It seems like every day, even in this “recovery”, there’s a new headline with a large company touting their latest round of layoffs. While the headlines and the numbers announced are widely publicized, I haven’t seen any news articles on WHY companies make these announcements the way they do.
Why do companies make these enormous headcount reduction announcements YEARS before they’ll be completed?
Why do they make employees sweat it out for years wondering if they’re next?
What prevents a company from just slowly laying off a hundred here, a hundred there without a huge announcement years in advance?
Here are the reasons you don’t see widely reported in the press:
- They Save MILLIONS/BILLIONS in Severance Package Payouts – When a company makes a huge layoff announcements, employees go scurrying for the exits. Look at what’s happening at Bank of America (Bank of America Employees Flood Rivals with Resumes). Let’s say 10,000 of the 30,000 employees they want to shed leave on their own over the next couple years. Let’s also say the average severance package is $100,000. This is reasonable because mixed in with low level tellers and back-office employees are also high level executives and middle management with 25 years in, making $300,000 per year or more. Anyway, the net result of this early announcement alone (via severance avoidance) is 10,000*100,000= $1 Billion! That’s a lot of dough, even for a big “evil” bank. On one hand, you might think corporations are trying to “do right by their employees” and give them some advanced notice about what’s about to happen, but I think savings has a great deal to do with it. They’ve already committed to particular levels and formulas for severance payouts, so this is a great way to reduce the impact.
- Beat the Competition! – If you’re a large player in a particular industry, you want to be the first to announce major layoffs. Why? So you can get as many of your employees to leave on their own as quickly as possible so you’re not stuck announcing last and paying out everyone’s severance. I saw this in my industry where as soon as one company accounced, everyone else did. All the large biotechs and pharmas are doing the same thing – shedding sales and marketing, selling/closing plant sites, cutting R&D/outsourcing low-level R&D, outsourcing IT, etc. Did the world change in a single year? No, just once one or two companies made their intentions known, everyone followed. The industry has been under constant pressure ever since.
- Improve Performance (Output per Worker) – Even at the expense of lousy employee morale, when you know your job is on the line, you’re more inclined to put your nose to the grindstone. Even if your particular business unit was never even slated for layoffs, senior management will never let you know it. They’ll let you sweat it out and work your butt off for the next few years. While you’re toiling away for 12 hours a day trying to stand out and make yourself indispensible, your peers are catching on and doing the same. The net impact is a huge productivity boost for the corporation – all while paying lower bonuses, annual raises and cutting expenses across the board – talk about profit momentum!
- Give Crappy Raises and You’ll be Happy – It almost seems obnoxious or morally repugnant when a company is engaging in lavish spending sprees while employees are being shown the door. The same goes for compensation to remaining employees. The subtle message, whether stated explicity or not, is the following: “Look, I know your annual increase is only 1% this year. And bonuses are down. And we’ve done away with stock options. But at least you have a job. Think about how lucky you are and how our colleagues that were separated are doing right now”. Bottom line – it’s a great way to further reduce both immediate and future headcount expenses (since all future raises are based on current salaries).
- Regulations – Depending on the country or state where the separations occur, sometimes companies must report layoffs in advance to a government Works Council, to the state or local governments. Sometimes, savvy industry watchers and bloggers keep an eye on the websites of government agencies to see when new postings go up for large layoff announcements to local agencies. These are often published in advance of the actual company announcement (just a side-note).
- The Numbers Don’t Actually Mean Anything – If you’ve been with a company that’s announced broad layoffs before, you’ll know exactly what I’m talking about. Often times, the presser goes something like this: “We will be eliminating 10,000 positions” or something along those lines. Often times, investors will rejoice, all of the above bullets take place (thus boosting the bottom line), but the net headcount to the company may not change much at all! How’s this? A position is different than headcount. You can eliminate a bunch of “analysts” while simultaneously posting new jobs for “managers” or vice-versa. You can start shedding your higher cost US and EU-based employees while simultaneously growing in the emerging markets. Depending on how they implement, it might just be a shell game and the actual company employee count may not match the stated cuts very closely at all. Finally, what if a firm announces a 10,000 person layoff. Who’s even going back years later to reconcile these numbers? The companies themselves can’t even keep track of how to count who was laid off, who was hired during the same period, who left on their own, who was re-hired, who came back as a consultant (often at a higher rate!), etc. Do investors even care 3 years later if you hit 8,000, 12,000 or nowhere close to 10,000? A lot can change in a few years! If profits are up and the strategy is working, they couldn’t care less if there are 44,000 or 46,000 employees – whatever it takes to optimize profits!
Basically, hitting the numbers aren’t critically important, so why do companies even put a number out there?
ALL OF THE ABOVE