Risk Management

Don’t Get Knocked Out in the Second Round of Layoffs

Three steps employers can take to avoid losing talented employees.
David KatzJune 14, 2001

While love may be lovelier the second time around, as the song says, that’s not likely to be the case for a second round of layoffs.

The patience of top-performing people who hung around for an opening round could start to wear thin if an employer announces that a new set of compatriots will be departing—and for the same reasons.

For the employer, retaining talented survivors is thus likely to be tougher with each successive workforce cut.

“Remaining employees who are going through it twice are fatigued by the whole situation and want to look around,” says Todd McGovern, a Chicago-based director in the compensation consulting practice of Unifi Network, a PricewaterhouseCoopers subsidiary.

The announcement of round two can create a big credibility problem about an employer’s previous business strategies, he adds.

Existing employees, the consultant notes, might ask their employers: “You said first, one would do the job,” so how do we know that more cutbacks, including our own jobs, won’t be next?

“You want to make sure that this is going to do it—you don’t want to come back to the well a third time,” McGovern adds.

Nevertheless, many employers are likely to be faced with such employee skepticism soon. Of 114 employers taking part in a Unifi survey of severance and retention practices released Tuesday, 24 of those that downsized in the last 18 months are planning to do so again within another year and a half.

The survey suggests a climate of even wider downsizing. All told, 57 of the companies have either downsized within the last 18 months, are planning to in the next year and a half, or are headed for their second round within the three-year period.

In fact, on Wednesday alone, Polaroid said it would can 25 percent of its workforce over the next 18 months, bringing its total planned layoffs for the year to about 33 percent.

To rebuild credibility with employees following a second round of job cuts, McGovern says, employers can take at least three constructive steps now:

  • If they haven’t done so yet, they can grant stock options to all employees. In the current economy, they can make the case that their companies are “hitting the bottom of the cycle, so they have upside potential to share,” the consultant says.
  • They can launch training programs. “When a company is in trouble, one of the first things they cut is training and developing employees,” he says. “To show how things are turning around,” he adds, employers can institute such programs. That way, they can show employees that they will get an educational benefit by staying with the company.
  • They can assign strong managers to coach employees. While this is an excellent way to build trust, it’s the toughest step, says McGovern. One reason is that good managers often don’t make good mentors. Also, unlike “one-time interventions” like broad-based option grants or training programs, coaching involves an ongoing relationship, he says.

To enact a good training and coaching strategy, however, employers must retain a cadre of strong middle managers. And, indeed, middle managers are making a comeback from their early-’90s nadir, when they were widely regarded as organizational fat that could easily be cut.

“Organizations are recognizing that a significant portion of their intellectual capital is tied up in their middle managers, particularly since employee turnover and churn has increased,” McGovern says.

But middle managers can also grow skeptical of an employer’s strategies if the first round of layoffs hasn’t done the trick and a second one’s needed.

To be sure, companies seeking to attract and retain good middle managers might not want to provide the extensive upside incentives—in bonuses and stock, for instance—that they give to senior executives.

But employers “can give a little downside protection” to their managers, the consultant says. For instance, they can offer them employment contracts with better severance agreements.

More specifically, they can waive the one-year, minimum-length-of- service requirement that frequently peppers the employment contracts of managers and employees, according to McGovern.

According to the Unifi survey, middle managers are typically covered in general corporate severance plans, which have minimum lengths of service. Forty-four of the 101 companies that have a severance policy have minimum-years-of-service requirements, according to the study.

Interestingly, while all 44 have the requirement for middle management, 34 waive it for senior management (chief executive officers are excluded in the calculation). Middle managers might appreciate an upgrade to what senior executives are getting.

Employers might find that waiving a length-of-service requirement might also be a good idea for senior executives, particularly where the competition for executives is hot. Further, the waiver might be a handy retention tool for traditional companies with an interest in luring executives from the dot-com world.

Says McGovern: “Think of the hot-shot CFO who went to a dot-com” and is thinking of going back to a brick-and-mortar company for more job security. Such executives might be more encouraged to move if they knew that in their first year they would not run the risk of getting no severance.

Desirable executives might also be lured by an offer from a prospective employer to pay the excise tax that could be charged if the executive gets too much compensation for a job downgrade or loss resulting from an acquisition of the company.

McGovern points out that if, as is true in some employment agreements, there’s a change in company control and an executive gets paid 2.99 percent or more of his or her compensation as a result of job hardship, the executive would have to pay a federal excise tax.

Of the 43 companies with executive change-of-control agreements that don’t cap severance compensation, 30 promise all their senior executives an excise-tax gross-up, the Unifi survey finds. Employers who don’t offer gross-ups are thus at a recruitment disadvantage, McGovern points out.

Such moves suggest that employers are struggling with a paradox in operating within today’s layoff-prone environment. Even as they contemplate layoffs, they must consider ways to retain the employees they want to keep, since the latter are likely to “figure out that situation and will be looking around,” the consultant notes.

McGovern thinks employers should admit that to themselves and plan for it by allocating some of the money they expect to save via layoffs into funds aimed at retaining desirable people.

If they factor in the costs of having to hire new people if their valued employees leave, in fact, employers might want to rethink how lovely those layoffs will be the second time around.