COVID-19 causing significant harm to our society and to individuals has been old news since March. However, if you’re like me, what continues to shock you is learning about the sheer magnitude of its effects on less-obvious outcomes other than sicknesses and fatalities. And while I do not want to discount the direct medical maladies, I would like to draw some attention to another important avenue whereby the pandemic is crippling our society, namely organizational layoffs.
As of this writing, since March 2020, over 65 million initial unemployment claims have been filed, each reflecting a lost job by a US citizen. To put that figure into perspective, the U.S. is currently home to 200 million adults between the ages of 18 and 65, meaning that, on average, a third of our citizens of working age have lost a job in the last six months. Even worse, this fraction is likely an underestimate because not all adults are working or seeking employment.
Unemployment Numbers Rise
When looking at the new initial weekly unemployment claims, for 30 weeks in a row now, we have surpassed the weekly record set in 1982. Indeed, our weekly average over the last four weeks has hovered around one million new claims per week. These data suggest that the Great Recession and the dot-com bubble will be taking back seats in the decades to come when we reflect on economic downturns.
Yes, the situation looks bleak. Even if you are one of the fortunate survivors of these massive layoffs, you are probably experiencing survivor syndrome, being anxious and worried about losing your job, perhaps while concurrently being asked to produce even more work with fewer coworkers to assist with organizational objectives. Perhaps this anxiety and worry is warranted? After all, an organization’s financial situation is the leading cause of the decision to undergo layoffs, right?
Wrong.
Core Value Correlation to Layoffs and Downsizing
According to Jeffrey Pfeffer, professor at the Stanford Graduate Business School, an organization’s financial situation is not the primary driver of layoffs and downsizing. When I first read his book, it initially didn’t make sense to me—don’t organizations always state that their financial situation is the cause of their decision to enact layoffs? However, after hearing Pfeffer’s explanation and doing some independent research, I became convinced—one’s financial situation, although sometimes important, is NOT the leading cause of organizational layoffs.
Pfeffer offers empirical and anecdotal evidence to support his claim. Empirically, evidenced across multiple studies here, here, and here, economic troughs and organizational profitability are unreliably related to the decision to downsize. Instead, factors such as mimicry and organizational values exhibit stronger, more reliable effects. This means that even when two organizations face a similar financial bind, one of them is more likely to lay off employees than the other based on how they prioritize their values.
Economic Storms and Employee Layoffs
As anecdotal evidence, even organizations with seemingly unlimited resources often decide to lay off part of their workforce. Consider Stanford University, who despite having well over $20 billion in the bank, has felt like they have had to lay off hundreds of employees in years past. How does one begin to compose an argument for an outsider that this action is financially necessary within the context of such financial bounty? Surely if Stanford wanted to, they could have kept these employees on board while the economic storm abated.
Furthering this point, we have exemplar organizations such as Toyota and Southwest Airlines, who for decades have routinely chosen not to lay off employees during economic downturns, even while their competitors have elected to do so. In short, there is convincing evidence that an organization’s financial situation does not unavoidably imply layoffs. Indeed, organizations who prioritize keeping their people employed are able to do so even during financial downturns.
Avoiding Layoffs and Furloughs
But for how long can such organizations continue to avoid layoffs in the face of perilous times? Surely companies like Toyota and Southwest Airlines have had to succumb to layoffs in this, the year 2020. Fortunately, at least as of this writing, the answer is an emphatic, “no.” Southwest continues to amaze, as its budgetary calculations are set to avoid layoffs and furloughs through the year 2021, if that is what the situation demands. Meanwhile, its largest competitors, American Airlines, United Airlines, and Delta Airlines, have all begun the layoff and/or furlough process at the beginning of October after their governmental financial aid expired (which had a clause precluding such actions before the expiration of the aid).
What’s amazing to me is that Southwest does not lead these competitors in any of the key financial indicators of profitability, revenue, assets, or even cash flow—so how do they do it? This is all further evidence that although economic conditions matter, layoffs are a much larger reflection of organizational values.
Prioritization of Layoffs Variances
If layoffs were a primary function of financial situation, shouldn’t American Airlines be the last to announce layoffs, seeing as how their revenue and market value dwarf Southwest’s? Rather, Southwest, with its culture of care and LUV, prioritizes keeping their employees, priding itself in never having implemented layoffs—not 20 years ago in the wake of terrorist attacks when zero planes were in the US airways, not 10 years ago during the Great Recession, and not now during the global pandemic. Admirably, as a true test of their value prioritization, Southwest CEO Gary Kelly has suspended his pay to zero, and the payment of all executives by 20%, through the end of 2021.
Importantly, far from constituting an outlier situation, other organizations beyond Southwest have thus far also avoided layoffs during 2020. Gravity Payments, the credit card processor headquartered in Seattle, has completely avoided layoffs, even while acknowledging how laying off employees in the spring would have quickly made them financially solvent. Rhode Island-based KVH Industries, maker of connectivity and navigation systems, has also avoided layoffs, despite it being “one of the hardest things [they’ve] ever done.”
Organizational Values Trump Finances
Both of these companies have instituted personal and company-wide pay cuts, again affirming their value of keeping their people. The CEOs of these two companies, Dan Price and Martin Kits van Heyningen, have spoken directly about how their values—not their financial situations—are what guided their decisions to avoid layoffs. As the last example, the University of Massachusetts, unlike a huge host of other universities (including Stanford again), hasn’t given up the fight to preserve jobs, despite lower enrollment figures, and despite maintaining an endowment valued at less than two percent of that of Stanford’s. All of these cases support the idea that layoffs—even in our current pandemic situation—are driven more so by companies valuing the sustainable employment of their people rather than by their financial situations.
Layoffs as a Last Resort
I’m not saying layoffs are never justified. I don’t fault companies for using layoffs as a last resort, even after foregoing personal pay, such as Marriott—in fact, I admire such companies. However, as discussed above, mimicry is a leading predictor of layoffs, despite being an unjustified rationale. Yet, I fear that some organizations in today’s business climate are laying off employees unnecessarily, merely because that is what the trend seems to be.
I realize that layoff decisions are complicated and that I should be slow to judge as an outsider, but some reports make it difficult for me to see how a decision to lay employees off could possibly be justified. To illustrate, Salesforce.com posted record sales figures—and then the next day laid off 1,000 employees. Hertz, who laid off 10,000 employees, paid $16.2 million to 340 managers the very next day, calling it a “retention bonus.” Interestingly, part of the justification for this retention bonus was due to “the substantial additional efforts undertaken by the company’s key employees with a reduced workforce in response to an extremely challenging business environment.”
Commitment to the Cause
Hmm… Just an idea, but maybe retaining some of the 10,000 workers would have alleviated much of the additional efforts on these 340 managers?? And why do these managers feel the need to be paid more during our crisis while those they let go are set up to suffer? Moreover, why do these managers deserve more money when other managers in other organizations are voluntarily sacrificing their pay? Layoffs amid signs of ample financial resources further support the hypothesis that an organization’s financial situation is not the primary driver of layoffs and downsizing.
Today, many laid off workers are hoping for the current pandemic to pass so that they can again find stable employment. But perhaps they are hoping the wrong thing? Perhaps they should instead hope for finding an organization that highly values their sustained employment, who will not simply kick them out and give their would-be pay as a bonus to higher-level managers when things turn south. It is along these lines that I offer my students my number-one career advice: Find a company that treats its employees with dignity and respect, and choose to be committed to their cause. The rest will take care of itself—pandemic or no pandemic.
