Lay Off The Layoffs

Is there anything more devastating than to lose your job? I have two close friends who have had that experience in the last year, and the emotional and financial challenges have been immense.

And according to a recent article in Newsweek, layoffs don’t work. In the article, Jeffrey Pfeffer writes that most of the supposed benefits from layoffs—higher stock price, increased profitability or productivity—fail to appear. He cites research that dispels many of the myths of layoffs:

  • Companies that announce layoffs do not enjoy higher stock prices than peers, either immediately or over time
  • Layoffs don’t increase productivity; though labor costs per employee fall, so do sales per employee
  • Layoffs don’t increase profits
  • Layoffs don’t even reliably cut costs

That last point is surprising; in this economic environment, most companies are trying to cut costs, and consider layoffs a good method for accomplishing that. But according to Pfeffer, there are significant costs to layoffs, including direct costs (severance packages, outplacement services) and indirect (loss of good people, need to re-hire later, toll on morale and productivity of those who remain).

So, if layoffs are so bad, why do companies continue to do it? Pfeffer suggests that it’s because leaders are under tremendous pressure from the media, analysts and peers to follow the crowd. Layoff behaviors are contagious, spreading like H1N1 from company to company.

Pfeffer presents a compelling argument for contrary behavior. Before leaders initiates layoffs, they would do well to consider the true costs. And then make a decision that will really get the results they want.

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