As volatility in the global economy continues, company layoffs remain in the news. Effective leaders understand that while layoffs may be necessary and appropriate, in many cases they cause more damage than benefit. These leaders take seven actions to reduce risks to company performance, reputation and long-term viability.
Numerous studies over the past 20 years correlate layoffs that are strategic and forward-looking with higher valuations and stock prices and those that are focused solely on cost cutting with lower ones. Examples of strategic reasons include exiting less profitable sectors, products or markets due to changing customer habits. Further, effective leaders know that being transparent regarding the reasons for layoffs increases investor, customer and employee trust and engagement.
The same studies demonstrate that most organizations that conduct layoffs do not see improved profitability, especially those that are highly reliant on innovation and growth. Leaders often underestimate the negative impact of layoffs on productivity, employee engagement, retention and brand/reputation. In general, investor response to layoffs is less positive than leaders expect. Companies that conduct layoffs generally underperform in the short and long term (for example, during the recession of 2008 – 2009).
Effective leaders know that they should pursue all possible alternatives before embarking on layoffs, including temporary furloughs, redesigning jobs and work models, moving some workers to contractor status, using more variable pay (such as bonuses) and offering more flexible benefits to create cost and operational flexibility.
Additional research shows that layoffs historically have had a disparate impact on women and underrepresented employees. Recent anecdotes in the news show stories of layoffs among employees on maternity and health leave, as well as those in vulnerable positions with visas.
Reasons cited as acceptable for determining who is laid off include factors such as employee performance, tenure, experience and skill set. Effective leaders know that evaluating performance, skills and other factors is difficult and time-consuming, and that maintaining ongoing performance evaluation and review processes can position companies well for both ongoing and unanticipated events.
Effective leaders know that their actions during layoffs impact both those who are laid off and those who stay. Current employees watch carefully what leaders are doing – for example, researchers found that a layoff affecting 1% of the workforce led to a 31% increase in the rate of voluntary turnover.
Other research determined that after layoffs, retained employees experienced declines in job satisfaction, organizational commitment and job performance. Many also experience guilt and distraction.
The absence of compassionate leadership during difficult times erodes loyalty among those who remain. Further, according to the Edelman Trust Index, customers watch closely and test alignment with their own values.
Effective leaders understand that actions such as canceling access to healthcare, terminating employees on leave, firing employees over email, and withholding access to personal information or property from terminated employees is harmful in both the short and long term. Additionally, WTW research shows that organizations that are highly effective at leading and managing change during disruption consistently demonstrate year-over-year superior financial performance.
Experienced leaders also recognize the price of not spending enough time learning about who they are laying off and the implications of doing so. For example, recent anecdotes of layoffs include a coding team needed to repair a vital application, the trusted account leader of an organization’s most profitable customer, and a large group of employees recently evacuated from a war zone.
Effective leaders spend the time and thought required to understand not only who they are laying off but also why and the potential impact. They conduct robust workforce planning exercises using data science to understand employee performance, skills, networks and collaboration patterns to safeguard against losing key talent and creating unintended consequences.
Effective leaders take responsibility for layoffs and show appreciation for those impacted. They know that the once-standard practice of not apologizing for layoffs has been turned on its head in today’s world of purpose and accountability. They demonstrate their empathy and compassion through all communications.
They understand their audience, share the reasons for the layoffs, allow opportunity for employees to process the information and share their feelings, and provide support and resources. A frequently cited, best-practice CEO message incorporating these elements comes from Airbnb CEO Brian Chesky.
Effective leaders understand that while layoffs can create short-term cost savings that may trigger higher executive bonuses during the years of the layoffs, leaders are most effective when they include actions to share the pain of layoffs. There are many examples in the news of CEOs and their executive teams taking pay cuts, either through salary reductions or lower bonuses (or both).
While layoffs are difficult for all involved, effective leaders handle them with care to avoid unraveling company purpose, culture and performance.
A version of this article originally appeared on Forbes.com on March 30, 2023.