Large-scale layoffs have been the norm for the past three years. According to layoffs.fyi, over 141,000 employees have been laid off from 468 companies in 2024 so far, many of which are in high-tech. While layoffs sometimes provide short-term financial benefits and the promise of a more agile, lean, and responsive operations, there is often no quick financial win. New research reveals that layoffs lead to long-term costs. Layoffs can significantly reduce the engagement, morale, and loyalty of employees for over a year and lead to higher, costly turnover.
Previous research (over two decades) has also shown the high costs of layoffs, including higher turnover, a significant rise in mental health issues, poor morale, and low engagement. Layoffs often do not lead to short-term financial gains when the layoff is for the purpose of cost cutting but can drive financial recovery for firms suffering revenue and profit loss or for companies making a strategic redirection (such as investing in innovative new products, services, and business models. However, there are many better alternatives to layoffs, as we will discuss below.
To understand the impact of company layoffs on employee engagement, Culture Amp studied 146 companies that went through layoffs between March 2020 and November 2022. The companies had conducted employee engagement surveys before and after the layoffs, giving Culture Amp an understanding of the change in employee experience over time, as reported in the Harvard Business Review last week.
Culture Amp reports that after layoffs, companies saw a significant drop in employee experience in many key areas:
- Employee confidence in the company dropped 16.9 percent. Belief in career opportunities dropped 12.1 percent. And confidence in leadership dropped 10.5 percent.
- High employee engagement prior to layoffs won’t protect you from the negative impact of doing layoffs. In fact, Culture Amp found that the higher the employee engagement, the more likely it is to plummet after layoffs, with the more committed employees leaving the business. The largest declines were from companies scoring in the top 10 percent of employee engagement measures prior to the layoffs. However, for some companies where employees were less engaged and committed to begin with, a layoff can be perceived as addressing structural and systemic problems within the organization and can actually boost commitment.
Culture Amp’s 2020–2022 research found it took 12–18 months for engagement to rebound after layoffs. And for 2023 layoffs, the recovery is looking even longer at 18–24 months, and that’s only if you hire new employees to backfill essential roles. For employees who make it through a time of layoffs, their commitment to staying with the company continues to drop over time, and this sentiment is a strong predictor of actual turnover.
Humanizing the layoff experience can reduce the damage
Culture Amp’s data revealed how companies can reduce the negative impact of layoffs among the survivors.
- Be realistic in your expectations and expect engagement and company confidence to take a long-term hit.
- Focus on how the change is communicated from the outset. Companies that are transparent and open fare better. No one wants to be working in a constant state of uncertainty.
- Don’t try to do more with less. Recognize that employees are human, and after going through a difficult change, it’s unlikely they’ll be able to increase their output. Instead, ruthlessly prioritize what work can be dropped so that everyone can focus and rally around the most important things that need to get done.
- Treat people humanely in the off-boarding process. While layoffs can involve months of planning for HR and business leaders, the experience of an employee finding out, reading an email, and having their system shut off can happen in a matter of minutes, creating a literal shock to the system. From a security and risk perspective, this is common practice. However, more organizations are taking a different approach, giving people more time to access systems that aren’t storing sensitive information, say goodbye to colleagues, process the news, and get the closure needed to move forward.
- Recognize that relationships outlive employment contracts. People need time to process what’s happening and grieve for the loss of identity that comes with the loss of a job.
Culture Amp’s research is not alone. Other research over the years has shown that layoffs take a tough toll on employees and do not always provide financial return to an organization.
In his book, Dying for a Paycheck, Stanford Professor Jeffrey Pfeffer points out that layoffs often do not cut costs, as there are many instances of laid-off employees being hired back as contractors, with companies paying the contracting firm. Layoffs often do not increase stock prices, in part because layoffs can signal that a company is having difficulty. Layoffs do not increase productivity. Finally. what Pfeffer asserts is that layoffs do not solve what is often the underlying problem, which is often an ineffective strategy, a loss of market share, or too little revenue. Pfeffer asserts that layoffs are basically a bad decision.
Another study published in the Harvard Business Review in 2022 by Sandra J Sucher and Marilyn Morgan Westner found that the short-term cost savings provided by a layoff are overshadowed by bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation — all of which hurt profits in the long run. The researchers found that layoffs destroyed trust with employees and had a long-term impact on people’s health and finances. Displaced workers have twice the risk of developing depression, four times the risk of substance abuse, and six times the risk of committing violent acts, including partner and child abuse.
The HBR authors also report that findings of two decades of profitability studies are unequivocal: The majority of firms that conduct layoffs do not see improved profitability, whether measured by return on assets, return on equity, or return on sales. Layoffs are especially hard on the performance of companies with a high reliance on R&D, low capital intensity, and high growth. Market response to layoffs was also less positive than might be expected, with three-day share prices of firms conducting layoffs generally neutral. Investors gave higher valuations for layoffs perceived as helping firms in financial distress return to profitability as well as those that were strategic and forward-looking. Layoffs undertaken only to reduce costs tended to lead to a drop in share price.
There are alternatives to layoffs.
The authors found many successful alternatives to layoffs, such as furloughs, executives forgoing bonuses for a year, and delaying salary increases. For example, Dave Cote, who engineered the turnaround of Honeywell in the 2000s used furloughs rather than layoffs to reduce costs during the Great Recession. Cote’s intact workforce enabled him to continue product development, earning Honeywell a three-year total stock return between 2009 and 2012 of 75% — more than 20 points higher than GE, his nearest competitor. Cote didn’t hesitate to use mass layoffs when exiting underperforming businesses. He also made strategic hires in areas Honeywell was growing, and consistently used performance management to ensure that the people who worked in the company were ones they wanted to keep.
Southwest airlines under previous management often reassigned employees to other jobs or used furloughs rather than layoffs during travel recessions. Because their workforce was on hand, Southwest financially grew much faster than its competition when airline travel increased. Learn more here.
Layoffs have been prevalent in business for the past three years, especially in the high-tech sector, but they provide dubious financial returns (unless the cause of the layoff is a loss of revenue and profitability). The costs to employees are high, with significant increases in depression. Companies also experience higher employee turnover, and loss of morale and engagement. Employees often do not overcome these issues for 12 to 18 months after the layoff, confounding employer productivity.
About Victor
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and Managing Partner of InnovationOne, LLC. He works with organizations to transform HR and recruiting, implement remote work, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: The Best of Empirical Research, Method and Process, and Digitization. He is quoted in business journals such as The Wall Street Journal, Workforce Management, and CEO Magazine. Victor has partnered with The Conference Board on innovation research. Subscribe to his weekly blogs at http://www.VictorHRConsultant.com