How and why companies lay off employees affects future success

Employers have engaged in temporary layoffs in reaction to the economic uncertainty they’ve faced during the COVID-19 pandemic.

A recent poll of 114 human resources and business professionals conducted by the Guelph Chamber of Commerce, in collaboration with the Gordon S. Lang School of Business and Economics at the University of Guelph, reveals that temporary layoffs were the leading worker reduction strategy used by businesses to respond to COVID-19. This aligns with research indicating that layoffs have become the most popular management tool to cut costs and restructure the organization.

Gordon S. Lang School of Business and Economics.

However, employment legislation in each Canadian jurisdiction limits how long an employee can be on a temporary layoff. Past that point, an employer must make a more permanent decision.

Given the prevalence of layoffs and the impact of layoff decisions on business recovery efforts, it’s troubling that most companies don’t have a policy in place to guide how layoff decisions are made. Two recent Canadian studies offer advice to help businesses take an informed approach to layoffs.

Layoff messaging matters

Leaders consistently indicate that the delivery of bad news, including job cuts, is their most challenging task. Research published in the Journal of Organizational Change Management in 2019 by myself and a colleague, Agnes Zdaniuk of the department of management at the University of Guelph, shows that the explanation of the layoffs and the messaging in layoff announcements has an impact on shareholder reactions. Explanations can include excuses, justifications, apologies and denials.

Our study explored 388 layoff announcements in Canadian media outlets from 2006 to 2015. The results show that shareholders respond positively when employers use excuses, shifting blame for layoffs to other factors (economic or industry decline, for example). There is a slight decline in share prices when the company uses justifications, whereby layoff explanations focus on a larger strategic goal (the long-term survival of the firm, for example).

Apologies and denials both result in significant drops in share prices. When companies use apologies, they accept blame for the layoffs and shareholders interpret that the cuts are a result of poor management.

Some companies deny the job cuts occur by reframing the layoffs positively, using terms like “right-sizing” or “transitioning.” That approach makes stakeholders feel that the company failed to provide honest and accurate information. They may begin to wonder what other information the company is hiding.

Stakeholders also expect CEOs to be more aware of potential threats and opportunities than other company executives. Given the CEO’s greater level of power and expertise, they’re expected to consider alternatives and take action to prevent job cuts from occurring.

Shareholders expect CEOs to take action to prevent job losses and view layoffs more negatively when CEOs make the announcement. (Unsplash)

Excuse- and apology-based explanations highlight the fact that a company’s actions, as well as errors in forecasting and responding to changes, contributed to job losses. There’s also a larger drop in share prices in response to excuse- and apology-based layoffs when the CEO delivers the message, compared to any other messenger.

Essentially, shareholders view the layoff more negatively when the announcement comes from the CEO, and the layoff explanation can be attributed to a failure to respond to internal and external changes. That means using a human resources manager, legal counsel or another manager rather than the CEO to make the announcement can minimize the negativity of stakeholder reactions to layoffs.

The best way to implement layoffs

In an upcoming article I wrote for the Canadian Journal of Administrative Sciences, I explored decisions and outcomes of voluntary versus involuntary layoff techniques.

For involuntary layoffs, management unilaterally makes decisions about which employees are selected for layoffs. In contrast, voluntary layoffs — also known as voluntary buyouts — involve employees volunteering to be laid off.

In May 2020, companies like Boeing, PostMedia, the Vancouver Airport Authority, United Airlines and Manitoba Hydro announced voluntary layoffs. Generally, they’re viewed as less psychologically traumatizing to employees, and more legally defensible given the employee’s say over the decision.

Too often, companies are focused on reducing head count with very little consideration for the quality and composition of the workforce that remains. Clearly, retaining the best performers can help a business recover and rebuild post-layoff.

To inform layoff practices, the forthcoming study compared voluntary and involuntary layoff decisions and outcomes at three Canadian companies. In total, 976 employee profiles were examined.

The results suggest that the use of voluntary layoffs significantly alters the composition of the workforce that remains post-layoff. In more than 19 per cent of the cases, an employee that management would have selected for a layoff would not have volunteered for a layoff. In more than 24 per cent of the cases, the employee who would have volunteered for a layoff was not selected by management for an involuntary layoff.

As expected, management decisions are influenced most by employees’ job performance, as poor performers are targeted for involuntary layoffs.

Severance packages

However, employee voluntary layoff decisions are driven mostly by the value of the severance package. Essentially, the severance package can incentivize employees to volunteer for a layoff. This results in increased layoff costs to employers, and the exit of employees who would not have been chosen under management-led involuntary layoffs.

Generous severance offers can prompt the best employees to leave companies during voluntary layoff appeals. (Piqsels)

The result is that the wrong employees leave during voluntary layoffs, and for the wrong reasons.

This suggests businesses should develop clear policies around eligibility for voluntary layoffs, including offering standard severance packages to employees and developing retention plans. If not, employers should consider abandoning the use of voluntary layoffs to retain control on the composition and quality of the remaining workforce.

Clearly, research shows that layoff explanations, who communicates the layoffs to shareholders and the public and how layoffs are implemented are important strategic decisions.

As organizations prepare for permanent layoffs, the approach to layoffs needs to be strategic and informed to ensure that the right employees remain with the firm. This will help the business recover and rebuild post-pandemic.