Experts: Avoid Costly Layoff Errors

I​​t should come as little surprise when laid-off workers believe their employers could have handled the life-changing situation better—or avoided it altogether. A recent academic paper notes that many executives, too, believe their companies made major mistakes in conducting layoffs and suggests ways they can improve.

“It’s surprisingly common for companies to make mistakes in their layoff decisions—and those mistakes can be expensive. Fortunately, businesses can do better,” states the MIT Sloan Management Review article, “Avoiding Layoff Blunders,” written by Christopher Z. Zatzick, Bin Zhao and Peter M. Tingling, all current or former faculty members of the Beedie School of Business at Simon Fraser University in Burnaby, British Columbia.

“Over the last three decades, organizations have eliminated millions of jobs in an effort to increase efficiencies and ensure survival. As the economy has emerged from the last economic downturn, managers are once again reflecting on how they managed downsizing during the downturn,” the paper says.

To RIF or Not to RIF

The authors interviewed 30 North American human resource executives about their experiences handling white-collar layoffs that weren’t based on seniority “and found that many believed their organizations had made some serious mistakes.” More than a third of the executives thought their companies should have laid off more people, and nearly a third thought they should have kept more employees.

Almost a third of the executives thought their companies laid off the wrong employee at least 20 percent of the time. More than a quarter considered their biggest error to have been laying off someone who should have been retained, while more than 70 percent said their biggest mistake was keeping a worker who should have been dismissed, say the authors, who note that a layoff can cost $100,000 per employee.

“What is surprising to me, quite frankly, is that more people don’t think about this,” said Tingling, who, in addition to teaching at Simon Fraser University, is founder and CEO of Octothorpe Software Corp., a Vancouver, B.C.-based company that researches decision theory and creates software to help businesses make decisions. HR professionals, he said in an interview with SHRM Online, need to put as much thought into layoffs as they do into selecting employees

“If HR is truly a profession, it should be concerned … that they’ve got the right people on the bus all the time,” Tingling said. “The reason that we have employees is to move our organization forward.” Downsizings should leave companies in good shape rather than just cut costs, he said.

A More Productive Layoff

Tingling and his colleagues say companies could conduct more productive layoffs by avoiding five decision-making problems:

• Groupthink, in which social or political pressures cause undue weight to be given to decision makers who lack sufficient information. Similarly, a “false consensus effect” can make it appear that everyone agrees with a layoff decision. Downsizing should include many independent opinions, the authors say.
  
  “At one company where managers collectively discussed employee performance, a manager later advised that he had accidently identified the wrong candidate, but when no other managers raised issues with his recommendation, he declined to correct the mistake due to fear of embarrassment,” the paper says.
• Framing effects, or the way choices are presented, which can significantly affect results. Managers’ lists of employees who should be laid off often fail to line up inversely with lists of who should be retained. Managers should write two lists—one of employees they’re ready to dismiss and another of those whom they would hire for a new team—and explain discrepancies. This focuses them on employees’ contributions and productivity as well as on how difficult they would be to replace.
• Managers’ undue emphasis on recent incidents and information. Almost half of surveyed executives said they used informal criteria such as loyalty rather than performance. An informal thought process, however, may give undeserved importance to recent events.
• Time constraints. “Haste also contributes to bad layoff decisions. More than half of the 30 HR executives we spoke to said that during layoff decisions, their companies spent less than an hour deciding whether to terminate each individual employee. Considering that hiring each employee probably took days and involved interviews with dozens of employees, the decision is strikingly offhand,” the authors say.
• Escalation of commitment—sticking with a decision to release the wrong employee or failing to re-evaluate layoff decisions if circumstances change. Executives report some managers “are reluctant to reverse their initial decisions for fear of looking incompetent,” the paper says.

Plan and Plan Some More

Executives should prepare a fair layoff process before they need it, the authors suggest. They can avoid errors in part by creating a psychologically safe environment that encourages managers to speak if they disagree, the paper says.

“Pretending like it’s not going to happen, waiting until the last minutes, those are recipes for disaster,” Tingling said.

Companies should conduct ongoing, systematic reviews of employee abilities, identifying people and positions they can’t afford to lose and those who’d be first to go in a downturn; performance criteria for cutbacks shouldn’t be the same as those used for promotions or compensation, the authors say.

One department’s worst employee may be better than another department’s best worker, Tingling noted.

“What we ought to be doing is cutting with a scalpel and not with an ax,” Tingling said.

‘Compassion and Care’

HR consultant Carol Olsby, GRP, GPHR, CCP, of Carol Olsby & Associates, and a member of the Society for Human Resource Management’s (SHRM) Technology & HR Management Special Expertise Panel, agrees that companies need to give as much thought to terminations as they do to hiring and to consider the effects on employees’ lives, especially given that many people live paycheck to paycheck.

Olsby said she never sleeps the night before a layoff.

“If you’re not affected by it in some way there’s something wrong with you, because when you lay off a person it has a huge domino effect on them,” she said. HR managers should be very “compassionate and caring with people,” giving energy to transitioning them out, she said.

The HR team can provide interview coaching, use their networks to help people get new jobs, offer an employee assistance program, assist with resume rewrites, and call laid-off employees to explain what’s offered. Ensure “that person feels valued for the contribution they made to the company, that they are very sorry,” she said.

While organizations are well within their rights to reduce their staffs, companies can’t be “employers of choice” if they mistreat people during layoffs, Olsby added.

“We don’t have to keep laying off the way we’ve always laid off,” said Olsby. Companies can find more-creative ways to cut costs, as Hewlett-Packard did successfully decades ago when it cut pay 10 percent companywide rather than lay off 10 percent of the workforce.

“Look at all the alternatives; be good business people,” said Olsby. Use consultants and temporary workers, “recognizing when you hire people that it’s a big decision and when you lay off people the decision is even bigger.”

Dinah Wisenberg Brin, a former Associated Press and Dow Jones Newswires reporter, is a freelance writer based in Philadelphia, Pa.