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Why Laying Off Employees is Not Good for Your Bottom Line


Opinions expressed by Entrepreneur contributors are their own.

Earlier this year, an old story about former Nintendo CEO Satoru Iwata went viral, posthumously praising him for taking a 50% salary cut rather than laying off staff.

Why would a story from 2013 suddenly make headlines? Likely because it provided such a stark contrast to current trends in North America, where employee layoffs are reaching levels not seen since the dot-com crash of the early 2000s.

The tech sector is being hit particularly hard. According to NPR, 2023 was “a bloodbath for the tech industry, with more than 260,000 jobs vanishing.”

The cuts were blamed on a post-pandemic hiring binge and high inflation, which lowered consumer demand. Yet, the layoff trend continues into 2024. According to NPR, tech companies collectively laid off approximately 25,000 employees during the first four weeks of this year.

While some layoffs are inevitable due to basic economic cycles of recession and growth, they seem increasingly to be a method for CEOs to please shareholders by providing small, short-term bumps to a company’s bottom line.

I think it’s a short-sighted approach that reduces workers to data points and budget line items while ignoring the value of retaining employees over the long term, even when economic times are tough.

As Iwata said shortly after announcing his personal salary cut, “If we reduce the number of employees for better short-term financial results, employee morale will decrease. I sincerely doubt employees who fear that they may be laid off will be able to develop software titles that could impress people around the world.”

The reflexive instinct among many CEOs today seems to be a throwback to the Jack Welch brand of management of the 1980s. Welch, the CEO of General Electric from 1981 to 2001, was known for being relentless in his pursuit of profit and his preferred method for achieving it: firing employees. According to a profile in the New Yorker, “no single corporate executive in history has fired as many people as Jack Welch did.”

Related: This Job Hack to Escape Layoffs Is Gaining Popularity — But It’s Divisive: ‘It Altered My Brain Chemistry’

He pioneered the “ranking and yanking” method, in which he developed a grading scale for employees and fired the bottom 10% every year. His ruthless style was revered at the time. But his legacy is mixed, with much of his success attributed to financial chicanery.

While his management style eventually lost favor in the 2000s and 2010s, CEOs’ desire to prune workforces for short-term relief seems to be gaining new momentum.

But does it improve a company’s bottom line in the long run? Even small cuts can quickly change a company’s culture, causing employees to go into self-preservation mode and stifling innovation and creativity.

I know all too well how costly it can be to lose long-term, loyal staff due to extreme circumstances. Like countless other companies and not-for-profits, my charitable organization had no choice but to lay off staff in response to the COVID-19 pandemic. It was one of the most difficult decisions I have ever made because I know the value employees at all levels can bring to an organization and the impact it would have on those employees’ lives.

And it’s a decision that rarely pays off in the long run. According to a report in Time, layoffs can often harm a company’s financial performance over time. They don’t consistently boost profits and can lead to lower employee engagement and customer service quality.

Conversely, while it doesn’t always show up on a balance sheet, there are so many benefits to fostering an environment where employees feel safe and valued and want to stay with a company in the long term.

The majority of my team has been with our organization for over ten years, with many in the 15- —to 20-year range, and I see the benefits of that dynamic every day. Employees who feel emotionally safe in their jobs provide a challenging function that is critical to decision-making and are loyal to their organization, something that can only be earned through mutual trust.

Related: I Turned My Layoff into a Learning Lesson and Became My Own CEO — Here Are the Lessons I Learned Along the Way

Empowered employees work harder because they are invested in long-term outcomes. They know that they will be around long enough to see their contributions come to fruition and are not just on a one or two-year stop before looking for their next job.

They are also comfortable taking risks and driving innovation. Too often, companies achieve a level of success and become complacent and risk-averse, which ultimately leads them on a path to failure. That’s why loyal and dedicated employees are so critical. They have the security to challenge leadership to continue innovating and driving impact or speak up when they see their leaders making potentially bad decisions.

A stable workforce also fosters better relationships with clients and suppliers, creating continuity and consumer confidence. A company constantly cutting and adding jobs cannot effectively maintain these relationships or conduct effective, long-term business planning.

Retaining an engaged workforce is particularly important in the era of “quiet quitting,” in which disengaged employees do the bare minimum level of work to keep themselves employed. This trend is not surprising given that so many employees are worried they could be cut at any moment. That insecurity can also fuel the tendency of employees to take on a side gig that will give them a softer landing if they are cut.

Related: TikTok Layoffs: ‘Large Percentage’ of Employees Laid Off

But don’t just take my word for it. Data shows that employee retention leads to higher productivity, reduced turnover and training costs, and employees who have higher morale and miss fewer work days, all of which are good for an organization’s bottom line.

Instead of constantly trimming workforces to create short-term bumps, business owners — large and small — should consider the benefits of investing in employees and nurturing a secure, stable workforce. Finding other ways to tighten budgets and keep your workforce intact is a decision you will never regret.

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