The True Cost of Layoffs

In the interest of full disclosure, I will admit now that I am unemployed due to a layoff, and have also been laid off in the past. Am I bitter? No, but I would have handled it differently. This post examines the benefits and pitfalls of a layoff from the perspective of symbiotic economics.

First, what do I mean by symbiotic economics? I mean that we are all connected economically and that our economic actions have effects on each other. When I spend a dollar at a retail outlet, you will likely receive a benefit as an employee of that company, a shareholder, a vendor, or a member of the community that receives the sales tax. Alternatively, if I destroy value in the economy through theft, dishonesty, tax increases, or otherwise, you will pay higher prices, higher taxes, or miss out on potential opportunities.

I laid out the tenets of my philosophy of symbiotic economics here.

Starting with the paradigm of symbiotic economics, let us examine the ramifications of layoffs. As a shareholder, you may view all layoffs as good for your bottom line, but I would argue that is not always the case. There will be times when layoffs are necessary to protect the value that your firm possesses. If your market does not allow for growth and there is no way to keep your employees engaged productively, then a layoff is probably the best option.

However, there are times when a layoff is used to cut costs and appease investors. On the balance sheet, a layoff is an attractive thing. It allows a company to reduce losses reported in a quarter by offsetting them with a cut in operating expenses. It all comes down to a ratio: the amount of money spent compared to the amount of money earned.

However, this ratio hides many important costs that are all being paid across the globe today. When one firm cuts payroll and another firm hires, then the result is basically a wash. Today, as in many times past, we see too many firms cutting and not enough hiring. Unemployed people do not spend money. Also, growing unemployment makes employed people nervous, curtailing their spending.

If you accept the fact that our economy is symbiotic, then you can predict that reducing spending in retail will reduce the revenue that the wholesalers and vendors receive. Transportation receives less revenue. More employees are laid off, salaries are frozen or reduced, stock prices and mutual funds fall short, and we find ourselves in a viscious circle. Basically, as we see in today's headlines, if everyone cuts headcount at the same time we actually ensure that our next quarter will suffer.

There is another cost that is overlooked. You layoff 10% today, and next year you find that you need some of those employees back. Now you have to spend the money to recruit, evaluate, hire, equip, and train the workforce that you already possessed one year ago. Did you really save money by eliminating their salary? Many HR professionals claim that it costs 150% of salary to replace an employee. It could be higher than that depending on the employee.

There is no way to know what an employee would have learned, created, or innovated during a year. There is also no way to know how much damage that employee can cause by taking your knowledge out the door. I know that elitist executives do not admit the value that their employees possess, and that is shameful. A lot of money is wasted on training and developing human capital, only to see that investment return value for someone else.

The intelligent executive is aware that the best asset that he can invest in with little risk of depreciation walks out the door every day. Investing in your employees can pay tremendous dividends. Plant and equipment alone cannot create wealth without the introduction of the right people. Cash, credit, energy, and brand are all powerless to create market value, but the right people can take advantage of such resources to create value, even in the face of economic adversity.

Recently, a contact of mine started a job on a Monday. On Friday of that first week, the company announced a 5% pay cut in response to economic forces. That person complained to me, the unemployed guy who would have accepted a 10% pay cut rather than a layoff. After scolding this person into a sense of gratitude, I pondered the situation from an executive perspective.

If I had been in my former CEO's shoes, what would have been the best decision to make? He runs an S Corporation, meaning that he has only a few private shareholders to answer to and wields greater power over his company than the CEO of a publicly traded company. He could have decided to accept a loss for the quarter without fear of lawsuits for fiscal irresponsibility. The CEO could have decided to cut costs and salary temporarily, with reasonable expectations that his company would grow again in the near future. The third choice was to cut a certain percentage of salary out of the operating expenses, which he did.

By ignoring the balance sheet and accepting the loss, the CEO would be acting irresponsibly. As a shareholder, I would be disappointed (to say the least) if my investment was not protected and money was wasted. Wasting cash in this quarter could have a detrimental effect on the firm's ability to pay expenses next quarter, putting the firm in grave danger. When the firm is in danger, then the employees, shareholders, vendors, customers, and community are also threatened. That is to say, there are many stakeholders who have an interest in the profitability of a firm besides the shareholders. As an employee, investor, client, or vendor, I want this company to maintain profitability for my own selfish and symbiotic reasons.

My former CEO chose to lay off 4 % of his workforce. Most of these people were good/great employees with unlimited potential. Many of us also possessed proprietary information about the firm's products, methods, and clients. We were 4% of the current workforce, but percentage of the firm's future growth did we represent? We'll never know.

The firm's market is in a current recession due to outside factors, and we all assume that once the global economy turns around, the firm's market will begin to grow again. At that point, they will need to staff up. I have already been told that I will be on a shortlist of employees called first. They already know my work ethic and abilities, and I have already worked through the period of training and connecting. I loved working for that employer and would return today if they called. However, I expect to be in another rewarding position when they finally call and will regrettably turn them down (unless they offer a lucrative salary increase.)

I know for a fact that my layoff represents an opportunity cost for the firm. I learn something new everyday, and will be far more valuable next year than I am this year. I am innovative, passionate, and entrepreneurial. My future includes great potential that they could have harnessed for their own benefit, but will now only read about or compete against. I am sure that the same can be said for most of the other 4%.

If they cannot rehire me and the other 4%, then they will incur the additional expense of recruiting, the cost of training them, and suffer through time it takes to bring someone onboard and get them productive (6 months or longer in the technical world.) They would have been better off if they could have kept us around somehow. That way, when the market rebounds they would simply need to plug us in and reap the benefits.

The company I left spends money on keeping their employees happy. They buy premium coffee, pay for free coke, offer fantastic benefits, and pay above average salary. What if they had cut salary and benefits/perks before cutting headcount? Could they have cut enough to save the quarter and offset future rehiring costs?

When you layoff a group, the people remaining realize suddenly that they are expendable. They realize that they may be next, despite valiant efforts to prove their value. They update their resumes, send out feelers, and surf job websites. They lose any altruistic ideas about helping the company, and begin to serve their own interests more.

Would the same effect take hold under a reduction of pay and perks? I think not. I know for a fact that in the culture I left, the CEO would have been lauded for his efforts to keep the team together. He is already respected by his employees as a generous man, and there is a lot of gratitude in the company for his efforts. The culture was similar to an extended family, and the layoffs are a very emotional topic. I think it is completely reasonable to assume that amidst any grumbling, there would be a lot of employees who felt grateful to remain employed.

Personally, I would have been grateful. We all knew that sales were down and cash was tight, so losing the free coke would have been expected. A 5 or 10% paycut would have been understandable. I could have contributed to another area of the company, and not only added value to the company but a gained valuable set of learning experiences.

My fear is that by laying off workers to save the share price, we ensure reduced revenue for our firm and our symbiotic neighbors for the next quarter. Only the forward-thinking, innovative, and opportunistic leaders will save us from this downward spiral.

When those leaders turn this situation around for us, it will take longer to recover due to the additional expense incurred of hiring and training. If we were innovative and forward-thinking, we would have discovered enough opportunities to keep these employees fulfilled and productive during bad times. We could then respond to economic growth with a strategic and natural hiring process, rather than a hurried and wasteful one.

We would respond to a growing market with employees who had endured a downturn with us and grown more valuable and more loyal. We could respond with a team who is already an expert on our product, procedures, resources, and client-base, and chomping at the bit to conquer the market.

There is a time for layoffs, to be sure. However, I am sure that it is an abused accounting trick which is destroying more value and preventing more revenue than is realized. It takes fear, backward-thinking, and herd-mentality to execute a layoff. It takes an innovative, resourceful, proactive, and visionary leader to avoid a layoff and strengthen his or her business.

We can't set sail until we raise anchor and embrace the potential adventure on the horizon.