Understanding and Preparing for Layoffs 

If you’re a younger millennial or a part of Gen Y, there’s a good chance you’ve yet to experience the unique joy of facing a widespread round of company layoffs. If you’re a GenX or even a Boomer, then you’ve been through times like this before, but never at your current age and station in life; so even though it’s nothing new, it’s still something new to you. 

Layoffs happen in waves, and they tend to affect related or interconnected companies and industries. How a wave of layoffs ends up affecting you can be hard to predict. While employers large and small often blame mass layoffs on a weakening economy, changing technologies, or a shift in consumer sentiment, the truth is that they often occur simply because the stock market thinks they should. After many years of economic expansion and an environment of low interest rates, we now face a prolonged period of more expensive borrowing and slower or stalled growth, leading many managers and industry leaders to consider layoffs. 

In this post, we’re going to talk about the phenomenon of mass layoffs: those layoffs that sweep across entire industries and affect hundreds of thousands of jobs. We’ll talk about how those layoffs are done, why executives argue in their favor, and what research has been done to determine whether those arguments make much sense. Finally, we’ll offer some simple steps you can take to ensure you’re ready for whatever changes your industry will face in the near future. 

Why Layoffs Happen in Waves

Layoffs, particularly when done in combination with sweeping reorganizations or mergers of large firms, are often pitched to the financial markets as “optimizing,” “cost saving,” or most recently “future proofing,” that will lead to greater profitability, adaptability, and growth. The argument goes that by merging with competitors, closing divisions, and eliminating jobs, a company reduces its future liabilities, making it more “flexible” and able to invest in hiring and capital expenditures that boost earnings in the future. This thinking often leads large firms to make cuts without regard to their present financial performance, arguing that their future performance will depend on this increased flexibility.

The thinking, promoted for decades by management consulting firms like McKinsey & Company, is that large companies become less responsive to the needs of their customers and to the demands of the market when the ranks of their middle management grow too large. The response that these consultants prescribe is to lay off large numbers of middle managers, merge and close “underperforming” divisions and departments, and massively increase top executive pay.

Whether any of those justifications are true, it’s clear that mass layoffs almost always lead to increased outsourcing. This trend becomes easier to justify in the periods after layoffs, since remaining workers are often stretched thinner, and the cost of hiring new employees will usually be less than outsourcing new work. 

At the same time, these consultancies have long pushed for executive pay to be increasingly tied to a company’s performance in financial markets, a trend which has seen net compensation for the executives at the largest companies increase tremendously. In 1989, an executive at one of the 350 largest firms in the world was compensated about 69 times as much as the typical worker. By 2020, that same executive receives net compensation of 351 times that of a typical worker. This trend has, understandably, led the largest companies to focus increasingly on their own stock market performance. 

It has also led executives to take larger and larger risks, often at the expense of consumer and employee safety. Former Boeing engineer and current whistleblower Sam Salehpour, for example, accused company executives of silencing internal critics of its safety culture, describing technical meetings in which executives demanded that engineers ask the question “is this good for our stock price?”

Former Boeing Chief Dave Calhoun received a 45% increase in net compensation during his final year at Boeing in 2023, bringing his pay to about $33 million. Calhoun had been brought on as CEO in 2020, following two fatal crashes that had cost the company and its client airlines tens of billions of dollars. During the year following that increase, one of the company’s brand new 737 Max airplanes experienced an explosive decompression, the result of a poorly installed “plug door.” Calhoun’s compensation had been determined by internal “performance scores,” weighted 75% towards financial performance, and 25% toward operational performance, according to Boeing’s 2023 proxy statement. 

Although the sharp decline in Boeing’s share price following the incident rendered Calhoun’s large stock option award worthless, he does retain the options for 10 years, according to the Financial Times, meaning that he may yet stand to make a handsome profit from his final year as CEO.

Layoffs as Social Contagion

Whether you subscribe to this theory of “creative destruction” that often seems to require that massive numbers of people lose their jobs so that a few executives can secure their bonuses, the data show that layoffs have adverse effects on the mental and physical health of the public, contributing to increased stress, morbidity, and even excess deaths. Perhaps most distressing of all, academic research going back decades has argued that so-called “downsizing programs” that tend to effect the largest employers and impact the greatest number of people seldom reflect an evidence based corporate strategy, and are instead the result of what researchers call “social contagion” – the widespread unthinking repetition of an observed behavior.

As corporate and private pensions have been increasingly replaced by stock-option compensation and IRA or 401k retirement plans, and as corporate management has come increasingly to focus on the sentiments of the stock market, corporate cost-cutting has transformed from something of a management fad into a sort of foundational faith of western capitalism. The belief that it will lead to a higher stock prices ensures that, in the short term, it does, since the markets that determine a stock’s price are dominated by the same thinking that leads the largest companies. 

Does it actually work? Art Budros, professor of Sociology at McMaster University, wrote in 1997 that waves of corporate downsizing had eliminated over 10 million jobs over the previous 17 years, and yet very little empirical research had been done to understand whether downsizing was an effective corporate strategy. It can often lead to short term boosts in stock performance, thanks to higher EPS (Earnings-Per-Share), but these are often fleeting benefits, destined not to be be sustained long as the company will have ultimately to either replace the workers it has laid off via outsourcing, or else reduce services and cut back product lines, affecting long-term profitability.

Sometimes the cost of profits today can be even more disastrous. Remember that former CEO at Boeing? His immediate predecessor, Dennis Muilenberg, had responded to the deadly failures of two brand new 737 MAX aircraft not by hiring additional safety engineers, but by engaging in nearly $20 billion of stock buybacks, a maneuver where a company buys its own stock in order to maintain its price. He did this mostly by saddling the company with debt, ensuring it had even fewer resources to weather any future storms. He walked away from Boeing with $62 million, mostly thanks to his efforts to pump the company’s stock. It has since lost more than half its value over the last five years, as its increased debt load and the massive losses caused by the grounding of its new fleet of aircraft have taken their toll. 

Stanford business Professor Jeffrey Pfeffer argued in his 2018 book Dying for a Paycheck: How Modern Management Harms Employee Health and Company Performance, that layoffs seldom save large companies any money. Not only do companies very frequently hire former employees as contractors anyway, but when the economy begins to grow again after a period of downsizing, large employers must then compete with each other to attract the same employees they had previously let go – essentially “selling low and buying high,” and exposing themselves to more costs than they would have faced by retaining their employees through the downturn. It is expensive to hire new employees, due to the costs of recruitment and onboarding, and layoffs often affect newer employees first, resulting in a great deal of wasted resources in training employees who don’t spend long working for the company anyway.

As if all that were not bad enough, Pfeffer also points out that layoffs increase average mortality by 15-20% over the following 20 years, resulting in a loss of life expectancy of at least 1.5 years for a laid off employee over 40. This increased mortality rate not only impacts the economy overall, but it also further reduces the pool of available labor, resulting in yet another increase in costs for future recruitment.

Preparing for Layoffs 

Regardless of how you may feel about them, layoffs happen, and they tend to happen in waves. As large companies make cuts, this often leads to layoffs from within the companies that serve those companies, leading to yet further cuts in companies that contract with those companies, etc. This is one of the reasons layoffs tend to spread between industries, as a service economy is based on many business relationships between companies that rely on each other for various services. 

Here are some things to consider when layoffs seem to be sweeping across your industry or a related one: 

  • Beware Short-Term Thinking: Is your company borrowing money, engaging in stock buybacks, or cutting corners in order to boost its earnings in the short term? Take any of these behaviors as a warning for the future: unsustainable practices are obviously unsustainable. Whatever costs are being cut today, consider the impact they are likely to have long term, on your job. 

  • Emotional and mental preparation: Consider seeking emotional support, such as via psychotherapy or support groups, even before layoffs begin. Being emotionally ready will make the trauma and transition of job loss easier and less stressful. If you’re getting to a point in your life when you’re considering retirement, start looking at your options for early retirement, or transitioning to a part-time or a consulting role – one where you will have more control over your future career, and the terms by which you will choose to walk away from it. 

  • Consider broadening your skill base: When and if you can, always consider going back to school or taking additional training to get new certifications and new skills. When your industry is thinking short term, you should be thinking long term. Not about this year’s stock price, but about next year’s job market. It’s never too late to start a second career, but facing a shrinking job market without a backup plan is a worst case scenario. 

  • Build your emergency fund: No storm lasts forever, but you should expect to face difficulties in finding a new job, particularly if you have high salary expectations. An old adage says that you should plan to be unemployed for one month for every $10,000 in salary expectation, meaning if you make $120,000 a year, you should expect to spend up to a year searching for a new position. The good news is that the more you’re making now, the better position you are in to start saving and cutting costs. 
  • Read the fine print: go back over your employment agreements and any other documentation you have from your employer, and don’t sign anything new without thoroughly reading and understanding all of it. If your employer is starting to make cuts, it may pay to consult with an employment lawyer to make sure your agreements are enforceable, and you’re not being deprived of any of your rights or protections. Don’t expect an employer to be forthright about honoring all of its obligations. You need to advocate for yourself. 
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