“When downsizing is a knee-jerk reaction, it has long-term costs. Employees and labor costs are rarely the true source of the problems facing an organization. Workers are more likely to be the source of innovation and renewal.” [1]

Case in Point: Circuit City Laid Off Employees for Over-performance

There were a combination of factors that lead to the demise of former electronics retailer Circuit City. A number of these reasons were self-inflicted wounds. The company located its stores in subprime locations, stopped selling appliances to cut warehouse storage and distribution costs and underinvested in its web presence at a time when consumer preferences were beginning to shift online.

However, the company’s biggest blunder was its decision to layoff its most experienced and knowledgeable sales persons while trying to compete in the competitive electronics retail marketplace. In March of 2007, Circuit City announced a scheme to layoff 3,400 hourly workers (roughly 8% of its workforce), while offering a severance package with the ability to reapply to former jobs at a reduced salary. Any reapplications had to occur after a mandatory 10 week cooling off period. Circuit City practiced genteelism by branding its cost cutting and de-skilling scheme a “wage management initiative”.

Management decided to staff its stores with fewer people, with fewer skills, making less money and expected this combination to yield long term positive results. As a result of the layoffs, Circuit City placed knowledgeable, experienced sales staff on a platter and served them to its main competitor, Best Buy. Additionally, where did Circuit City expect to find quality people who would work for a company that did not value loyalty, experience and wage increases?

“From a strategy perspective, customer-facing sales personnel would appear to be a core resource and potential differentiator for a consumer products retailer,” he [Kevin Clark, an assistant professor of management at Villanova School of Business] says. “Especially in an era of rapidly changing and more complex consumer electronics, knowledgeable sales personnel who are perceived by customers as ‘experts’ can be a source of competitive advantage.” [2]

Reportedly, “employees who were paid more than 51 cents above a set pay range for their departments were fired.” [3] However, solidifying the trope of senior executives reaping the gains without the pains, the CEO and Chairman of Circuit City received almost $10 million in various kinds of compensation for steering the company to its imperiled state. [4]

In under two years (i.e., November 2008), Circuit City announced it was going out of business. By laying off its highest paid hourly workers and replacing them with cheaper less skilled workers, in-store customer service levels plummeted which negatively impacted customer perception and sales.

Southwest Airlines Gets it Right

Treating employees as mere cogs and judging employees by costs and not by the overall value they create is self-defeating.

Some companies don’t understand that making workers happy leads to elevated productivity and higher retention levels. High employee morale should be table-stakes, instead it is a strategic key differentiator. Southwest Airlines has never had a layoff in its 47 plus years of existence. That’s laudable when you consider that airlines endured the fallout from 9/11 and the Great Recession (when oil prices spiked over $100 a barrel). As a well deserved consequence, Southwest Airlines routinely leads domestic airlines in customer satisfaction.

Consider this example of how Southwest Airlines treated its recruiting team during the global financial crisis:

“At one point, however, Southwest Airlines was staring at a tough time financially and it did ‘corporate redeployment’. It had 82 employees in the recruiting team. When the company put [in] a hiring freeze, it also wondered what to do with 82 of its employees in this particular team. The company utilised them for customer service. The result: Customer satisfaction went up as a result of this team’s enhanced skill set. When the economy recovered, the team went back to its original job; only this time, they had an additional skill set, which helped the company and the customers alike.” [1]

If you were in the airline industry would you rather work for Southwest Airlines or a competitor with a reputation for layoffs, labor strife and toxic mismanagement of employees?

The Negative Impact of Layoffs

There is a time and place for layoffs. However, more often than not, companies layoff employees during down times in the business cycle to simply lessen the impact on profits, not to avoid a collapse of the business. Against their own best interests, companies also announce layoffs during times of rising profits which causes their best people to head for greener pastures. Any expected cost savings are negated by lower productivity (when the best performers leave), lower innovation and a remaining demoralized workforce subjected to the negative effects of survivor syndrome (i.e., the feeling of guilt after seeing longtime co-workers discarded).

Additionally companies are impacted by “Brand equity costs—damage to the company’s brand as an employer of choice.” [1]. Sites like Glassdoor offer unfairly laid off employees the opportunity to share their sense of betrayal online which can significantly impact a company’s reputation.

Shortsighted management typically operates under the assumption that layoffs will positively impact shareholders. While financial analysts may cheer downsizing efforts, research indicates that layoffs have negative effects on share prices.

“A recent analysis of 41 studies covering 15,000 layoff announcements in more than a dozen countries over 31 years concluded that layoff announcements have an overall negative effect on stock-market prices. This remains true whatever the country, period of time or type of firm considered.”[1]

It should come as no surprise that Circuit City’s stock price fell 4% the day after the company pulled the plug on its most experienced employees. [5]

References:

[1] Employment Downsizing and its Alternatives. Retrieved from https://www.shrm.org/foundation/ourwork/initiatives/resources-from-past-initiatives/Documents/Employment%20Downsizing.pdf

[2] Circuit City plan: Bold strategy or black eye? NBC News. April 2, 2007. Retrieved from http://www.nbcnews.com/id/17857697/ns/business-careers/t/circuit-city-plan-bold-strategy-or-black-eye/

[3] Circuit City Cuts 3,400 ‘Overpaid’ Workers: Washington Post. March 29, 2007. Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2007/03/28/AR2007032802185.html

[4] Thousands Are Laid Off at Circuit City. What’s New?. New York Times. April 2, 2007 https://www.nytimes.com/2007/04/02/business/media/02carr.html

[5] It’s the Workforce, Stupid! The New Yorker. April 30, 2007. Retrieved from https://www.newyorker.com/magazine/2007/04/30/its-the-workforce-stupid

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