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Alternatives to Layoffs

Alternatives to Layoffs | Human Resource Executive Online Cutting wages or hours across the board in an attempt to save jobs would save more money and be less agonizing than layoffs. But too few companies even consider such alternatives, possibly more due to psychological reasons than fiscal ones.

Monday, January 5, 2009
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The recent front-page story in the New York Times followed similar stories in the Wall Street Journal and on National Public Radio and other outlets about companies pursuing alternatives to layoffs that would cut costs in other ways.

I can't remember getting as many calls from reporters on a single topic as I have recently asking about these alternatives.

The idea that there are alternative ways of handling the need to cut costs without laying off individual workers is actually a very old story. In fact, up until the mid-1980s, the idea that an employer would dismiss workers permanently -- that they were not expected to come back after business picked up -- was so rare that the Bureau of Labor Statistics did not even keep track of such cuts.

The term "layoff" in those days meant temporary job losses: Unionized workers, but even some non-union employees, would be paid supplemental benefits during the period of layoff not just to be nice to them but to keep them from taking another job someplace else. As soon as business picked up, the companies wanted to bring those temporarily furloughed workers back as fast as possible, the same workers into the same jobs.

Rehiring took place, based on seniority, in part to make sure that the most experienced workers stayed with the company. The benefits from this, of course, were that the company could get going again really fast, and the costs of hiring new workers and training them were eliminated as were the learning-curve problems of waiting for the performance of new hires to get up to speed.

After the 1981 recession, the term "layoff" shifted from its original meaning of a temporary job loss from which workers could expect to be recalled to a permanent separation with no prospects for recall.

It was in this period that more creative alternatives to layoffs flourished. The most prominent of these alternative approaches was wage cuts, often negotiated by unions under the guise of concessions to existing union contracts, but the goal was always to reduce permanent job losses.

The range of other alternatives was impressive -- reduced hours of work (and pay), job sharing where the same job would be split into two part-time positions, cutting back on outsourced work and the use of vendors to make work for regular employees whose normal tasks were no longer needed, etc.

Given the steepness of the current downturn, it isn't surprising that there would be a lot of attention directed at layoffs and their alternatives. Further, there is at least some circumstantial evidence that the need to keep your workforce together by avoiding layoffs is even more important now than in the past.

One reason is that most companies just spent the last few years struggling to recruit and retain the workforce they need. To lose them voluntarily seems like shooting yourself in the foot. The second reason is that all the liquidity that governments around the world began pouring into markets beginning in September will start to hit the global economy soon, and the predictions are that the pickup in business will happen even faster than in the past.

So here's the amazing thing: Despite the extraordinary pressures to cut costs, the knowledge from decades past about alternatives to layoffs and the contemporary concerns about losing skilled employees, almost no one is doing anything about it!

Literally thousands of employers are laying off employees, but reporters are struggling to find even a handful of companies across the entire U.S. economy that are pursuing any other approach -- even when those alternatives are combined with layoffs.

When we look carefully at the stories about companies pursuing alternatives, we see they are mostly very small, privately held companies, many of whom have never had a layoff in their history. The few big companies that are cited -- Motorola, for example -- are, in fact, laying off employees; they are just cutting other things as well.

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The best example of a significant company that is pursuing real alternatives to layoffs is FedEx, where they are cutting wages to reduce costs. What is particularly important about the cuts at FedEx is that the cuts are even bigger for executives: 10 percent for executive pay, five percent for everyone else. (Fed Ex also announced for the first time that it will not be advertising in the Super Bowl, another very public effort to save money.)

Why are so few companies pursuing any alternatives to layoffs? Why has the interest in these alternatives declined so much over time? It isn't because the alternatives don't save money: A five-percent salary cut saves much more money than a five-percent layoff because there are no severance payments; the legal liability and associated costs are much less; and the savings come instantly without the agonizing administrative process of figuring out who has to go and getting them out in a dignified manner, etc.

Morale might actually improve through a collective effort to save jobs, certainly as opposed to the morale-killing effects of layoffs and, of course, the ability to ramp up when business improves is dramatically accelerated.

What's striking to me is not just that almost no companies end up pursuing these alternatives. It is that they don't seem to even consider them.

I don't know, for sure, why this is, but it does seem to me that, in part, many companies move first to layoffs because they think the investment community wants them to do so.

The financial community isn't especially aware of alternatives and the benefits associated with them, and their focus is very much on the immediate financial performance, not how the companies will respond when business improves.

The fact that virtually every company, despite their varying circumstances, ends up pursuing exactly the same approach to cost-cutting suggests that the processes involved have more to do with psychology -- herd mentalities -- than to any rational processes.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at the Wharton School of Business. www.talentondemand.org

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