information.. I will check out your blog often for a number of latest post.

    1. Thanks for the suggestion and for adding me to your blogroll. What’s your blog url? I think you will find that I try to use video as often as I can and encourage you to click around to other posts and see whether it’s in the direction you suggest. I look forward to reading your blog! . . . Erik

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