Preserving Employee Morale during Downsizing

“The real question is how downsizing is done, rather than whether to downsize. Companies that downsize through buy-outs and attrition, that help their workers get new jobs, and that sometimes provide outplacement services, end up much better positioned than companies which simply wield the ax. [They have] a better chance of retaining the loyalty of the surviving workers. Trust is one of the most valuable yet brittle assets in any enterprise. So over the long term, it’s far better for companies to downsize in a humane way.” — Robert Reich1

Companies began downsizing in the late 1970s to cut costs and improve the bottom line. Today, companies with record profits carry on the quest to become lean and mean. More than 3 million jobs have been eliminated each year since 1989, for a loss of 43 million jobs since 1979. Government budget cuts alone have resulted in more than 1.1 million lost jobs in the defense industry since 1987, with another 700,000 cuts expected through 1998.2 To put these numbers in perspective, 50 percent more people have been victims of layoffs than victims of violent crime.

Downsizing has become almost a way of life for U.S. companies. In fact, a first round of downsizing is generally followed by a second round a short time later: 67 percent of firms that cut jobs in a given year do so again the following year.3 Unfortunately, many companies have found that the expected payoffs from downsizing (higher productivity, better stock performance, and more flexibility) have been sparse.

In this paper, we explore the reasons that many of the expected gains from downsizing have not been achieved. Drawing on findings from an ongoing research program on effective strategies for downsizing, we argue that maintaining the trust and empowerment of survivors is essential to minimize costs and realize the expected gains. The research program began in the late 1980s and draws on extensive interviews with top managers who have implemented downsizings, surveys of employees who have both been laid off and survived downsizings, and in-depth case studies of companies that have successfully downsized.

The Dark Side of Downsizing

The promised payoffs of downsizing have been mixed at best. One study found that (1) a 10 percent reduction in people resulted in only a 1.5 percent reduction in costs, (2) the average downsized firm’s stock price rose 4.7 percent over three years as compared to 34.3 percent for matched firms that did not downsize, (3) profitability was up in only half the firms that downsized, and (4) the results on productivity were not conclusive.4 The financial costs often incurred by downsizing firms explain some of the mixed findings.

For example, laid-off employees often receive a severance check that includes one week’s pay for every year of service, their accrued vacation and sick pay, supplemental unemployment benefits, and outplacement benefits that can be as high as 15 percent of their salaries. The loss of key talent also minimizes the expected gains from downsizing. Crucial skills disappear, and organizational memory is disrupted or completely lost.5 Thus companies may be losing the very employees most able to revitalize their competitive advantage. More than half the downsizing firms cut too much of their workforce and have to rehire laid-off employees as consultants.6 In addition to the direct hiring costs, there are the indirect but significant costs of forgone opportunities while searching to replace lost talent.

Perhaps the most prominent reason that the expected benefits of downsizing are not achieved is the survivors’ poor morale. A Right Associates survey found that only 31 percent of survivors agreed that they still trusted their organizations after downsizing.7 Survivors reduce their commitment if they perceive that the company’s downsizing process is unfair.8 Several studies also have shown that survivors often exhibit resistance to change, fear, withdrawal, and paralysis due to increased cynicism and burnout as their workload doubles or triples and their department size shrinks by one-half to two-thirds.9

Those managers who must implement layoffs suffer too. Two researchers found that managers often become abrasive, narcissistic, withdrawn, alienated, apathetic, or depressed. Many blame themselves for the harm that they have caused others.10 The irony is that downsizing companies are unwittingly destroying the very qualities they need for competitive advantage, namely their employees’ trust and empowerment.11 At the same time they are downsizing, many companies are advocating the implementation of high-involvement work systems and total quality management strategies.12 Yet employee trust and empowerment, often shattered in the process of downsizing, are the engines that make these initiatives work.

Collision Course

Trust between managers and employees is critical for effective work relationships, especially under conditions of high uncertainty or conflict.13 We define trust as an individual’s willingness to be vulnerable to another based on the belief that the other party is competent, open, reliable, and concerned about the individual’s own interests. Empowered employees have a sense of meaning, competence, and personal control over their work environment. We define empowerment as a proactive orientation to one’s work. Empowerment becomes critical because it is a prerequisite to employee risk taking and proactivity.14

Downsized organizations in particular depend on empowerment and trust as hierarchies are dismantled and fewer managers remain to monitor employee behavior. This is especially true in the 1990s when white-collar rather than blue-collar workforce reductions are the norm.15 With weakening hierarchies, individuals are increasingly faced with situations in which formal controls and sanctions do not exist and where trust becomes essential to coordinated action. Indeed, some scholars have argued that trust and empowerment are replacing hierarchy and transactional contracts as central control mechanisms in organizations.16

Employee trust and empowerment decline considerably during downsizing for various reasons. Survivors may no longer trust top management’s openness because communication is not credible or information is withheld. Survivors may not believe that management cares about employees’ needs if they see that their welfare has been sacrificed for top managers’ personal gain. Their trust in top management’s competency may also suffer. Finally, survivors may also think that the company is unreliable if it has reneged on promises or been inconsistent in stated intentions and subsequent actions.17

Survivors’ sense of empowerment also suffers. As they become increasingly suspicious of management, they may see themselves as independent contractors, viewing the organization in purely instrumental terms and refusing to integrate themselves into the work culture. Empowerment languishes, as survivors’ sense of meaning is lost due to insufficient communication. Survivors’ competency may also be threatened as they take on the jobs of laid-off coworkers, which often require different skills. Their sense of personal control may suffer because of unclear or constantly changing job responsibilities or frequent layoffs that leave them wondering if they are next. Not surprisingly, their willingness to take risks may decline, and they may become more resistant to change.18

Fending off the Collision

Can a company mitigate employees’ mistrust and disempowerment with an effective downsizing process? In our research, we sought to discover whether and how companies can preserve trust and empowerment during downsizing.19 Through interviews and surveys, we identified effective and ineffective strategies.20 Downsizing strategies that focused strictly on eliminating individuals were less effective in reducing costs and improving quality and were also associated with various dysfunctional responses from survivors, including decreased morale, resistance to change, reduced innovation, and restricted communication. In contrast, more encompassing downsizing strategies that identified redundancies and inefficiencies in an organization’s processes and products and involved rethinking culture, structures, and systems were much more effective in reducing costs, improving quality, and preserving survivors’ good will.21

We also sought to identify factors that enhanced the more effective, encompassing downsizing strategies.22 The final phase of our ongoing research, which most directly informed this article, sought to determine how to maintain trust and empowerment during downsizing.23 Two case studies provide examples (see the sidebars).24

A Timeline for Downsizing

A successful downsizing process requires planning that begins long before the formal announcement. Unfortunately, many organizations engage primarily in damage control, reacting to negative employee reactions following the announcement rather than proactively planning the downsizing to minimize survivor angst and preserve trust and empowerment. From our interviews and surveys, we learned that effective downsizings have four distinct stages in which companies must pay close attention to trust and empowerment (see Figure 1):

Making the Decision to Downsize

Never easy or painless, this decision must be made with care. Just because the competition has downsized is not a viable reason. Two managerial actions will help mitigate pressures on trust and empowerment:

Use Downsizing as a Last Resort.

Employees often see downsizing as a failure by top management to control costs and hiring in the first place. It also represents a failure to count employees as valued assets but to see them simply as costs. Senior managers must counteract mistrust by addressing the needs of both survivors and laid-off workers. Managers can show their concern by exhausting all possible alternatives before deciding to downsize. For short-term declines, some companies have successfully implemented hiring freezes, salary freezes, overtime restrictions, pay cuts, elimination of bonuses, shortened workweeks, or unpaid vacations. Some companies have come up with creative alternatives; for example, Rhino Foods lent several of its key employees to customers and suppliers until its business turned around. This concern for employees built significant trust. However, such alternatives to downsizing are successful for short periods of time but can be demotivating if used for too long.

Once all options have been exhausted, companies can offer voluntary separation with severance benefits or early retirement. Some employees welcome a change of employment or a switch to consultant status. Often, they use this as a chance to start a new business that they may have dreamed of for years. The real danger in offering voluntary separation is that the best performers may be the first to leave because they have the most attractive employment alternatives.25 Thus companies must manage such separations carefully to avoid losing people with key skills or competencies. Companies that have successfully downsized often make a special point of telling high performers how much they are valued to encourage them to stay, once the downsizing has been announced in stage three.

Only after the company offers other alternatives and voluntary separations should it consider forced layoffs. This approach shows employees that management is concerned about their interests and needs rather than just its own short-term needs to reduce costs. While this approach may take longer and incur upfront costs, it will pay for itself in the long term through survivors’ increased trust.

Craft a Credible Vision.

Management should never see downsizing as a short-term fix. Instead, it must integrate the decision to downsize into a well-crafted, credible vision that makes clear how downsizing will create a competitive advantage. The vision must be part of a corporate improvement plan that is integrated into the firm’s overall strategic position.26 Indeed, Aaron Feuerstein, CEO of Malden Mill Industries, has managed to downsize continually without impairing the morale of his workforce. As he puts it, “Legitimate downsizing as a result of technological advances or as a result of good industrial engineering? Absolutely. I’m in favor of it. And we do it here all day long.” The trick, he says, is to keep growing fast enough to give new jobs to the people whom technology displaces, to weed out unnecessary jobs “without crushing the spirit of the workforce. . . .If you just have a scheme to cut people, you’re never forgiven.”27 The vision will help reinforce employees’ trust in senior managers as competent leaders who can revitalize the firm and restore competitive advantage. It gives employees a sense of empowerment, meaning, and direction amid uncertainty and ambiguity. It also helps employees to feel in control as they can see a real future for themselves in the company.

Planning the Downsizing

The implementation plan must consider all stakeholders’ needs. Laid-off employees and survivors must trust that management is concerned with their needs, not just those of shareholders, so they feel in control of their destiny, even if it involves layoffs. Our research shows that almost 50 percent of the effort to implement downsizing should be done before the downsizing announcement. Well-trained, well-respected managers who know the business and its people must do the planning. Downsizing without planning can make managers look incompetent, as they initiate random, poorly thought-out cuts.

Form a Cross-Functional Team.

The team to plan and implement the downsizing should represent all members’ interests so employees see that management is looking carefully at everyone’s needs and concerns. At a minimum, it should include representatives from human resources, labor relations, operations, finance, public relations, and legal affairs. In addition, there should be links to technical and customer relations — key parts of the company that can determine the downsizing`s success.

The team members should divide up the responsibility for communicating to stakeholders. For example, their general manager should give employees downsizing information, and the public relations officer should always keep the media informed. The team should also have a clear agreement on the reasons for downsizing, so workers don’t perceive disagreements among team members.

Identify All Constituents.

The team’s first task is to identify constituents and address their concerns throughout the implementation. They include:

• The firm’s employees — those who will be separated, survivors, corporate staff, and any other facility receiving a transfer of people, machinery, or business.
• The community — employees’ families, community leaders, and local businesses.
• The local and, perhaps, the national press.
• Any government agency that might be affected, such as local politicians, community service agencies, and relevant private industry councils.

Next the team should ascertain all constituents’ needs and potential risks and formulate an action plan for dealing with each one (see Table 1 for an example). Not considering all stakeholders can create bad publicity and a poor image.

Use Experts to Smooth the Transition.

While the cross-functional team should plan and execute the downsizing, there will be some areas, such as placement and counseling, for which the team will want the knowledge of outside experts. The Job Training and Partnership Act (JTPA) provides federal funds to states for worker readjustment efforts, including training, job development, and job placement. Applying for these funds takes about sixty days, so it is important to start the process early. Outplacement companies can help employees obtain new positions quickly. Other firms specialize in personal and financial counseling to downsized workers.

Experts can help preserve employees’ feelings of empowerment and fight feelings of helplessness. Many resources — from job retraining to outplacement to financial counseling — enable a company to better respond to the immediate needs of all employees. Using outside experts may also increase survivors’ trust, because they do not expect management to know all the answers in a highly stressful, often ambiguous situation.

Provide Training to Managers.

Training should explain how to communicate the downsizing announcement empathetically and convincingly. It should give the managers who execute the layoffs skills and practice in telling employees that they will lose their jobs. Managers, including the human resources manager, should be able to answer any questions.

Sharing bad news with employees is never painless and is often accompanied by “terminator guilt.” These managers can become the scapegoats for a top management decision.28 Some laid-off workers will be unable to comprehend what is happening and will lash out at the messenger or become violent. But managers prepared to deal with their emotions and those of employees in advance can feel competent in executing this difficult task. Often these managers need counseling and support after they share the news with employees to deal with their own guilt and stress.

Supply Information on the State of the Business.

Employees want to know that there is a purpose for their continued employment and participation in the ongoing business. Research suggests that when workers have a premonition about a future plant closing, they are able to devise coping mechanisms that reduce stress.29 The information may help stakeholders arrive at their own conclusions about the industry or company situation and prepare themselves for potential layoffs.

Employees who have full knowledge of the company’s finances and its industry feel personally in control amid the uncertainty. Downsizing becomes less a crisis and more an expected path. In addition, sharing sensitive financial or competitive data ensures employees that they can trust management to be open and honest.

A critical issue during the second stage is the need to maintain confidentiality until the official announcement. One manager remarked: “The key challenge in downsizings that we really, really fouled up a couple of times was the security. We have a tendency, with e-mail and all that stuff, to put too many things on the table.” As he implies, there is tension between the need for broad input from stakeholders and the cross-functional team and the need for confidentiality throughout the planning process. Indeed, confidentiality during planning risks undermining the trust and empowerment that managers should try to preserve. Many managers suggested that to minimize the potential for leaks, managers involved in planning should focus on communicating face to face, through secured channels, or in off-site meetings, rather than through easily intercepted memos or faxes. But this does not begin to address all confidentiality issues.

For example, in order to retain the most desirable employees, top managers may discuss aspects of the downsizing planning to reassure them that they still have a position in the company, perhaps an even better one. One danger, of course, is that “less desirable” employees will learn of the conversations or hear distorted versions and feel devalued. As a result, trust is undermined, and employees’ empowerment may be reduced. Unfortunately, none of the organizations we studied had completely solved this problem; it is an issue for investigation as our research continues.

Making the Announcement

At this stage, the company must not only show concern for employees’ needs (whether survivors or laid-off workers) but must also be open and honest about the reasons for the downsizing and the implementation process, thus helping to mitigate distrust. The company must communicate its vision so that survivors can have a sense of hope and personal control about the future and feel empowered. Severance packages and other benefits for downsized employees are critical so that they feel in control and can find other employment.

Explain Business Rationale.

Managers should explain to employees where the company is headed.30 By emphasizing the necessity of downsizing due to market changes or unanticipated decreases in product demand, they can help employees see that downsizing does not reflect on their contributions. One manager stated, “I tried never to leave employees with the impression that they were burdened with the responsibility of the plant closing in the sense that they caused it.” An ex-aerospace employee said, “It’s like the company telling you that you’re no damn good.”31

Employees should know why downsizing will help rejuvenate the organization. Communicating a clear vision helps them trust management’s competence in turning the company around. If they see the larger vision, they will also feel more in control. Such a vision engenders hope rather than helplessness. One manager commented:

“People wanted something more definite so they could create their own life. All we could do was supply them with the most current information and let them make their own decisions. A lot of folks wanted us to make decisions for them; that’s just not realistic. They had to determine what was best for them; we couldn’t do it for them.”

Announce the Decision.

Because senior managers have made the decision to downsize, ultimately they must be responsible for announcing it. Their presence tells employees that senior management is concerned about employee well-being. If they do not participate in the announcement, employees are likely to feel abandoned. But their presence is more than symbolic; they must be prepared to help employees and answer any stakeholder questions to enhance trust and open communication. Senior management must listen to employees who may need to vent their emotions immediately after the announcement.

Notify in Advance.

The 1988 WARN Act requires that a company give employees sixty days of advance notice when closing a facility or laying off workers. While some companies think that advance notice will encourage employees to leave when they are still needed, studies have shown that employees notified in advance are more loyal and will delay starting a new position until the appropriate time. Kimberly-Clark went further and announced all expected layoffs at once to prevent people from spending twelve months wondering what would happen.32 Advance notice helps employees feel in control so that they can better plan their futures. It also enhances their trust in management’s openness and willingness to share sensitive information.

Be Specific and Time the Announcement Appropriately.

Employees want to hear about their company’s downsizing from the organization itself, not from the newspaper or television. Thus it is critical to communicate the downsizing announcement simultaneously to all affected constituencies. Various members of the cross-functional team should talk to their respective constituencies in a carefully prepared statement.

The company should make the announcement early in the week and early in the day to allow constituencies time to adjust to the information and use the resources available. A Friday or the day before a major holiday is not an appropriate time because employees have no time for questions and answers. The announcement also should provide a timeline for completion, if known, to dispel further panic. The information should enhance trust in management’s reliability, assuming that managers adhere to the timeline and explain any deviations. Finally, a company should give information about the separation process and the benefits and services for those losing their jobs. Communicating all this information in the announcement will enhance employees’ feelings of control and mitigate some of the disempowering effects.

Offer Employees the Day off.

Most companies find that productivity plummets on the day of the announcement. Giving people some time off allows them to absorb the news and to begin to take responsibility for themselves. After employees are notified of the layoff, they must tell their families that life will change. It is important that they understand the resources that the company will make available to them and what benefits they will receive. This symbolic act will enhance feelings of trust.

Implementing the Downsizing

While the first three stages are critically important to effective downsizing, a company must implement the last stage carefully to avoid decimating whatever trust and empowerment it has so far preserved. This is also the time to rebuild any lost trust and empowerment. The fourth stage emphasizes maintaining openness and honesty during implementation and following through on promises made to all employees. Reneging on promises devastates employees’ trust in management. At the fourth stage, survivors become involved in the implementation process, which increases their empowerment. And when survivors know that the company has taken care of laid-off workers, their feelings of trust and empowerment are preserved.

Tell the Truth and Overcommunicate.

A company should anticipate employees’ questions and answer them throughout the implementation phase. It should ensure time to listen and understand employees’ concerns and needs. One organization had a drop-box so employees could submit unsigned questions about the layoff. Another created an anonymous voice-mail system for lodging concerns. In both cases, management was able to take the company’s pulse and clear up any misunderstandings. Sometimes the awkward situation of a downsizing or a plant closing can cause management to avoid saying anything. Frequent communication is critical to prevent rumors; without it, employees are likely to give credence to unofficial sources.

Face-to-face communication is most effective in resolving misunderstandings and conveys nuances better than e-mail, newsletters, or faxes. Management’s openness and honesty preserves and builds trust by showing its true intentions, undistorted by rumor or third-party interpretation.

Help Departing Employees Find Other Jobs.

The crisis is not over until departing employees are gainfully re-employed. Sometimes employees can be absorbed into other parts of the business. Outplacement agencies can facilitate employment in new firms. To help its laid-off employees, AT&T publicized a job bank to encourage other companies to hire them.33 BankBoston offered to pay the salaries of its employees for six months if they moved to a position in public service. It also supported internships and small grants for new business start-ups. Helping employees secure alternative employment preserves their sense of empowerment and personal control. Employees with greater seniority may need the most assistance in finding alternative employment. The longer they have been with a company, the more specialized skills they have developed and the longer it has been since they have written a résumé, had an interview, or networked.

Announce Subsequent Separations as Planned.

Once a company has a timetable in place, it must keep its promises. Employees will count the days until a specific announcement. If it comes early, they will be shocked. If it comes late, the company loses credibility. Reliability builds employees’ trust in management and helps them feel in control.

Be Fair in Implementing Separations and Generous to Laid-off Workers.

Survivors will judge a company’s future interactions with them on how fairly it treats those laid off. The selection process should focus on past performance or some other objective criteria, and the criteria should fit with the vision of the future. For example, if part of the vision is to move into a new business area, it makes sense to retain employees with the requisite skills. In a unionized environment, there may already be criteria for the separation process specified in the labor contract.

A company should also provide generous benefits so workers feel fairly treated. Severance benefits typically include at least one week’s salary for every year on the job (more for higher level employees). Medical and dental benefits must, at a minimum, conform to COBRA requirements. Outplacement services can include career counseling, stress management, skills assessment, retraining reimbursement, and job placement assistance such as secretarial support, job fairs, résumé preparation, and interview training. Some companies offer incentives for laid-off employees to remain on the job until they close the doors. Generous benefits repay themselves by making survivors more positive about the downsizing.

This is also the time when senior managers should show that they are sharing in the downsizing burden.

Obviously, this is not an occasion to announce record bonuses to top management. AT&T angered stakeholders when it publicized a record pay raise for its CEO while laying off 125,000 people since 1986.34 Fair procedures and generosity help enhance survivors’ trust that management hears their concerns. If employees perceive that top managers are operating primarily in their own self-interest, there will be a backlash and resentment.

Allow for Voluntary Separations.

Compared to forced layoffs, voluntary separations (e.g., employee buyouts, early retirements) help maintain the morale of both survivors and victims. Ideally, people want to choose to walk out, not be pushed out the door. While there is always concern that too many employees will take a buyout, our research and others’ shows that employees will reward a company with their loyalty if given a credible vision for the company’s future. By continually updating them on the progress of the restructuring and the long-term vision, a company can retain valued employees. When downsizing is accomplished largely through voluntary separations rather than forced layoffs, a company reduces the risk of wrongful discharge suits as well.35

Involve Employees in Downsizing Implementation.

A well-implemented downsizing focuses not only on removing employees but also on changes in work design. Remaining employees often have ideas about restructuring their jobs and improving internal processes, so companies should involve them. General Electric invented the popular “Work Out” program, in which groups of employees meet to determine where unnecessary work and procedures can be removed. The result is a much more efficient system that requires fewer employees. Mercedes-Benz Credit Corp., the U.S. finance unit of Daimler-Benz, guaranteed employees a new job if they could find a way to eliminate their current one.36 Involvement in redesign enables survivors to feel they control their futures. (See the sidebar for an example of how to involve employees.)

Provide Career Counseling.

Internal career development offices or external career counselors can help laid-off employees. Chevron, in anticipation of future downsizings, began encouraging employees to think about other career options, such as new positions at Chevron or elsewhere, or entrepreneurial opportunities. Supporting laid-off workers in future careers can be critical to maintaining and enhancing the loyalty, productivity, and commitment of the remaining work-force.37 Such counseling helps all employees feel more in control.

Train Survivors.

It is easy to assume that the survivors will know how to carry out their responsibilities after the workforce is downsized. But they may feel overburdened in taking on the jobs of former coworkers that require different skills. Training should give them confidence to work in a new environment and make them feel more competent and empowered as they grapple with uncertainty. Often this training focuses on using new technology or working in teams — two critical skills.

Each stage of downsizing works to mitigate mistrust and disempowerment. Implementing downsizing is stressful for both managers and employees. Nevertheless, trust and empowerment increasingly will become sources of competitive advantage in an environment of uncertainty and rapid change. How managers plan, announce, and implement downsizing will have an impact on employees’ contributions. In any future crisis, employees who remember how well the company treated them and managed the implementation will be able to trust the organization and build a better, more effective company.