By David Sirota and Douglas A. Klein
How companies deal with job security is one of its defining characteristics in its employees’ eyes.
It is a defining characteristic because, in addition to its economic effects, a decision to lay off people sends a message of fundamental importance to the workforce about the way the company views its people: not as assets but merely costs (necessary evils).
We argue that the way many American companies now seem to operate, by essentially using downsizing as a strategic maneuver rather than as a last resort compelled by economic necessity, is largely misguided and self-defeating. It violates a fundamental need of workers and, in doing so, severely damages the sense of equity that’s necessary for effective organizations.
Yes, job security still matters with young workers
Some people urge that this argument is old-fashioned and that today’s workers have different attitudes about job security.
Their view goes something like this: starting in the mid 1990s, a “new generation” of workers entered the American workforce — young people who readily move from company to company and for whom job security is a low priority. These thinkers posit that the “new workers” want an environment where they feel “empowered” and “self-actualized” and, above all, in which they can develop the necessary skills to find a job in another company when they decide to leave.
Suppose, however, that employment elsewhere is difficult to find. How uninterested in job security are these young people then?
It was not security in general that became unimportant for many young people in the 1990s — instead, it was security in one company. The late 1990s were boom times with plentiful job choices; why be concerned uninterrupted income. He is completely oblivious, evidently, of the fact that the worker has the same need.”
- Nucor, a successful steel company — far the most profitable in its industry — has never had a single layoff. Ken Iverson, Nucor’s former CEO and the creator of its culture, writes, “ ‘Painsharing’ has helped us get through the tough times without ever laying off a single employee or closing a single facility for lack of work, even when the industry overall was shedding thousands of jobs. But, our history of no layoffs is not noble, altruistic, or paternalistic. It’s not even a company policy. We’ve told our employees time and again, ‘Nothing’s written in stone. We’ll lay people off if it is a matter of survival.’ The question is, when is laying people off the practical and sensible thing to do? To compete over the long-term, a company needs loyal, motivated employees. Can management expect employees to be loyal and motivated if we lay them off at every dip of the economy, while we go on padding our own pockets?”
- The well-being of employees is a “central value” and layoffs “a last resort” in world-renowned Mayo Clinic. Chief Administrative Officer Shirley Weis says that,“It is our physicians, our scientists, our allied health staff, our nurses that really make a difference … We are very committed to job security. We’ll do everything we possibly can to preserve jobs. Of course, we can’t guarantee anything.”
Balancing business and employee interests
Our point, obviously, is not that companies should never lay off employees. For some, that would be suicidal.
The real issue is whether employees see the company’s decisions as balancing its immediate business interests with a consideration of how those decisions affect employees. Or, is it all just this quarter’s earnings and stock price, and everything else be damned?
Few people would expect employee well-being to be the sole, or even the paramount, consideration in business conduct. Certain about continued employment in any one company if employment elsewhere is so easy to obtain?
But, times changed in late 2000. The high technology sector imploded, and the country experienced its first economic downturn in a decade. Hundreds of thousands of workers were laid off and, once again, the media were filled with tales of high anxiety in the workplace.
Surveys clearly showed that job security rose to its usual high position on the list of worker concerns. For example, workers in the telecom industry, whether currently employed or not, ranked job security as the No. 1 attribute they looked for in employers.
The impact of the Great Recession on workers will be discussed in Chapter 5, “The Impact of the Great Recession: Flight to Preservation.” We just note here its recent, enormous impact in the political arena. The predominant theme of the 2012 presidential campaign was “Jobs! Jobs! Jobs!” Does anyone still believe that job security is unimportant for American workers and their families, “new generation” or not?
“No downsize” companies DO exist
Don’t believe for a moment that stable employment — the predictability, not just the size, of a paycheck — is ever a trivial issue for workers. An environment in which many jobs are available is, by definition, a secure environment. The late 1990s-type boom is uncommon in the career experiences of the great majority of workers, so for most people most of the time, the employment stability that a company offers is critical.
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Equally momentous is a company’s decision not to downsize when other companies in the industry take that path. Such companies do exist. The in-your-face capitalism described by Sloan and others, while increasingly prevalent, is not a universally accepted model; if it were, our survey data would be nearly all negative! The alternative philosophy is exemplified by these comments from two highly successful CEOs:
Sure, we could take out a lot of our people. But we could give up our future. One, we’d demotivate the people who remained. Two, they surely wouldn’t have the loyalty they have now. Three, if there were any good people left, they wouldn’t be here long. They’d be looking around. And uncertainty reduces risk taking.”
— Wolfgang Schmitt, Rubbermaid CEO, when growth of his company slowed
I had always figured out how to maintain full employment, because I totally believe that when you bring people into your workforce, they’re taking on debt, they’re building families. They’re trying to go forward in terms of their lives. To pull that from under them is probably one of the biggest disgraces I could ever imagine.”
— Jack Stack, CEO of Springfield Remanufacturing Corporation
The policies represented in these views are not just humanitarian — they are the best for the business.
Are layoffs ever good for a company?
How do we know that? Let’s examine the heart of the claim, which is that layoffs are good for a company in the ordinary course (the implication being, of course, that the financial benefit trumps the human issues). To some readers, Xerox’s actions will no doubt sound like good business. These are the kinds of actions that, we are told, have finally dispensed with old-fashioned and inefficient paternalistic management.
Sure, a layoff often results in a short-term spike in a company’s stock price. However, the impact on the long-term can be quite different. There is now a mountain of evidence that casts doubt on the efficacy of downsizing for many companies as a cost-reduction strategy. At the least, the projected savings are greatly overestimated.
Basically, the studies show that only about one-third of companies that downsize gain increased productivity and profits over the subsequent 3- to 5-year period. Further, these companies underperform the stock market over that time. Research done in the mid 1990s found that downsizing companies outperformed the S&P only slightly during the six months following news of a restructuring, then lagged badly, netting a negative 24 percent by the end of three years.
The theory of keeping a company “lean and mean,” then, may really be only “mean.” One study found that, on average, a 10 percent reduction in workers resulted in only a 1.5 percent reduction in costs.
Why the surprisingly poor results for downsizing companies? Lester Thurow of MIT argues that, “Layoffs are painful and costly. There are innumerable reasons they should be avoided if possible.” Among the reasons he cites are the cost of severance payments, the loss of skilled workers who will have taken other jobs and not be available when the company rehires, the retraining of new hires, and, when the layoffs are made, the lower morale and reduced loyalty among the surviving workers.
Successful companies that avoid layoffs
Contrast the in-your-face-capitalism approach with the approach of highly successful enterprises that have made it company policy to avoid or minimize layoffs:
- Southwest Airlines has never laid off any workers, not even after Sept. 11, 2001. CEO James F. Parker said at that time, “We are willing to suffer some damage, even to our stock price, to protect the jobs of our people.”
- Federal Express is dedicated to the principle that its people are its most important asset, as evidenced by its “People, Service, Profit” corporate philosophy. People are deliberately placed first because, in the company’s view, putting people first makes good business sense. These are not just words: FedEx has an explicit commitment not to lay off employees except under the most extreme circumstances as determined by the CEO.
- Lincoln Electric is a Cleveland manufacturer, famous in the management literature both for its extraordinary business success over more than a century and for its innovative management practices, which include guaranteed job security for its employees. The former chairman, James F. Lincoln, wrote, “The greatest fear of the worker … is lack of income. The industrial manager is very conscious of his company’s need of actions had better be taken in the short-term because, otherwise, there might not be a long-term!”
However, things are rarely that black and white. Many factors affect a decision, and the problem, from the point of view of employees in so many companies, is that employees’ interests are a distant last — if they count at all — top management’s calculations.
Excerpted from The Enthusiastic Employee: How Companies Profit by Giving Workers What They Want, by David Sirota and Douglas Klein. Published by permission of FT Press; August 2013.