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Shareholder loyalty may be more of a factor than economy in layoffs
Feb. 20, 2001
BLOOMINGTON, Ind. -- Don't be too quick to blame the economy as the cause when companies announce layoffs. Sometimes, shareholder angst is more of a driving force in a company's decision to reduce its work force, according to an Indiana University professor.
Vincent Mabert, the John and Ester Reese Professor of Operations Management in IU's Kelley School of Business, has studied the processes that companies go through when they reduce their work forces.
"Clearly in the 1980s and 1990s, companies were a little more reluctant to reduce their work forces until they hit a really bad break," Mabert said. "Today, there is so much pressure on firms to perform well for the stock market. We've become so extremely oriented toward bottom-line profit performance that these companies are less willing to forego good returns for a couple of quarters. They want to have good returns quarter after quarter.
"Companies clearly are attempting to manage their costs closer to the vest than they did years ago," Mabert said, adding that workers should expect layoffs sooner rather than later.
During the 1990s, Mabert studied nine Midwestern manufacturing companies that sharply reduced their work forces and found that they could document true savings only 50 percent of the time. Layoffs often were followed by new costs, production problems and morale problems among remaining workers.
"What's interesting is that companies today who are going to be reducing their work force or who have reduced their work force are going to experience similar types of problems that were present in the past," he said.
The times are not exactly the same, however, and there have been shifts in both the implicit and explicit relationships between employers and employees. For example, employees feel fewer allegiances to their employers. Feelings of paternalism from the company are gone. Many employers and employees have severed retirement and pension program connections. More employees have personal retirement programs that are vested and portable, and that move with the employee.
Unlike in the past, a lot of staff reductions today include workers in knowledge-based jobs, and much has been reported concerning layoffs at e-commerce and "dot.com" firms.
"I don't think any firm is immune to the shakeup and the inefficiencies that are generated when important, knowledge-based people leave," Mabert said.
He cited as an example a leading pharmaceutical company that reduced its ranks through early retirement programs in the mid-1990s. "They lost a lot of top researchers for their product development area, who they struggled to replace for many years," he said. "If they were to go through this process again and lose key people, they would go through the same struggles again."
An important consideration for many companies seeking to cut labor costs today is whether they are able to retain valued employees with institutional skill or knowledge by establishing effective, well-communicated and defensible criteria for making such reductions.
"The issue that companies need to deal with today -- and I think some of them learned this from previous mistakes -- is do they provide a universal reduction program, where certain sets of people who meet certain criteria are eliminated?" Mabert said. "Or do they selectively target individuals, based on certain criteria, who might be of less value to the organization?
"In this new environment, where we have rapid communications about profitability and losses, companies are faced with the same need to communicate rapidly with their work force," he said. "If they're going to make changes in their work force, they have to communicate on a continuous basis to that work force on how that's going to take place."
Company management needs to disclose in great detail how job performance will be evaluated and measured, so if there are reductions in force, workers know the process being used. If they don't, the "grape vine" can create expectations that ultimately hamper productivity and morale, he said.
However, even as firms downsize, the economy continues to create other job opportunities, particularly for those with information technical skills.
"The job opportunities are usually in smaller organizations that are nimble and more in a growth start-up mode," Mabert said. "For knowledge-based workers, the economy is still strong enough and enough opportunities are opening up that they're quickly reabsorbed."
For semiskilled workers, including many who benefitted the most from economic expansion in the 1990s, Mabert said the outlook is more sobering.
"They're faced with a slightly different problem. There may be jobs being created, but they clearly are going to lose jobs that paid much better in those specific industries. Their alternatives will probably be in the service sector, which will pay at best half the rate that they're currently earning."
Mabert can be reached at 812-855-2661 or mabert@indiana.edu
(George Vlahakis, 812-855-0846, gvlahaki@indiana.edu)