Share a current event article with the class that relates to the concepts covered in this week’s reading. Write a brief summary, and explain why you felt the article was relevant.
Note: Please make sure you add a substantive summary of the article and include a descriptive section on how the article specifically relates to chapter 6.
APA FORMAT AND WORKS CITED
CHAPTER 6 :
6-1 ETHICS AND HUMAN RESOURCE MANAGEMENT
In Chapter 2, we discussed how the legal framework provided a set of parameters for human resource management decisions, and, as noted above, we discussed various sources of information for these decisions in the previous chapter. But ethics is another important aspect of decision making for all managers, not just human resource (HR) managers.2 Ethics is a separate concept from the law but is closely intertwined. Ethics refers to an individual’s beliefs about what is right and wrong and what is good and bad. Ethics are formed by the societal context in which people and organizations function. In recent years, ethical behavior and ethical conduct on the part of managers and organizations have received considerable attention, usually fueled by scandals at firms such as Enron, WorldCom, Imclone, and Tyco International and unscrupulous managers such as Kenneth Lay, Jeffrey Skilling, and Bernard Madoff. The basic premise is that laws are passed by governments to control and dictate appropriate behavior and conduct in a society. The concept of ethics serves much the same purpose because of its premise about what is right and what is wrong.
Ethics refers to an individual’s beliefs about what is right and wrong and what is good and bad. Ethics are formed by the societal context in which people and organizations function.
But ethics and law do not always coincide precisely. For example, it may be perfectly legal for a manager to take a certain action, but some observers might find his or her action to be unethical. For example, an organization undergoing a major cutback might be legally able to terminate a specific employee who is nearing retirement age, but if that employee has a long history of dedicated service to the organization, then many people could consider termination to be ethically questionable. Managers from every part of the organization must take steps to ensure that their behavior is both ethical and legal. Some organizations develop codes of conduct or ethical statements in an attempt to communicate publicly their stance on ethics and ethical conduct.
Managers must take steps to ensure that their behavior is both ethical and legal.
The various scandals of the 1990s raised many public questions about the ethical training and orientation of managers. A survey published in USA Today created even more questions. In that survey of 443 master’s of business administration (MBA) students, more than 50 percent responded that they would buy stock based on insider information, more than 25 percent said they would allow a gift to influence a company purchasing decision, and more than 10 percent said they make a payoff to help close a deal.3 Even more serious questions of business ethics emerged in the aftermath of the financial meltdown of 2009, and the financial crises of 2010–2011.
Following the near collapse of several major banks and financial institutions, the U.S. government instituted its Troubled Asset Relief Program (TARP) to provide billions of dollars in loans to institutions such as Bank of America and JPMorgan Chase. By the end of 2011, every one of these firms had repaid the loans, and were, for the most part, reasonably healthy financially. It does seem clear, however, that many of these institutions would never have survived without the federal funds. The problems really arose, however, over the year-end bonuses the companies were paying to their executives. We will discuss executive compensation more fully in Chapter 9, but suffice it to say that Wall Street firms paid multimillion dollar bonuses to top executives in early 2010. There was no question that these bonuses were perfectly legal, but questions were raised about the ethics of paying out huge bonuses to executives while many Americans were unemployed or struggling financially—especially when the firms were in a position to pay those bonuses only because of government bailout dollars. In fact, in early 2010, Andrew Cuomo, New York’s attorney general, sent a letter to eight of the nation’s largest banks demanding to know how they structured those bonus payouts.4
“The biggest risk is not taking any risk.… In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
co-founder of Facebook
© Ryan McVay/Photodisc/Getty Images
One interesting ethical challenge facing an organization became apparent when Internet search provider Google announced that it was going to close its operations in China.5 The huge company had formally entered China in 2005 (although it had provided a Chinese-language version of Google since 2000). As the company saw its market share shrink, however, Google’s executives realized they must formally enter the Chinese market. The problem was that Google considered itself a company that was socially responsible; to enter the Chinese market, the company had to agree to a certain level of censorship required by the government. Not only was information that was critical of government policies censored but also there was evidence that the Chinese government used Internet access to track down and prosecute dissidents within China.
To access the hundreds of millions of Chinese Internet users, Google agreed to this censorship, even though it was clearly at odds with Google’s corporate philosophy and what most Americans would consider ethical behavior.6As a result, in January 2010 Google announced that it had uncovered a Chinese government plot to use e-mail attachments to get access to sensitive information and to identify political dissidents, and this was seen as going too far. The source of the attacks has been speculated to be students at Chinese universities. In March 2010, Google transplanted its Chinese operations to Hong Kong. This case illustrates how some companies must balance ethics with profits, and how complicated it is to maintain a real balance.
This case also helps illustrate how the scope of business ethics can be even more complicated when one thinks about the global environment of modern business. Different countries and different cultures have different values and norms, and this translates into different ideas about what kinds of behaviors are ethical and what kinds are unethical. Specifically, nations and cultures differ in what they see as acceptable behaviors relative to corruption, exploitation of labor, and environmental impact. Transparency International, a global coalition fighting corruption, publishes a list of the countries perceived to be the least and the most corrupt in the world. In their latest survey, they found Denmark, Finland, New Zealand, Sweden, and Singapore to be perceived as the least corrupt countries in the world. Somalia, North Korea, Afghanistan, Sudan, and Myanmar were perceived to be the most corrupt. The United States was ranked as being perceived to be the nineteenth least corrupt country.7 Thus, it is important to recognize that one’s sense of ethics is always part of any decision made, but that individuals as well as countries can differ in terms of their sense of what constitutes ethical behavior. We will refer back to questions of ethics throughout these next two chapters.
6-2 RIGHTSIZING THE ORGANIZATIONS
One of the more basic decisions an organization must make concerning human resources is the size of the workforce. Whether a company is forecasting revenue growth or decline, the number of its employees must be adjusted to fit the changing needs of the business. In all cases, therefore, it is essential that the organization, through the HRM function, manage the size of its workforce effectively. This process is called rightsizing, and it is the process of monitoring and adjusting the organization’s workforce to its optimal size and composition.
Rightsizing is the process of monitoring and adjusting the composition of the organization’s workforce to its optimal size.
If not for the intervention of the U.S. government, many large banks and financial institutions would have failed during the recent recession.
© Norman Chan/Shutterstock.com
Managing the size of the workforce may, in turn, involve layoffs or early-retirement programs to reduce the size of the workforce, retention programs to maintain the size of the workforce, and using temporary workers as a bridge between the current state of affairs and either growth or reduction. In any case, the organization must ensure that it has the “right”people. Reduction, retention, or any other strategy affecting the size and composition of the workforce must target the specific types of employees the organization would like to eliminate or keep. For the most part, organizations choose to retain highly committed, highly motivated, and productive employees and would prefer to lose less committed and less productive employees. How an organization achieves this goal while staying within the limits of the law is one major focus of this chapter.
Over the past three decades, people in the United States have witnessed firsthand the cyclical nature of economic forces. In the 1980s, numerous layoffs and workforce reductions occurred at U.S. firms, primarily as the firms adjusted to increased global competition. Both academic researchers and the popular press discussed at length the best ways to manage layoffs and the challenges of dealing with their survivors. Then the economy began to grow at an unprecedented rate in the 1990s, and expert opinion began to focus more on recommendations for recruiting and retaining valuable employees. Then came September 11, 2001, and its aftermath: The economy slowed, and workforce reductions began again. By the middle of 2002, the Dow Jones Industrial Average had its sharpest decline since the Great Depression, and layoffs and reductions were again the order of the day. This time, however, most organizations took a more strategic approach than they had in the 1980s; as a result, many were in a good position to capitalize when markets rebounded again in 2006. In late 2008 and early 2009, however, things took a turn for the worse. Problems with bad mortgages led to foreclosures, banks that had invested in mortgage-backed securities began to have serious problems, and there were massive layoffs. In fact, as noted earlier in the chapter, if it had not been for the intervention of the U.S. government, many large banks and financial institutions would have failed during 2009. The economy began showing signs of recovery by 2010, but unemployment problems lingered and did not drop below 9 percent until 2012. By June 2013, the unemployment rate was hovering around 7.6 percent. The Dow Jones Industrial Average set a new record high in July 2013, and by then the housing market had demonstrated several months of steady improvement. Throughout the first half of 2014, the stock market continued to get stronger, there was continued job growth, and unemployment claims went down to their lowest levels since 2007. Nonetheless, the United States was still plagued by economic uncertainty in the middle of 2014, and many believed that this uncertainty was preventing companies from expanding hiring even further.
How, then, do organizations manage the size of their workforces to deal with their current needs and potential future economic realities? One important, short-term solution is the use of temporary or contingent workers, who provide a buffer for the organization. When facing declining needs for employees, the organization can simply decide not to renew the contracts of temporary workers or end their relationship with contingent workers in other ways. When facing increasing demand for employees, the organization can increase overtime or hire contingent workers until it determines if it will need more permanent workers. Once the need for permanent employees is established, companies must deal with the recruitment and selection issues discussed in the next chapter. This chapter is more concerned with temporary fixes for increased demand and the special issues that face an organization with declining demands for employees: These are the true focus of any discussion of rightsizing. We begin with an examination of the increased demands for employees.
© Khakimullin Aleksandr/Shutterstock.com
6-2a Dealing with Increased Demand for Employees
When an organization anticipates an increased need for employees, the traditional approach has been to recruit and hire new permanent employees. In recent years, that model has changed. Specifically, if the demand for new employees is not expected to last, or if it would take a long time to find the needed permanent employees, then a firm may try a more temporary solution—at least for awhile. This is the case, for example, when the increased need for employees is part of a normal and well-understood cycle such as the practice of retailers hiring temporary help during November and December.
The easiest way to deal with a temporary increase in the demand for employees is to offer overtimeopportunities, which simply means asking current workers to put in longer hours for extra pay. As noted, this alternative is especially beneficial when the increased need for human resources is short term. For example, a manufacturing plant facing a production crunch might ask some of its production workers to work an extra half-day, perhaps on Saturday, for 2 or 3 weeks to get the work done. An advantage to this approach is that it gives employees the opportunity to earn extra income. Some employees welcome this opportunity and are thankful to the organization for making it available. In addition, it keeps the organization from having to hire and train new employees because the existing employees already know how to do their work.
Overtime refers to hours worked above the normal 40-hour workweek, for which there is usually a pay premium.
On the other hand, labor costs per hour are likely to increase. The Fair Labor Standards Act (described earlier in Chapter 2 and discussed further in Chapter 9) stipulates that employees who work more than 40 hours a week must be compensated at a rate of one and a half times their normal hourly rate. Furthermore, if the organization doesn’t really need all the members of a work group for overtime, then it may face a complicated situation in deciding who gets to work the overtime. Unionized organizations often have contracts that specify the decision rules that must be followed when offering overtime. Finally, there is the problem of potential increased fatigue and anxiety on the part of employees, particularly if the overtime is not particularly welcome and if they have to work the overtime for an extended period of time.
Another increasingly popular alternative to hiring permanent employees is a growing reliance on temporary employees. The idea behind temporary employment is that an organization can hire someone for only a specific period of time, and a major advantage to the organization is that such workers can usually be paid a lower rate, although they are now more likely to be entitled to the same benefits as full-time workers.8 Considerable flexibility comes from the fact that employees themselves realize their jobs are not permanent, so the organization can terminate their relationship as work demands mandate.9 On the other hand, temporary employees tend not to understand the organization’s culture as well as permanent employees. In addition, they are not as likely to be as productive as permanent full-time employees of the organization.
Employee leasing is yet another alternative. An organization can pay a fee to a leasing company that provides a pool of employees to the client firm. This pool of employees usually constitutes a group or crew intended to handle all or most of the organization’s work needs in a particular area. For example, an organization might lease a crew of custodial and other maintenance workers from an outside firm specializing in such services. These workers appear in the organization every day at a predetermined time and perform all maintenance and custodial work. To the general public, they may even appear to be employees of the firm occupying the building. In reality, however, they work for a leasing company.
Employee leasing involves an organization paying a fee to a leasing company that provides a pool of employees who are available on a temporary basis. This pool of employees usually constitutes a group or crew intended to handle all or most of the organization’s work needs in a particular area.
The Fair Labor Standards Act stipulates that hourly workers must be compensated at a rate of one and a half times their normal hourly rate for work in excess hours of 40 hours per week.
© iStockphoto.com/Sachin Bhavsar
The basic advantage to the organization is that it essentially outsources to the leasing firm the HR elements of recruiting, hiring, training, compensating, and evaluating those employees. On the other hand, because the individuals are not employees of the firm, they are likely to have less commitment and attachment to it. In addition, the cost of the leasing arrangement might be a bit higher than if the employees have been hired directly by the firm itself.
Our final alternative to hiring permanent workers is to rely on part-time workers, or individuals who routinely expect to work fewer than 40 hours a week. Among the major advantages of part-time employment is the fact that these employees are usually not covered by benefits, thus lowering labor costs, and the organization can achieve considerable flexibility. The part-time workers are routinely called on to work different schedules from week to week, thereby allowing the organization to cluster its labor force around peak demand times and have a smaller staff on hand during downtimes. Part-time workers are common in organizations such as restaurants. Wait staff, bus persons, kitchen help, and other employees might be college students who want to work only 15 or 20 hours a week to earn spending money. Their part-time interest provides considerable scheduling flexibility to the organization that hires them.
Part-time workers refers to individuals who are regularly expected to work less than 40 hours a week. They typically do not receive benefits and afford the organization a great deal of flexibility in staffing.
Each group of employees described in the preceding can be considered part of the contingent workforce, which includes
1) all temporary employees, (2) all part-time employees, and (3) all part-time employees who are employed by organizations to fill in for permanent employees during peak demand. Thus, these contingent workers are considered alternatives to recruiting, but usually as alternatives that are less desirable. Some recent views of staffing take a more strategic perspective, however, and suggest that there may be situations when it would be preferable to hire temporary or contingent workers instead of permanent employees.10
In this view, whenever a firm requires additional human resources unrelated to its core competencies or required to have skills or knowledge that is generally available in the marketplace, then it may be to the firm’s competitive advantage to add resources through some other arrangement besides permanent hires. Eventually, though, it may become clear that the firm needs to hire more permanent employees, and that is the focus of the next chapter. For now, we turn instead to the situation in which rightsizing requires the firm to reduce the number of employees.
6-2b Dealing with a Declining Need for Employees
There are also cases in which an organization needs fewer employees. If the organization employs a large contingent workforce, then the easiest solution is to cut those workers and simply retain its core of permanent employees. This approach works best in cyclical industries in which demand increases and decreases with the time of year, such as farming and its use of migrant farmworkers. But dealing with more permanent decreases in the demand for employees is more problematic, although there are some approaches we can discuss for this possibility as well.
Early retirements and natural attrition can be used when it is possible to plan systematically for a gradual decrease in the workforce. In some cases, organizations can even conduct planning exercises that may suggest the need to reduce the workforce over the next few years. This reduction may result from anticipated changes in technology or customer bases or even to anticipated changes in corporate or business strategies. The organization can attempt to manage the reduction by simply not replacing workers who leave voluntarily, or by providing incentives for other employees to retire early, or both.
Clearly, a certain number of employees will retire every year in any mature organization, which can reduce the size of the workforce by simply not replacing those retired employees. But what if normal retirement rates are not expected to be enough to produce the necessary reductions? In those cases, the organization can offer certain types of incentives to convince some employees to retire earlier than they had planned.
Perceptions of distributive, procedural, and interpersonal justice affect reactions to layoffs.
For example, in an organization that has a defined benefit retirement plan (see Chapter 9), the pension that an employee earns at retirement is a function of (among other things) the number of years that person has worked and her or his salary. An organization could simply announce that those who are thinking about retiring will automatically have, say, 3 years added to their years of service if they make a decision to retire by a certain date. As a result, employees could feel comfortable about retiring 3 years earlier than they had planned. An organization could also increase the rate at which it matches employee contributions to 401(k) plans (also discussed in Chapter 9) or in some other way make it financially more attractive for employees to retire early. Some firms actually provide employees with opportunities to learn more about wealth management so they are better able to take advantage of early retirement opportunities. But, in all cases, these plans must truly be voluntary or the organization may encounter legal problems. By definition, early-retirement plans target older workers, so any attempt—real or perceived—to coerce them into leaving can be construed as age discrimination. As noted in Chapter 2, age discrimination toward older workers is illegal.
© Kheng Guan Toh/Shutterstock.com
6-2c Strategies for Layoffs
In many cases, there is not enough warning to rely on early retirements, or the early retirement strategy simply does not result in enough decrease in employee numbers. In these cases, it is usually necessary to reduce the workforce through layoffs. Layoffs are not popular for obvious reasons. When notified of a layoff, some employees decide to sue the organization for wrongful termination. In these cases, the former employee alleges that the organization violated a contract or a law in deciding who to terminate. Even if an employee does not pursue legal remedies, many employees who have lost their jobs develop negative feelings toward their former employer. These feelings usually manifest themselves through negative comments made to other people or refusing to conduct personal business with their former employer. In some extreme cases, they may even result in aggressive or violent responses directed at those perceived to be responsible. Hundreds of such attacks occur each year, and several dozen result in the loss of life. For these reasons, it is critical that layoffs be carried out humanely and carefully.
A critical determinant of an employee’s reaction to being laid off is his or her perceptions of the justice involved in the layoff process. Three types of justice—distributive, procedural, and interactional—seem to be related to reactions to layoffs.11
1. Distributive justice refers to perceptions that the outcomes a person faces are fair when compared to the outcomes faced by others. This type of justice is often important in determining an employee’s reactions to pay decisions, for example. Most experts believe that these perceptions are based on both the actual outcomes faced (e.g., how much I am paid, whether or not I lose my job) and the perceptions of what others have contributed.12For example, a person may be paid less than his co-worker, but if he can see that she contributes more to the company than he does and that the difference in the pay is proportional to the difference in contributions each makes, then he can still view the outcome as fair. Others argue, however, that unequal outcomes alone lead to perceptions of low distributive justice and when someone loses his or her job but someone else does not, then it is difficult to see how this difference in outcome can be linked to differences in contribution.13
Distributive justice refers to perceptions that the outcomes a person faces are fair when compared to the outcomes faced by others.
TABLE 6.1 Critical Dimensions of Procedural Justice
Voice: The perception that the person had some control over the outcome or some voice in the decision.Consistency: The perception that the rules were applied the same way to everyone involved.Free from bias: The perception that the person applying the rules had no vested interest in the outcome of the decision.Information accuracy: The perception that the information used to make the decision was accurate and complete.Possibility of correction: The perception that some mechanism exists to correct flawed or inaccurate decisions.Ethicality: The perception that the decision rules conform to personal or prevailing standards of ethics and morality.Representativeness: The perception that the opinions of the various groups affected by the decision have been considered in the decision.
Source: Adapted from Jason Colquitt, Donald Conlon, Michael Wesson, Christopher Porter, and K. Yee Ng, “Justice at the Millennium: A Meta-Analytic Review of 25 Years of Organizational Justice Research,” Journal of Applied Psychology (2001), 86: 425–445.
2. Nonetheless, those who lose their jobs may still react reasonably as long as they feel that the organization has not also violated another type of justice—procedural justice—or perceptions that the process used to determine the outcomes was fair. Thus, an employee who loses his or her job may be less angry if everyone in a department also lost their jobs or if layoffs were based on objective and accepted criteria. Several models of procedural justice have been proposed, and these models have yielded the dimensions of procedural justice presented in Table 6.1.
Procedural justice refers to perceptions that the process used to determine the outcomes were fair.
It is also clear, however, that an employee (or any other observer) will judge a process to be fair when it leads to an outcome that is favorable.14 This perspective explains why most students generally consider fair tests to be the ones they perform best on. It is also why employees who do not lose their jobs are more likely to view the basis for layoff decisions as being more just (see, however, the discussion on the survivor syndrome).
3. Finally, a third dimension of justice, interactional justice, refers to the quality of the interpersonal treatment people receive when a decision is implemented.15 Thus, employees losing their jobs will feel that the decision was more just if it is communicated to them in a considerate, respectful, and polite manner. In fact, scholars have proposed more recently that there are two separate dimensions to interactional justice. The first dimension deals with the extent to which the person was treated with respect and dignity when he or she was told about the decision, while the second dimension refers to the extent to which the decision maker provides information about the decision rules used and how they were applied. These two dimensions have been called interpersonal justiceand informational justice, respectively.16
Interactional justice refers to the quality of the interpersonal treatment people receive when a decision is implemented.
The human resource manager who has to deal with layoffs should consider these justice issues. Basically, they suggest that necessary layoffs should be implemented using a well-formulated strategy that can be communicated to and understood by the employees and follows the rules implied by the dimensions of procedural justice in Table 6.1. Finally, the decisions should be communicated in a way that conveys respect and caring for the people involved.
Of course, the actual strategy used for determining who will be laid off must also be reasonable. As noted above, a layoff strategy that targets older workers is probably illegal and would rarely be considered as fair. Sometimes, layoff decisions are made on the basis of performance; that is, the organization decides to lay off its poorest performers. But how does an organization decide who these employees are? Typically, this decision is based on past performance appraisals, but, as we shall see in Chapter 10, performance appraisals are far from perfect and prone to various biases. When layoff decisions are based on performance ratings, those ratings take on the role of employment tests. In other words, because the organization is making a decision based on the performance ratings, the courts consider the performance ratings to be employment tests. Thus, if there is evidence of disparate impact in the layoffs, the organization will need to demonstrate that the performance ratings are job related or valid. This process is not always simple, as we shall see in the next chapter. In addition, the layoff strategy must also include some plan for callbacks if the demand for labor increases again. For example, a strategy that states the first to be laid off will also be the first to be called back will often be perceived as a fair strategy.
HR in the 21st Century
Making Good Decisions Managers today use more information to make decisions than ever before. Perhaps the most obvious example comes from the retailing sector. Point-of-sale technology helps managers know exactly how many units of every product in a store are sold every day. They can correlate this information with sales of other products, track it on daily, weekly, monthly, seasonal, and annual bases, and monitor the effects of price fluctuations on customer demand. Similarly, hotel managers can track occupancy rates in real time, Web site administrators know how many people view their sites every day, and airline managers know how many reservations are made, how many people are on each flight, and how much luggage is on every airplane.
“Our analysis provides management with another data point before they make their decision.”
—Bob Bennett, chief learning office and vice president of HR for FedEx17
It should come as no surprise, then, that human resource managers are also getting into the act. HR managers essentially use two kinds of data. One type they gather themselves: For instance, they can collect, store, and access objective data related to employee education, skills, experience, demographics, and so forth. In addition, they can conduct employee surveys to assess attitudes, job satisfaction, engagement, and the like. In most cases they can also access organizational data related to finance, operations, marketing, and so forth.
HR managers also often rely on the second type of information, from external sources. For instance, salary surveys, cost-of-living data, projected population shifts (migration), and labor force profiles can all be useful. This and related information can be obtained from government sources, consulting firms, and so forth.
FedEx is a great example of a firm that relies heavily on HR information in making decisions. For instance, if FedEx is considering acquiring a company, it first analyzes data from the target company related to employee engagement surveys, turnover rates, experience, education, and diversity to compare with its own workforce information. This helps FedEx understand what additional investments (if any) it will need to make in human capital if it completes the acquisition. The firm is also looking into ways to compare data its employees provide on engagement surveys with the information they share on various social media platforms.18
THINK IT OVER
1. Can a manager ever have too much information? Why or why not?
2. What issues arise when a firm looks at its employees’ posts on social media sites to gain information about them?
Finally, as noted in Chapter 2, when an organization is about to undertake a large-scale layoff or site closure, it is necessary to announce this step far enough in advance to allow employees (and others) to take some action to adjust to the coming changes. The Worker Adjustment and Retraining Notification (WARN) Act requires at least 60 days’ notice for a facility closure or a mass layoff. Failure to provide this notification can result in serious financial penalties, especially for a firm facing pressure to reduce costs. From the organization’s perspective, however, some potential costs come with announcing planned layoffs. Once this plan is made known, many employees will seek alternative employment to avoid being out of work (which is the intention of the law). The employees most likely to find alternative employment are the best employees, however, and the firm is most likely to want to retain these employees. It is difficult to balance the requirements of the law (and of the individual employees) with the needs of the organization that desires to retain its top talent. This chapter’s closing case presents additional information about exporting jobs.
6-2d Is Downsizing Effective?
Given the prevalence of downsizing as a way to reduce labor costs and make a firm more efficient, it would seem that the effectiveness of downsizing as a strategy would get a lot of support. Why else would so many firms turn to this strategy as a means of becoming more competitive? The data on the effectiveness of downsizing is rather mixed, however, and most of the data suggests that downsizing is not an effective strategy.
A major study of the effects of downsizing was conducted in the 1990s.19 The authors compared several groups of companies that were tracked from 1980 through 1994, but we will focus on only three for the current discussion. “Stable employers” were defined as those firms where changes in employment throughout these years fell between plus and minus 5 percent (this was the largest group in the study). “Employment downsizers” were firms where the decline in employment was more than 5 percent during this time and the decline in plant and equipment was less than 5 percent during the same period. “Asset downsizers” were defined as firms where the decline in employment was less than 5 percent during this time, but the decline in plant and assets was at least 5 percent greater than the decline in employment. The authors examined the impact of these strategies over time on two indexes of performance: return on assets (a financial index of profitability) and common stock prices.
The results clearly showed that employment downsizers had the lowest levels of return on assets over time and also did quite poorly on stock price. In both cases, the asset downsizers produced the greatest performance over the period. Most of the pressure on management to downsize the workforce comes from stockholders, who believe that this method is a good way to cut costs and increase profitability. But the results of this study suggest that firms facing increased competition or some other need to downsize should consider reducing plants and assets rather than their workforce.
The Worker adjustment and Retraining Notification (WARN) act requires at least 60 days’ notice for a facility closure or a mass layoff.
Most of the pressure on management to downsize the workforce comes from stockholders.
Other studies have also reported negative effects on stock prices and other financial indexes as a result of downsizing.20 Given these findings, why do firms continue to downsize as a reaction to the need to cut costs? Some evidence suggests that, in the short run, the stock market reacts positively to these cuts, and so managers are reinforced for their decisions. But other potential costs, not only potential direct financial costs, are also associated with downsizing.
Earlier in this chapter, we emphasized issues that can occur in conjunction with those employees who lose their jobs in a layoff, but issues related to those who avoid losing their jobs in the layoff also crop up. A phenomenon known as survivor syndrome can counteract many of the presumed cost savings that led