Avoiding Layoff Blunders
It’s surprisingly common for companies to make mistakes in their layoff decisions — and those mistakes can be expensive. Fortunately, businesses can do better.
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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.
Recently, we asked 30 North American human resource executives about their experiences conducting white-collar layoffs not based on seniority — and found that many believed their organizations had made some serious mistakes. More than one-third of the executives we interviewed thought that their companies should have let more people go, and almost one-third thought they should have laid off fewer people. In addition, nearly one-third of the executives thought their companies terminated the wrong person at least 20% of the time, and approximately an additional quarter indicated that their companies made the wrong decision 10% of the time. More than one-quarter of the respondents indicated that their biggest error was terminating someone who should have been retained, while more than 70% reported that their biggest error was retaining someone who should have been terminated.
Such errors can be extremely expensive for the individuals affected and for the
organization. The cost of terminating an employee can be as much as $100,000 — and that’s not counting the cost of hiring a replacement if, during the recovery, managers discover that the person who was let go had critical skills. Fortunately, these kinds of expensive mistakes are not necessary. Simply by avoiding five common decision-related problems, companies could conduct much more productive layoffs.
1. Groupthink
Social and political pressures frequently result in undue weight being given to recommendations made by a subset of decision makers who don’t have all the information they need. Similarly, a “false consensus effect” can lead individuals to believe that everyone is on board with a specific layoff decision. Done well, downsizing decisions include a variety of independent perspectives. If that is not the case, the decisions are likely to be characterized by overconfidence, because the available information will be reinforcing rather than discordant. If, for example, an influential manager suggests a particular scope of reduction or makes a public statement of support or rejection for a particular employee, it is much less likely that another manager will offer a contrary statement. 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.
2. Framing Effects
The way choices are presented can have a significant effect on the outcome. For example, when managers have been asked to prepare a list of employees who should be retained, the results often vary widely when compared to the inverse recommendations of managers who have been asked to prepare a list of employees who should be terminated. On the whole, managers would make better decisions and be better positioned for the future if they were asked to make two lists: one of those they would hire for a new team drawing from their existing employees and another of employees they are prepared to terminate; they could then be asked to consider and explain the differences between the lists. Done properly, this is not a semantic exercise where the list of employees to be released simply comprises all the employees not designated to be retained. Rather, it focuses on key issues, such as the specific contributions that employees make, their productivity and the ease or difficulty with which they can be replaced.
3. Recency Effect and Availability Bias
Managers often give undue weight to recent incidents and information that is readily available. They make decisions based on what they can easily recall or collect, rather than doing the work or taking the time needed to obtain complete data. Almost half of the executives surveyed reported using informal criteria (such as loyalty) not related to employee task performance in layoff decisions. While this information should certainly be included in the decision-making process, its informal nature makes it more susceptible to the recency effect. Consider an employee who, other than some recent personal issues, is a very good performer. A manager may remember the employee’s recent work-family conflict and perceive it to be an indication that the employee is not committed to the organization.
4. 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 per employee 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. One reason is that layoff decisions often lack the open discussions that characterize hiring. Individuals who have key information about candidates may be excluded from the discussion, and managers may lack the luxury of deferring a decision. While little can probably be done to increase the overall time available for downsizing, recognizing that personnel evaluation takes time and allocating it fairly is a good start. For example, one organization spent half of the allotted time on decisions about less than a third of the employees, which meant that the decisions about the remaining two-thirds were much more draconian and more likely to result in staff being made redundant — a problem that is exacerbated if employees are reviewed alphabetically or by seniority.
5. Escalation of Commitment
Managers are often unwilling to admit that they have incorrectly released the wrong employees or fail to reevaluate their decisions if the situation changes — for example, if another employee with related skills quits voluntarily, increasing the importance of the employee identified for downsizing. There are a variety of reasons for such mistakes and, our interviews suggest, they are a fairly common occurrence. But some executives we spoke to said many managers are reluctant to reverse their initial decisions for fear of looking incompetent.
Lessons From the Downturn
How can we learn to prevent future errors in layoff decision making? Given the time constraints and anxiety that layoffs involve, the best time to work out a fair layoff process is before it is needed. Based on what we learned from HR executives, companies can do four things to reduce the number of errors next time:
1. Create a psychologically safe environment.
Groupthink tends to occur when managers, as a group, feel pressured to keep silent if they disagree. To avoid groupthink, managers need to feel free to acknowledge and admit errors made in the decision-making process. A psychologically safe environment with minimal interpersonal or interdepartmental politics facilitates objective and bias-free analyses of errors and reduces self-serving interpretations when things go wrong.
2. Conduct an ongoing, systematic review of employees’ capabilities.
Working under extreme time pressure, managers often take a simplified approach and process readily available information in such a way that only information consistent with their predetermined perspectives is considered when making decisions. Time pressure can be reduced if managers prepare complete files on employees and prioritize their importance to the company on an ongoing basis. Using what’s known as the Shamrock approach, for instance, managers identify jobs and employees that the company cannot afford to lose (and that therefore should be retained during a normal downturn) and jobs and employees who will be the first to go if the company must downsize. Furthermore, managers responsible for performance appraisal should be consulted when performance is used as a criterion for downsizing; it is important to find out whether performance evaluation was done using a future-oriented perspective. Decision makers need to find out whether performance ratings were made for compensation, training or any other purpose, because performance criteria for cutbacks should not be the same as those for raises and promotions. Similarly, managers responsible for recruitment and selection should also be part of the system. To avoid mistakes such as “last in, first out,” hiring managers are in the best position to know whether the most recent hires have the cutting-edge skills companies need most and therefore are the ones most difficult to replace.
3. Involve multiple decision makers throughout the process, including follow-up.
For learning from errors to occur, it is important to involve every decision maker in the evaluation and follow-up process after a mistake is identified. No learning will occur if identified errors are not properly examined and corrective measures are not taken.
According to management scholars Katsuhiko Shimizu and Michael Hitt, highly participative processes in which every decision maker is involved can facilitate the transfer of learning in several ways. First, diverse knowledge from across individual managers needs to be integrated into the analysis of errors in order to overcome ambiguity and correctly locate root causes. Second, a common language or a framework for discussion of errors is likely to emerge from a highly participative process, which facilitates sharing and institutionalization of individual learning (a precondition for optimal learning to occur at the organizational level). Third, getting everyone involved helps minimize resistance to any changes that may result from learning from errors. In contrast to learning from successes, learning from errors often means that structural rules and routines need to be changed in order to prevent error recurrence. A highly participative process helps counteract organizational inertia, a great barrier to implementing decisions to make changes.
4. Teach managers the risks.
Making managers aware of all the common mistakes in decision making will reduce errors in the layoff process. For example, at the individual level, knowledge of evaluation biases that may distort their information selection and interpretation in decision making helps managers question any assumptions they may have and that helps avoid pitfalls in the layoff process.
Learning from errors made in layoffs is important for both companies and managers. For companies, downsizing is a recurring issue due to cyclical economic downturns, and the lessons learned will certainly benefit companies in the long term. Managers who can learn from errors will be able to improve their individual performance and become better decision makers. Determining the causes of errors can be difficult, because errors can be due to multiple factors that may or may not be within an individual’s control, but organizations and managers can take some initial steps to identify and correct possible errors in their layoff processes.