Take the Road Less Traveled - alternatives to mass layoffs

HR Magazine,  July, 2001  by Frank Jossi

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Rather than mass layoffs, employers are asking employees to take pay cuts, go on vacation or cut hours.

Earlier this year when database management firm Acxiom asked employees to consider taking a voluntary pay reduction to help the company weather some economic hard times, it anticipated that 10 percent to 20 percent of the workforce might participate. After all, the Little Rock, Ark.-based firm already had implemented a mandatory pay cut of 5 percent across the board; so, executives assumed, many staffers would believe they already had done their fair share.

In April, Acxiom reported that 36 percent, or 1,973 people, had agreed to a voluntary reduction, losing about 5 percent of their paychecks. "We were blown away by the high percentage of people who took a higher pay cut," says Rizza Barnes, spokesperson. "It says a lot about the dedication of our associates."

In this case, employees were rewarded for their efforts. The money lost to mandatory and voluntary pay cuts already has been returned to employees in the form of shares in the company stock, she says. The carrot for the cuts turns out to be a 1-1 ratio per share for mandatory cuts, a 2-1 ratio for voluntary ones. For example, if an employee takes a voluntary $10,000 pay cut, he receives $20,000 in stock. If he loses $5,000 as a result of the mandatory 5 percent cut, he receives stock amounting to that sum, she explains. The result? More than $24 million in savings this year, and no layoffs, she says, as well as a workforce vested in the success of Acxiom.

As the economy soured this year, many U.S. companies scrambled to find ways to cut costs. For some, the quickest solution was cutting jobs, sometimes thousands at a time, resulting in record high numbers of layoffs.

Others bypassed the ax for cost-cutting efforts that involved sacrifice by employees and executives alike, from taking unpaid vacations to accepting smaller paychecks or reduced work weeks.

While these efforts may sound humane, they also make good business sense. Economists, such as Princeton University's Alan Blinder, former vice chairman of the Federal Reserve Board, generally agree that most recessions last from 9 to 11 months. If the economy turns around, companies that cut jobs won't be prepared to exploit growth. That's a lesson Acxiom company leader Charles Morgan learned the hard way. In 1991, he laid off 7 percent of his workforce and then found the company had to "jump through hoops to find people" after the economy started its long upward climb in the 1990s. He's not making the same mistake again, says spokesperson Barnes.

"You need to make sure you have the right people to manage your business," says Barbara Mitchell, principal of the Millennium Group, a management consulting firm in Vienna, Va. "If you jump to take out people through layoffs, you may find you don't have the right people in place down the road. You need to think things through to figure out what you're trying to accomplish."

Heads Are Rolling

If you thought the first quarter of the year looked like an outtake from the movie "Gladiator," you were right. The cratered economy left a trail of carnage. For the first five months of the year, announced layoffs totaled 652,510, surpassing the total number of 613,960 for all of 2000, according to Challenger, Gray & Christmas, an outplacement firm based in Chicago. The current spate of layoffs is the highest number since 1993, when Challenger first began tracking employment numbers.

Some layoffs come less as a result of good corporate planning and cost cutting than as a simple matter of impressing the stock market. "The effect has been [that] shareholders drive the decision to trim staff," says John Challenger. "Shareholders are the kings; they rule. There used to be much more leeway between stakeholder and shareholders. But today, there's so much emphasis on short-term profits that stockholders dominate and heads roll if the companies don't make their projected estimated earnings."

Yet at least one study of layoffs indicates that layoffs fail to produce the desired outcome. Bain & Co., a global consulting firm in Boston, examined 288 Fortune 500 companies between 1989 and 1992 to determine how the stock price performance of those that reduced their workforces compared with those companies that did not. Bain director Darrell Rigby says that over those three years, the companies laying off more than 3 percent of their workforces saw little or no gain on their stock prices, while those that conducted massive reductions of 15 percent or more "performed significantly below average," he says.

"Layoffs, by themselves, do little or nothing to alter long-term stock price performance," Rigby adds.

Layoffs also discourage remaining employees from sticking around, especially if the pink slips are distributed crudely. "The biggest thing is the impact [layoffs] have on people who stay," says Mitchell, who is also immediate past president of the Employment Management Association, an SHRM Professional Emphasis Group. "If you don't do a layoff properly, it can backfire on you with the people who stay but who do not want to work for you anymore.