Good morning,
Do mass layoffs reflect poor management? That's up for debate. But a new analysis suggests the practice harms shareholder returns, and companies should instead consider tactics like a four-day workweek to cut costs.
CFOs tend to underestimate the “organizational drag” that’s created as a result of layoffs, according to the research and advisory firm Gartner. This can inadvertently reduce shareholder returns in the long term instead of protecting them, an analysis finds.
“The first thing to recognize is that there is an immediate upfront cost to layoffs as a business will need to reorganize itself around a smaller group of employees and typically incur costly upfront severance payments,” Vaughan Archer, senior director of research and advisory in the Gartner Finance practice, said in a statement. And what will follow is an increased need for contractor hiring, which can be costly, and remaining employees have a ton of more work and more demands for increased compensation, according to Archer.
Within three years, the forecasted savings from layoffs tend to become offset by the unforeseen consequences, Gartner said. Even if a business avoids "a vicious cycle of employee turnover" driven by overworked staff and low morale, any cost savings from layoffs will likely be lost. And when businesses start to rehire at some point, it will likely be at higher rates than the employees who were laid off.
“In the more negative scenarios, the factors detailed here are also going to harm growth in existing and new business, and ultimately a firm will start losing its customers,” Archer said.
Four days instead of five
A four-day workweek is one of the 10 cost savings actions companies can take instead of mass layoffs, Gartner suggests. Trimming the traditional workweek model to four days is “not about cutting pay, but may control pay growth and staff turnover as employees find better work-life balance and increased productivity as burnout is reduced,” the firm noted.
This work dynamic has certainly been a hot topic of discussion. Monster conducted a survey of 868 workers in March focusing on work productivity. Sixty-one percent said they’d rather have a four-day workweek and 33% say they’d leave their job for one with a shortened week.
Britain announced in February the results of the world’s biggest trial of a four-day working week, Fortune reported. The six-month pilot included over 60 companies and just under 3,000 to feedback on the “100:80:100” working model: 100% pay for 80% of the time, in exchange for 100% productivity. The results included a 65% reduction in the number of sick days, maintained or improved productivity at most businesses, and a 57% decline in the likelihood that a worker would quit, improving job retention.
Andrew Barnes is the cofounder of the nonprofit 4 Day Week Global, helping organizations in various countries, including the U.K., pilot shorter schedules. Barnes also owns Perpetual Guardian, one of New Zealand's largest corporate trustee companies. During MIT Sloan Management Review’s virtual summit on May 4, he talked about his company’s experience.
“We implemented the four-day workweek five years ago,” he said. “We’re twice as productive on a per capita basis now as our nearest competitor. We’re not seeing any adverse impacts.”
Voluntary reduction in hours, internal redeployment, reducing executive compensation, remote work, voluntary leave of absence, a hiring freeze, benefit cuts, organization-wide pay cuts, and sabbaticals are the other options companies can take instead of mass layoffs, Gartner advises.
If the livelihood and well-being of employees and shareholder returns are on the line, there’s a lot to consider before deciding on a major workforce reduction.
Sheryl Estrada
sheryl.estrada@fortune.com
