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Why Layoffs May Hurt Your Organization More Than You Realize
With many economists projecting a recession in the near future, employers and employees alike are concerned about how this may affect their work. For many, the word recession is immediately met with the thought of layoffs. While this may seem like an unfortunate yet necessary solution for some companies, the reality is that layoff can hurt an organization far more than many realize.
Financial Cost of Layoffs
While cutting back staff during times of fiscal difficulty is typically seen as a way of saving money, there are notable financial costs that come along with the process. Many organizations do not consider the immediate financial costs. For example, many companies have policies to pay out accrued vacation. Meanwhile, for those organizations that offer severance, a typical package would pay one to two weeks of salary for each year employed, a figure that quickly adds up.
However, there are more extensive costs that can be accrued from engaging in unnecessary layoffs. It likely is not much of a surprise that there is a strong correlation between staffing and revenue. After all, running a company requires personnel. When a company finds itself short-staffed, productivity can quickly diminish. Losing valuable people can reduce the inflow of cash and cause losses.
In fact, research has been done to estimate the financial cost of laying off an employee.
It is estimated that each laid off employee will cost a company approximately 50% of that person’s compensation and benefits for each week that the position remains vacant. This was seen even in situations where other staff members began to assume that person’s responsibilities.
There is a distinct financial loss when it comes to losing a C-level executive or member of upper management. The average cost of replacing upper management is typically three times their annual salary, creating a significant negative financial impact for an organization.
Impact on Employee Morale
While financial costs are often understated when making the decision for layoffs, perhaps the most overlooked aspect is employee morale. Simply put yourself in the position of an employee. The threat of looming layoffs undoubtedly creates anxiety and fear. For those who remain after layoffs, the environment is often one of wondering if they are next combined with the pressure of taking on more responsibilities.
These things can quickly shift even the most positive of company cultures into a stressful one, greatly diminishing organizational performance. The impacts of a negative workplace culture have been greatly documented. These include decreased productivity, burnout, further turnover, and mental health concerns among employees.
Intangible Costs to Laying Off Employees
Looking at the impacts of layoffs provides a lens into the existence of both tangible and intangible costs. A significant intangible cost of layoffs is the loss of expertise. This is particularly true when layoffs lead to the loss of people who have been with the company or in their specific positions for a long time.
Most people have been a part of an organization that has lost a seasoned employee only to find that many other people are unsure of how to complete some of their roles.
Being with an organization a long time involves building a lot of relationships, allowing efficient functioning. A sudden loss of that can create a bit of chaos. The impact is even greater in the event that layoffs lead to further unexpected turnover as employees leave in search of a more stable environment.
Another major intangible cost that organizations fail to adequately consider is the impact on customers. Decreased customer loyalty is often associated with layoffs for a number of reasons. Part of this is structural. Laying off employees negatively impacts an organization’s ability to respond to customer concerns, maintain quality, and keep customers happy.
Other reasons for decreased customer loyalty are psychological in nature. The public generally does not like layoffs, so doing so creates a bit of negative PR. Additionally, layoffs tend to send a message that a company is experiencing internal problems. This can make customers concerned about the future of the organization, decreasing trust.
Layoffs Are Not Short-Term Decisions
Many organizations view layoffs as a short-term solution to an immediate problem. After all, recessions typically pass within a year or two. However, the impacts of layoffs are rarely short-term. As can be seen, the financial costs are often underestimated while eventually replacing staff involves significant recruitment and onboarding costs. Meanwhile, layoffs can create problems for company culture and customer trust.
This necessitates the need for careful consideration in the event that an organization considers layoffs. The fact is that terminating employees can cost far more than keeping them in many situations. Organizations should strive to consider alternatives before turning to layoffs. Given the extensive cost of layoffs, finding other solutions can provide greater stability and future success for organizations.
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