Cut pay and perks before cutting staff

Downsizing is back in fashion, with the IT sector leading the way.

Downsizing is back in fashion, with the IT sector leading the way.

Among the recent examples are Fujitsu with 16,400 layoffs globally, Hewlett-Packard 6000, Dell 4000 and AOL Time-Warner with 1200.

Despite the New Zealand economy ticking over reasonably nicely and many local vendors enjoying healthy sales, the axe still often falls here on one or two simply because US bosses order it.

But is downsizing in the longer-term interests of the company?

US website recently ran an article on the perils of slash and burn. Authors Dr Suhail Abboushi and Dr Jay Lebowitz of Duquesne University school of business say both dot-com companies and traditional bricks — and — mortar organisations will be much more successful in the long run if they implement layoffs as a last resort, not as a first response to a temporary downturn in sales.

Many firms jumped on the dot-com bandwagon, they say, and have consequently fallen into the same traps that plagued companies for years. “The knee-jerk reaction of many of these [IT] companies, laying off large employees to achieve profitability, is often not necessary, and frequently counterproductive,” they say.

In today’s new information economy, the argument goes, companies will only beat the competition by fully utilising the skills of their staff and “capturing the hearts” of their employees, so that they feel committed to and passionate about their employers’ philosophy. This way, they will suggest innovative ideas for new products, offer creative suggestions for improving quality and provide customers with exceptional service.

Few firms have developed an employee culture to their competitive advantage, but the report cites Southwest Airlines, sharebroker Charles Schwab and coffee house Starbucks among others. Starbucks chief Howard Schultz says taking care of staff means they communicate the firm’s passion to customers, so they get good service. This translates in sales and eventually the firm’s bottom line. However, many firms don’t see this and Abboushi and Lebowitz warn of a “myriad of hidden costs” associated with downsizing that executives rarely consider.

Based on a survey of more than 2000 US firms, they report the following typically occurs before, during and after a round of layoffs.

  • Lowered productivity and quality
  • Poor customer service
  • Decreased sales
  • Higher absenteeism and tardiness
  • Higher employee turnover (of the best people, who are often hired by the competition)
  • More accidents on the job
  • Wasted training expenditures
  • Higher medical insurance/disability claims especially for stress-induced illnesses
  • Increased use of the company’s employee assistance programme (if available)
  • High severance pay
  • High unemployment compensation expenses
  • High litigation costs pertaining to discrimination and wrongful termination lawsuits
  • A need for greater security on premises
  • Fees to outplacement services firms
  • Wasted time spent by management in responding to employees’ fears
  • Idle equipment and machinery
  • Retention bonuses for employees who don’t “jump ship”
  • Fewer, creative product ideas
  • A difficult time in ramping back up to full production when the business cycle turns upwards
  • Excessive overtime pay
  • Unnecessary recruiting expenses.
While companies downsize to improve their financial situation, research by the American Management Association shows less than half of companies that downsized increased their profits. US-based Mercer Management Consulting similarly discovered just 27% of intense cost-cutters emerged as profitable and growing. And more recently,studies by Cascio and

Mick & Wise found downsizing had no effect whatsoever on the companies’


Recognising the debilitating effects of a downsizing, a few experts have found alternatives, leaving layoffs as a last-resort. But even fewer firms are using them, despite their acclaimed benefits.

“Virtually all of these practices should save the company money in the long run if management implements them as part of their strategic vision to make an employee-orientated culture their competitive advantage,” say Abboushi and Lebowitz.

These practices include helping the downsized find work, viewing employees as assets not costs, making efforts to improve the moral of survivors, reducing staff through attrition and recruitment freezes, cutting overtime, bringing out-sourced work back in-house, offering early retirement or longer (unpaid) holidays, communicating the need for layoffs, asking staff for alternatives, freezing or cutting pay, shortening the working week (and with it pay) and reducing executive perks.

Abboushi and Lebowitz say management telling staff they are implementing these polices to avoid layoffs will capture their motivation and commitment. Staff will strive to deliver their best work/customer service if they feel senior management cares and treats them as part of their “family”.

Top management must “share the pain to share the gain” and if senior management inflict pain on staff to reward executives, a downward spiral begins.

If, for example, a firm needed to cut costs by 10% to remain viable, instead of laying off 10% of the workforce, the firm could temporarily cut pay 10% for all from the chief executive down. Alternatively, the working week cut be by 10% (say, Friday afternoons off) with commensurate pay cuts. Overtime can also be cut, early retirement or payoffs used, and cutting executive perks should boost employee motivation.

These are US examples, of course, but Abboushi and Leobowitz believe these kinds of approaches will help firms in any country far more than downsizing.

Greenwood is Computerworld’s human resources reporter. Send email to Darren Greenwood.

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