Gartner Says Layoffs May Ultimately Harm Shareholder Returns

Changing Demographics and Declining Labor Force Participation Mean Rebuilding a Workforce is Slower and More Costly than in the Past

CFOs tend to underestimate the organizational drag created by large-scale workforce reductions, and therefore can inadvertently reduce shareholder returns when taking actions to protect them, according to Garner, Inc.

“Given a higher cost of capital, renewed investor focus on profitable growth and widespread forecasts of a global recession, CEOs are asking their CFOs to reduce costs,” said Vaughan Archer, senior director, research and advisory in the Gartner Finance practice. “In many notable bellwether companies, particularly in the technology, retail and financial services industries, this is taking the form of layoffs.”

“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. Thereafter, a business is likely to see an increase in both costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden.”

Given that personnel are a key cost driver for most organizations, it’s not surprising that business leaders look for cuts here when trying to contain costs in an uncertain business environment. However, a recent Gartner analysis suggests that forecasted savings tend to become offset by the unforeseen consequences of layoffs within three years and in many cases can be detrimental to shareholder returns in the long term (see Figure 1).

Figure 1: How Unexpected Layoff Consequences Can Undermine Cost Savings

Source: Gartner (May 2023)

Many businesses will see any cost savings from layoffs eroded, and that’s even if a business manages to avoid a vicious cycle of employee turnover driven by overstretched staff and lower morale. Moreover, at some point the business cycle will turn, and businesses will need to rehire the headcount anyway, likely 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,” said Archer. “None of this is conducive to long-term shareholder gains. CFOs need to work cross functionally with peers in HR, recruitment, sales and service to ensure they are properly accounting for the potential cost of layoffs.”

To help its clients find alternatives to layoffs, Gartner experts have identified ten alternative ways to reduce personnel costs.

1.    Voluntary Reduction in Hours – Many employees may willingly take a reduction in hours and commensurately lower pay.

2.    Internal Redeployment – It is likely that even where headcount reduction is necessary, there will be transferable skills in demand elsewhere in the business.

3.    Reduce Executive Compensation – Laying off staff while failing to contain executive pay is likely to damage staff morale and the wider reputation of a business.

4.    Four-Day Workweek – This 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.

5.    Remote Work – Similar to a four-day week, this promotes a better work-life balance, and also could reduce real estate costs over time.

6.    Voluntary Leave of Absence – Extensive unpaid leave (typically three to 18 months) with an understanding staff will return when conditions improve.

7.    Organization wide pay cuts – All staff salaries are reduced by an equal percentage.

8.    Hiring Freeze – New hires approved by finance on a case-by-case basis.

9.    Sabbatical – Opportunity for employees to pursue a professional interest that still contributes back to the company. Employees are not required to be paid, but partial pay could be an option, depending on the sabbatical contribution to organization.

10.  Benefit Cuts – Fringe benefits cut based upon cost and impact assessment.

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