Sunday Strategist: The Payoff on Layoffs Takes Longer Than You Think

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(Bloomberg Businessweek) -- Outside of the hospitals, the Covid-19 casualty list now includes at least 10 million jobs in the past two weeks. James Bullard, president of the Federal Reserve Bank of St. Louis, says almost one in three of us may be out of work in coming months.

Firing an employee, however, is often more costly than it seems. The damage of job cuts tends to infect the company long after the separation. Ironically, profits tend to get squeezed in the aftermath, possibly because survivor’s guilt eats away at productivity. Quality, safety and innovation suffer as managers spread about the same amount of work over fewer workers.

And how soon we forget that hiring is expensive. Just weeks ago, workers were as scarce as toilet paper and companies were going to relative extremes to find them and keep them. With the U.S. economy at full employment and then some, companies trucked in prisoners, retail workers were promised raises and in the white-collar world, there was an arms race of sorts in extending parental leave. 

The sweeteners were certainly sound strategy. Replacing an employee costs up to 60% of that worker’s salary, according to one estimate. When factoring in other friction, such as productivity lost to training, the costs can be up to twice the annual pay. In short, some of the companies making headlines today won’t see any benefit to their layoffs unless the position remains defunct until 2022. Let’s hope we’re all past Covid-19 by then.

What's more, employees spared from the axe are far less loyal and much more liable to jump ship when other opportunities come up. The companies saving the most on payroll now, will be paying the most to combat churn once a recovery takes hold.

Harvard Business Review has a few best practices for companies in crisis mode on human capital. Namely, leaders should communicate openly about the company’s survival strategy, make sure cutbacks are equitable across seniority levels, crowdsource survival strategies to get workers engaged and consider options like four-day work weeks and unpaid leave. 

Consider Honeywell in the 2008 credit crisis, which furloughed employees rather than cutting them loose entirely. Then-CEO David Cote explains that most companies overestimate the savings of layoffs and underestimate the cost. "They consume everyone in the organization for at least a year," he wrote. In the recession, Cote told his managers to think of a layoff like investing in a piece of equipment, ordering them to crunch the ROI.

This week, Boeing offered buyouts and early-retirement packages to trim payroll, essentially letting its least committed workers self-select. Even as it lobbied for a jumbo federal aid package, the company maneuvered to sustain manpower. “We can’t get back to regular operations again after the crisis,” wrote CEO David Calhoun, “if we don’t have the people and skills to make that happen.”

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