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.

Symbiosis

sym·bi·o·sis (sĭm'bē-ō'sĭs, -bī-)

n. pl. sym·bi·o·ses (-sēz)

1. Biology A close, prolonged association between two or more different organisms of different species that may, but does not necessarily, benefit each member.

2. A relationship of mutual benefit or dependence.

("symbiosis." The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. 22 Sep. 2007. .)

Look at the person on your left. Look at the person on your right. Think of the person you love the most. Now think of the person you hate the most. Now try to think of someone you haven't thought of in years. Now think of me. Everyone one of those people have something in common with the others: we need each other.

Today's Word Of The Day is symbiosis. In the context of this blog, it means that every living human is affected in some way by every other living human being. There are many directions I could go with this, but I am trying to stick to the economic as I build an argument for Corporate Social Responsibility.

I first learned the word symbiosis in an Ecology class. We all first learned the basic principles in a 1st grade science class. Think of a pond. You have lilly pads, insects, big fish, little fish, and various micro-biotic life forms. If you affect one of these groups, the others are affected as well. For instance, if you kill off all the big fish, then the little fish that were once eaten by big fish begin to rapidly reproduce. They eat more insects, which hurts the lilly pads, which hurts the pond scum, which changes the PH balance of the pond, which starts to kill off the little fish. Therefore, even though the big fish may have nothing to do with the pond scum or lilly pads, each is still affected indirectly by the other.

The same principle applies to society. I need you, whomever you are. You also need me. There are many ways we can affect each other, but let's stick to business and economics. If I do not pay my taxes, then there is that much less money paid into the system that has to be made up somewhere else. Conversely, if I have a windfall this year and pay twice as much taxes as I did last year, then there is that much more money in the system that does not need to be collected elsewhere.

If you do not pay your debt and have it written off in bankruptcy, you should realize that money does not disappear. Just like energy cannot be destroyed, neither can money. Your written off debt will result in higher prices for me. Or, perhaps, my company will lay me off to cover their compounded losses. Or perhaps my 401k will take a hit because of written off debt diluting coroporate earnings.

It is popular in our culture to say "follow the money" when we expect it will lead to the source of a conspiracy or scandal. Money is the mascot of economics, so we can follow money to trace the symbiotic nature of our economy. We will start with $20 in your pocket.

You take your $20 and buy a widget. The retail chain from which you buy your widget is located in my city. A penny from your purchase is sent to my city in the form of a sales tax. This penny lessens the burden on my city to match revenue with expenditures; in other words, it lessens the likelihood that they have to raise my property taxes. If you spend enough money over time, it may mean that I get a street re-paved. Thank you.

My spouse may happen to work at that retail store. Part of your $20 paid her salary. It may have even influenced her bonus. Thank you.

That retail store has to purchase their product from somewhere, and they chose the Acme Manufacturing Company. My mutual fund owns shares in Acme, Acme's earnings drive up the stock price, which drives up the value of my mutual fund and overall 401k. Thank you.

Since my 401k is doing well, I take a loan out of it and buy a car. The salesperson whom I purchase from is your cousin, and he owes you $20. He was having a bad month and planned on avoiding you until I walked into the showroom. I hadn't planned on buying a car, but my wife got her bonus and the city repaved the road and my 401k was doing well, so I decided, "Why not?" Therefore, you got your $20 back from your cousin because you spent $20 on a widget.

No, that isn't ridiculous. Money travels all over the place, all the time, and does much more than we realize. Sometimes, what appears bad to me turns out to be good. Sometimes what is bad for me is what is good for you. At some point, we need to realize that we are all linked economically, for better or worse.

Economics is a system of many parts, including each individual, each company, and each governing institution. The tiniest action at the lowest level has an affect the whole, especially because it affects other tiny actions, which affect other tiny actions. This can be demonstrated mathematically in a principle called The Butterfly Effect, but is much more easily demonstrated in the movie of the same name, or in the movie It's a Wonderful Life.

Giving Money Away

A bleeding heart liberal, a serious Christian, or other charitably minded person would look at this principle and think of how we should try to affect the system to benefit the poor, weak, handicapped or incapacitated, unlucky, and other people who are not prospering in the system. I feel these feelings. I often wonder how we can help those who are currently not helping themselves effectively, for whatever reason. Some people concluded that personal involvement and donations are necessary. Others think that the government should take more money from wealthy people and corporations in the form of taxes and give it in various forms and social programs to the poor. Some people seem to think that talking load and writing angrily will solve the problem.

If we continue to consider symbiosis, then we will realize that we cannot just give poor people money from any source. We need to get something of value in return for that money, whether the source is charity or taxes. We need poor people to contribute to the system, not just take from it. In a motor, every part needs to contribute in the same direction at the same speed. If one part works slower (due to dirt or lack of oil) or if a part quits working completely, then the whole motor is slower and requires more energy to work.

Another way of looking at it: Imagine that you and I are on a bicycle built for two. If we both pedal in unison, we have an enjoyable ride. If I stop pedaling, you will have to pedal harder to keep us going. If you pedal backwards and I pedal forwards, we will crash the bike. We need to contribute as equally as possible to have an efficient bicycle ride.

Therefore, giving money to people who have little or none without receiving something from them in return makes for an inefficient system. It would be better if our charitable contribution or tax money resulted in a contribution to the system. This has been the case with many charities and faith-based programs. I benefited personally from Alcoholics Anonymous, and I think it has led me to become a stronger contributor to the system. This has most often not been the case with government programs due to bureaucracy, politics, and corruption; not just in America, but in other countries and the United Nations. That has led me to lean to the right, and distrust the use of government to combat charity.

Poor Help Themselves?

What if we went to the political extreme on the right and just ignore the poor--let them fend for themselves like the rest of us? Well, that would cause a few poor people to get off their ass, get a job, and quit whining. The other 99% would find that impossible for various reasons. Maybe they are too old, or they have a mental handicap, or a physical handicap, or just a long life of abuse and neglect. Whatever the situation, our charities today are not equipped, scoped, or funded to take all of the people who are a drain and turn them into contributors.

There are some who would just write them off. Social Darwinists, students of Nietzsche, and other cold-hearted bastards would say let nature run its course and we can prune the vine. There is a problem with this as well. The people who are unable or unwilling to help themselves as contributors to the economy may be willing and able to commit the crimes that will supply their needs. Why do you think crime rises as property value descends?

For those who did not turn to crime, they would grow sick and eventually die. Where should they die? That is an important consideration. Do we ship them off somewhere to die as a group, or do we step over them as they die on our sidewalk? Seriously, people do not just fade away like Yoda and Obi-Wan Kenobi. They take up space, they leave behind a decomposable structure, and they make a mark on their way out--it make take them months or years to finally die. We need to either prevent their passing or be prepared for an epic mess.

Also, there are spiritual dimensions to symbiosis. If we begin to allow people to starve and freeze, it affects our collective soul. Look at Germany in the 1930's. They started with persecuting wealthy Jews and nationalizing their property, but they ended up killing millions of people based on ethnicity, sexual orientation, and mental handicaps. What would have come next if we hadn't stopped them? Wiping out all left-handed people? Wiping out people who have trouble with math? What is the likelihood that you would end up on the list at some point?

What is more, when your respect for human life dwindles what else does that affect? Your love of art, beauty, the innocence of children, or what? There is an opportunity cost associated with every decision; if we decided to let go of our respect for human life and dignity, I shudder to think of what else we would be giving up.

Can we agree that we, as participants in the economic system and a human society, should make sure that we all benefit as much as possible, and that no one should be left behind? We need not agree on the means at this point, but we should agree on the principle. Now that we have the principle, it is all over but the shouting: We agree to help people economically, can we agree on the need to do so efficiently? Of course, let us do so efficiently; otherwise we will waste our effort, miss our mark, and eventually destroy the benefits of the system. So what is the most efficient method?

Some people liked the combination of Marx, Trotsky, and Lenin, with the end result being that the workers of the world rise up, take the wealth from the rich, and distribute it equally. We are still waiting for that to happen. The Russians rose up in October of 1917 and took from the Czar and nobility; they forgot to give equally to everyone. Apparently, as Orwell eloquently put it in Animal Farm, "Some are more equal than others." It is not likely that a government can avoid the corruption and bureaucracy that drains money and oppresses common people.

It has been attempted since, but we are still waiting for it to be properly implemented. One eyewitness to the October 1917 revolution, Ayn Rand, wrote a brilliant novel that demonstrates what happens when you take from the successful and give to "the people". Like I pointed out in my last post, without the incentives of Capitalism, you lose the benefits that we enjoy from the people seeking incentives.

For instance, there are people working feverishly to cure cancer right now because they know the result will be fortune and fame for them. Without the fortune and fame, how hard would they work? An answer to that can be found at your local fast-food "restaurant": without incentives, the employees do not work very hard--just enough to keep from getting fired. Do not expect that your food will taste good, that you will see a smile, or that the bathroom has been cleaned in this decade.

If we tax the rich and give to the poor, what is the result? Bunker mentality. If you attack the wealth of people, they will seek to protect it. This means they will spend less, take less risks, and be less generous. Therefore, there will be considerable less money in the system to trickle down to everyone else. Now, rather than the inefficiency existing at the bottom with charity, it exists at the top with preservation of wealth.

It is popular and acceptable to hate Bill Gates. However, without Mr. Gates our life would be very different. By developing and selling a version of the BASIC programming language for the 8080 Intel processor, he inspired and empowered many other people in their development of computers, including Steve Wozniak, the inventor of the Apple. Without Bill Gates, there may not have been a Wozniak. Without Wozniak, there would not have been a Steve Jobs. Without Woz and Jobs, what would you view this blog on? Linux? Not hardly; Linux is a direct response to Windows. And most people would never have been able to afford or learn to use Unix. Since then, Mr. Gates has inspired and empowered millions more ideas and people. There is no way to calculate the wealth and quality of life that Mr. Gates has helped us achieve, but we can be sure it is tremendous.

And Mr. Gates needed us. He needed someone to write software, someone to run the machines that packaged the software, and someone to sweep the floors. Each one of those employees was needed. He needed people to buy the software. He needed other programmers at other companies writing games, productivity packages, and other applications. He needed telecommunications companies to lay more fiber, which made computers more useful, which made his software more useful. He needed Intel and Western Digital to develop more resources and expand the capabilities of computer hardware so that his software could do more. He needed people to mine silicon, pump oil, and produce electricity. He needed instructors to learn and then teach others about his software. He needed people like me to fix computers when they break and customize systems for individuals and companies.

Economics is a tale of symbiosis, large and small. Companies need governments, and vice versa. People need corporations, and vice versa. small companies benefit form large companies, vendors and suppliers affect each other, and it all comes down to one person. Any person. Any little action will set off other actions, some which are imperceptible at first.

The basis of historical and current Capitalism does not make any provisions for individuals or organizations who are unable to compete. They are simply chewed up and spit out. Sometimes that is a good thing when it comes to companies. That is always a bad thing when it removes a human being from the game board. What we need to do is to adjust Capitalism somehow so that it encourages Econmic Synergy, an efficient state where everyone is contributing and benefiting in some way.

I argue that Economic Synergy is in every government's, corporation's, and individual's best interest. I also argue that Corporate Social Responsibility is the best and most efficient means to achieve Economic Synergy.

Loyalty

I have often wondered about the concept of loyalty. As a Marine, we were taught to be supremely loyal (our motto Semper Fidelis is Latin for "always faithful"). We were also reminded of times when we would have to disobey orders, such as the soldiers in My Lai, Vietnam should have. I really had trouble with the concept of when to disobey and appear to be disloyal because war contains so many gray areas. Also, the consequences of disobedience are deadly. Perhaps that is the excuse of some of the Marines from 3/5 who followed their squad-leader in Haditha, Iraq that allegedly killed innocent civilians--they were torn between loyalty and morality.

Even today, there are times when I wonder if I should be more loyal to my customers or my corporation. Loyal to my boss or to my corporation? Loyal to myself or to my company? Loyal to my wife or my mother?

Mark's blog has produced a tangent that I would like to include here: a surface analysis of loyalty. I do not know that I can do more than graze the surface on a subject that can cut so deep and requires a broader experience than I possess. Even so, loyalty is a subject I must face often, as well as teach to my children and nephew. Therefore, I might as well get started now cleaving the fine points of loyalty. Perhaps I by analyzing it now I will have a better grasp of loyalty when I really need it.

Loyalty, it is argued by many, is a binary condition: either you are loyal or you are not. There isn't a gray area of loyalty according to conventional wisdom, and there isn't a reliable method of choosing when to be loyal, or not to be, that everyone would agree with. If I asked my father or barber, they would counsel me that I should be totally loyal to the institutions that I benefit from: my family, my company, my church, my nation, etc.

However, we have all seen what happens when we are blindly loyal: I think Nazi Germany is the most popular and best example of misplaced loyalty. Even in America, we cannot be expected to be loyal without negative consequences. My company has laid off loyal employees, families have been known to do horrible things when inheritance or scandal is on the line, our nation drafted boys for Vietnam even though they never intended to win the war (nor should we have been there in the first place), and churches...well, don't get me started on that. You know what loyal religious zealots can do, regardless of what name they give their deity.

Perhaps Shakespeare grasped the essence of the right kind of loyalty: "To thine own self be true." This is the kind of loyalty that I have clung to so far in my life, and I do not think it has proved to be a shallow, selfish loyalty that leads me to rationalizing unethical behavior and disloyalty. You may predict that a loyalty that is based on situational ethics is bound to be imperfect. I would argue that all loyalty is bound to be imperfect, but situational loyalty based on personal values that are aligned with societal mores is the most accurate loyalty we, as humans, can muster.

Benedict de Spinoza argued that the highest virtue of man was to know God; this knowledge would make us ethical. He argued that God is always ethical because that is His nature to be so: everything God does is right because He embodies what is right. According to this argument, the more we know God, the more we will desire virtue and our actions will begin to match God's ethics. The end result of knowing God is to imitate His nature. If everything God does is considered ethical, and if we know and imitate God then everything we do will be ethical too.

Spinoza goes on to argue that if we seek our own desires, we will conflict with the desires of other men seeking their desires. We will be hated and opposed in achieving our desires, which is obviously contrary to an ideal life. However, if we are all seeking God's desires, we can all be happy. We can help each other, receive help, and all end up equally receiving our share of the one desire.

I lean towards agnosticism, or at least Christian cynicism of some sort. Even so, I can follow Spinoza's logic most of the way. I believe that we can all agree as a society on some level of moral absolutes (against stealing, killing innocents, etc...) If we are examining our life and our society, as well as ourselves, we will know instinctively when loyalty is called for and when you should blow the whistle.

Also along Spinoza's reasoning, I think most of us are fairly honest and try to do the right thing for ourselves and our society. I have accidentally left my car unlocked with CD's and electronics visible and been glad to find them unmolested. If we are seeking to do what is right and in the best interests of ourselves, which includes doing what is best for the objects of our loyalty, then we will know where to cleave the limits of loyalty.

For instance, as a Marine I hope I would know at the necessary time that shooting unarmed civilians is actually disloyal to the Marine Corps. In the end, I should know that such an action is not only morally outrageous but it will damage the image of my beloved Corps and my nation, as well as my family and myself. Therefore, even though resisting the order to fire is disloyal to my squad leader and unit, it is an act of loyalty to all Slobodzians, all Marines, and all Americans.

We could even carry this further to say that shooting unarmed civilians is disloyal to the human race of which we are a member, and that disloyalty will have a direct, adverse effect on me (besides a blackened soul, I will enjoy less stability and more animosity. I may lose my life or a friend's life in revenge for the killing of an unarmed civilian). It would be better if our starting point was here at the highest level, but as humans we tend to be loyal to the lowest orders first.

I plan to talk more on my blog about how we are all symbiotic. At this point, I would like to define symbiotic as the state of interdependence; we all need each other; when we help each other we help ourselves; when we hurt someone else, we have hurt ourselves. The dictionary calls it symbiosis, but I am creating the word Symbioticism to define a philosophy I am developing.

For the subject of loyalty: if we understand Symbioticism, we realize that we act in our own interest when we help others. Therefore, if we make a decision with Symbioticism in mind, we will always be loyal to a higher order, even if we must be disloyal to a loyal order. Moreover, we know that if we choose a cowardly loyalty over known morality, then we have harmed ourselves as much as if we had polluted our own drinking water. The Germans should have known they were not better off by exterminating the Jews; they lost many of their best scientists, logisticians, and entreprenuers when they "cleansed the race".

I agree with Spinoza's reasoning: If I am a bad person, then I will make a bad decision when faced with a crisis of loyalty. If I am a good person, then by definition my actions are usually good; as much as is humanly possible. The result will be a right decision when faced with a crisis of loyalty: though I may choose to be disloyal to a certain organization or institution, I will have chosen rightly and it can be considered loyalty to a higher institution.

Now if we could all just agree on what is good and bad (what is quality?) in every situation.