HR Magazine: Sweating It Out

By Frank Jossi Jul 1, 2001

HR Magazine, July 2001Vol. 46, No. 7

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

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."

Says Beccie C. Dawson, vice president of Sage Software Inc., in Irvine, Calif., "Layoffs show there's no company loyalty to employees, no stability and encourage the best and brightest to start looking for new jobs."

Dawson believes layoffs signal a lack of management skill and little understanding of how head counts affect the bottom line. In the software business, revenue per employee should be around $185,000 to $230,000, and Sage uses those numbers to determine precisely how many employees it should have based on quarterly sales. If sales decline, about 17 percent of the workforce leaves every year and Dawson simply does not fill the vacated positions. The company's managers conduct performance reviews and eliminate poor performers on a routine basis, which means that the fat usually has been trimmed before a downturn occurs.

Bain's Rigby agrees with Dawson. Research suggests that layoffs work only when a company is involved in a merger or strategic repositioning, rather than as a tool to save money or increase a stock price, he says.

"Tell me that a company is implementing layoffs because they overhired, didn't anticipate an industry slowdown, didn't know what else to do and will likely announce additional layoffs, and I'll be wondering what else they haven't anticipated and why I should own any of its stock," he says.

Layoffs also affect customers—just at the time you need them the most. Customers suffer from broken relationships with departed employees, the frustration of dealing with new staff and reduced service levels, Rigby says.

And layoffs are costly. Many companies have to pay severance, accrued vacation time and potentially higher unemployment premiums, along with potential legal costs due to lawsuits, according to John Fossum, professor of HR and industrial relations at the Carlson School of Management at the University of Minnesota in Minneapolis. A company that lays off a substantial number of employees tends to lose its luster in the marketplace as a good employer, he says, which is a poor strategy in a labor market that remains tight.

Avoiding Layoffs

There are other options. As Sage Software demonstrates, simple turnover and elimination of poor performers can save costs. "On average, U.S. companies see voluntary employee turnover of 15 percent to 20 percent per year," argues Rigby. "Another 5 percent to 10 percent are probably bad fits. To me, this says that companies experiencing volume declines of less than 10 percent can probably use a combination of cost reduction, intelligent hiring, voluntary turnover and performance management to minimize the number of layoffs required."

Consider the newspaper industry, which has been particularly hard hit by an advertising slowdown and other cost pressures. At the Moline Dispatch Publishing Co., publisher of The Dispatch in Moline, Ill., HR manager Donna Herbig says the company plans to curtail overtime and to institute a hiring freeze that will leave 12 full- and part-time positions unfilled. The overtime rule has proved to be the most difficult to enforce, at least initially, because of the flooding of the Mississippi River in April, which left the newspaper with little choice but to cover what will be one of the biggest local stories of the year.

The publisher also has requested that managers forego attending trade shows, conferences, seminars and other activities requiring a great deal of travel. The newspaper isn't eliminating all potential training activities, only those that might be viewed as superfluous in tight economic times, says Herbig. The company also plans to offer employees the chance to work a reduced schedule in summer months and take unpaid time off, an opportunity she believes will be attractive to some of its 236 full-time and 143 part-time employees.

Fifteen years ago, during another downturn, Herbig says the paper put together six committees that came up with more than 200 suggestions for cost savings, and at least half of them were used. Employees are the best sources for ideas on saving money, as long as you trust them and speak to them often, she says.

"We often have talks with the publisher where he talks about the state of the community and the paper. He's not sharing financial numbers, but he's indicating how we're doing. The more information you can give on why you're doing things, the smoother it's going to be." Asking employees for input may not always help avoid layoffs when a business slumps. At 415 Inc., a San Francisco-based web developer, a meeting of all employees in February was designed to explain the company's financial situation and to encourage cost-cutting ideas from staff. Michelle Williams, 415's HR manager, says staffers suggested unpaid vacations, shorter work weeks, shorter work months and pay cuts. The company decided to allow employees to work four-day weeks and take a 20 percent pay reduction or take a 5 percent pay cut and work regular hours. Enough people took unpaid leaves of absence and four-day weeks to slash labor costs by 40 percent.

Unfortunately, the effort proved not enough as 415 laid off 16 people from every division, leaving 57 employees to continue the work. To cushion the blow, 415 allowed former employees to use computers to prepare portfolios, arranged for sessions on writing resumes and referred employees to agencies. "We've been open and honest in everything we've done, and everyone has always had a good idea of what's going on in the firm," Williams says.

At a handful of companies, executive staffs have taken it on the chin, notably at San Francisco-based Charles Schwab, which already has laid off more than 3,400 workers. Any manager at the level of vice president or higher will see a salary cut of 25 percent while regular employees, not immune to the effort to stave off layoffs, will see cuts of 5 percent. At Kansas City Southern Industries, around 50 middle and senior managers have voluntarily agreed to take pay cuts as the railroad company began to lay off 6 percent of its workforce.

For pay reductions to really work, says Mitchell, management must agree to take a hit to their paychecks and forego bonuses as good-faith examples to the workforce.

Improving the bottom line sometimes can be as simple as encouraging employees to take vacation rather than accruing it, a liability on every company's balance sheet. Sage Software's Dawson has employed the strategy and seen at least half the firm's employees agree to take their vacations this year as business has slowed. Programmers are legendary for odd hours and full-throttle workloads, but, in this tight economy, Sage wants to see them at the beach or in a cabin.

"We think it's a positive thing," Dawson adds. "The economy has slowed down, productivity has slowed down, revenues have slowed down and people don't have to work as hard. They can finally take their vacations. It will rejuvenate them and no one, so far, has perceived it as a negative. You can help the bottom line by taking the vacation."

Palo Alto, Calif.-based Hewlett-Packard is attempting to curtail layoffs by using a combination of these ideas. It delayed the effective dates for employees' annual raises by 90 days and mandated that employees take vacation time. The goal is to avoid a second round of layoffs if the nearly 5,000 layoffs in April don't improve the bottom line.

A Special Case

Lincoln Electric Holdings Inc. in Cleveland, cited as a sterling model of corporate responsibility by Harvard University's business school and lauded by many labor scene observers, has not laid off employees in more than 40 years. Since the 1950s, the company's policy guaranteed employment for Cleveland staffers with three or more years of service regardless of economic conditions, according to Ray Vogt, vice president of HR.

Dubbing the strategy "no-fault loss of job," Lincoln reserves certain rights in return for its job guarantee, such as the right to reassign employees to positions in any division within the company. A reassigned employee receives the wage of the new job, which in some cases can be as much as $5 an hour less than their previous pay, Vogt says.

In an economic downturn in the 1980s when domestic sales plummeted 40 percent, the company took 50 workers off the shop floor and sent them out into the field as salespeople, recalls Bruce Cable, director of HR. "We had them calling on distributors, and we called them 'leopards' because they were finding spots in the market we hadn't covered," he says. "A number of them had college degrees, and they're still working in sales out there in the field."

As an example of Lincoln's devotion to employees, Vogt recalls that when the company sold an automotive division two years ago, it made the buyer agree to keep employees for at least two years. Lincoln even encouraged employees of the division under new ownership who wanted to return to Lincoln to apply for open positions. Today, 257 former staffers have returned.

Today Lincoln provides a good deal of cross training for its 3,000 Cleveland employees and transfers someone to a new position nearly every day, says Vogt, who adds that the policy only applies to the company's U.S. operations. When the economy tightens, workers shift to adjust to the changing needs of the company. While the guaranteed employment may sound like a sweet deal, Lincoln employs a rigorous performance evaluation system that leads to as many as half of first-year workers either not making the cut or deciding on a different career. Once staffers pass their third-year anniversaries, he says, less than 5 percent of the workforce leaves each year.

Lincoln makes a good business case for avoiding layoffs, but Vogt says there's a humane philosophy that aligns with the strategy. In his own career, he's seen a fair bit of bloodletting when the economy soured. "The more typical response is to put pressure on head count and push for layoffs, but you'll find that destroys the fabric of the workforce. Lincoln shows how a different process can work, but it requires more creativity and imagination. This approach takes more time and more thought. It's just as tough-minded as layoffs yet humane because it takes away the anxiety of employees who will [otherwise] wonder, 'What happens to me when the economy goes down?'"

Frank Jossi is a freelance writer in St. Paul, Minn., specializing in technology, HR and business.

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