The Layoff Exodus Conundrum & Investing Now

Companies may get more than they bargained for with layoffs, losing far more employees than planned in addition to the accompanying morale and productivity issues common with the psychological after-effects of layoffs. The Academy of Management Journal published the results of a very interesting study on layoffs and exodus that often follows:

“Downsizing can set off an exodus among retained employees that in some cases is much greater than the reduction achieved through the layoffs.

"’The downsizing-turnover relationship suggests a sad irony in that employees are laid off by companies that may subsequently find themselves understaffed,’ write the study's authors, Charlie O. Trevor and Anthony J. Nyberg of the University of Wisconsin - Madison. ‘Moreover, to the extent that turnover rates hinder organizational performance, the performance of downsizing companies may well suffer further through the leaving behavior that the layoffs generate.’

"Perhaps the most striking finding in this study of quitting rates in some 200 companies was the considerable exodus that even a small downsizing could set off. For example, companies that laid off a mere 0.5% of their workforce sustained, on average, a turnover rate of 13%, a rate that was 2.6 percentage points higher than the average turnover rate of non-downsizing firms. In other words, an extra 2.6% of the workforce left of their own accord, more than five times more workers than were laid off. … The amount of quitting in all these instances substantially exceeds the average 10.4% turnover rate for companies that do not impose layoffs.”

So what should leaders do? Well, Intel’s recently retired CEO Craig Barrett is encouraging investment. In fact, in this Newsweek article, several chief officers are advocating caution in layoffs and continued investment in their people. See these telling statements:

Craig Barrett, Intel
“But companies that cut back on research and new product development do so at their peril. In the high-tech marketplace, for instance, companies that cut deep into R&D will probably fall behind competitors who continue to invest. You cannot save your way out of a recession, you can only invest your way out. … CEOs must screw up their courage and invest through the downturn. It's time for long-term thinking in an environment that has too often been dominated by quarterly statements.”

Jim O’Neill, Goldman Sachs
“If the slump turns out to be severe but only short-term, companies that reduce inventory and cut back staff too aggressively will suddenly have to restock and rehire just as aggressively.”

Diane Swonk, Mesirow Financial
“So many CEOs are so focused on defense that they may be missing real opportunities. If you only play defense, you will not be on the right side as the economy bottoms, let alone turns. For us, for instance, there was an opportunity to attract talent and clients as our Wall Street counterparts imploded. The new blood is helping to buoy profits today and will put us in a whole new position on the other side of the crisis.”

Next week I intend to examine this issue of retention in recession more deeply. Some assume erroneously that retention is not currently a problem for senior executives. Quite the contrary, retention of key talent is always an issue and even more so in this recession.

In the meantime, if you’ve had to conduct layoffs, are you seeing the “exodus effect?” What are you doing to counteract it? Are you continuing to invest? Tell me about it in comments.