We have many euphemisms for workers losing their jobs, none of which make the pain any less for the person walking out the door or for the organization which is losing the employee’s talent and institutional memory. The pressure on companies to cut costs is tremendous in the current global recession. Everybody is feeling it: banks; manufacturing; high tech; retail; hospitality; services; tourism; etc. And the first thing they do is look at their payrolls, hoping that job cuts will demonstrate to their stockholders and boards of directors that they are taking decisive action to stem the loss of revenue. But this is, in most cases, the wrong course of action.

First of all, we have no evidence that mass layoffs result in more successful organizations, whether we are talking about productivity, revenue, or stock price. In fact, the opposite appears to be true. The research does not support across-the-board layoffs as an effective response to losses in profit and market share. A short-term rise in stock price might occur, but this doesn’t last. When a company’s stock does outperform the market over a couple of months it is usually because of other factors, not simply because of a reduction in payroll.

A colleague of mine, who was having a stellar career in a company, had her director job terminated due to wholesale cuts of everyone at her level. The business processes and initiatives that were managed by directors will continue; it’s just that they will now be the responsibility of VPs who may or may not know how to manage these efforts and who are quite removed from the internal and external customers of these jobs. This company is sending its institutional knowledge and talent out the door as well as creating low morale and a survivor mentality among remaining staff, and will have a tough and expensive time recovering once the economy turns around.

Even when cuts are targeted at low performers, morale is affected. In an About.com article titled Alternatives to Layoffs, the author writes:

A company may lay off employees it considers the low end producers, but in doing so it creates a climate of personnel uncertainty. That uncertainty causes others to leave. The first people to leave due to uncertainty in the company are the best people, because they can always get another job somewhere else. The climate of uncertainty that follows a layoff, therefore, always guarantees a reduction in the quality of the staff, not just the quantity.

It’s easy for an executive, several layers removed from the people being forced out, to make the job-cut decision. And I can appreciate how tempting it is (having done it myself, in a small business) to cut people from the payroll in order to stop the bleeding as quickly as possible. But this is usually a case of slower is faster. Companies need to look at all other ways to cut costs before removing the knowledge and talent that they need to get back on the right track and to stay there.