I have been covering and consulting with companies either internally or externally since the Mid-80s and have three business degrees. One of my focus areas was Manpower Management which focused mostly on optimizing productivity along with employee care and well-being. I have been troubled that increasingly senior executives, either in school or as part of their work experience, never seemed to learn how employee loyalty, compensation, and trust work.
So, I thought it would be helpful to lay out the three ways often uninformed CEOs destroy their company’s productivity in the hope that some will take this to heart and the related mistakes can, in the future, be avoided.
I will list these to increase damage and this list is by no means exhaustive; there are many more ways to destroy productivity (like affairs between management and workers) which we will leave for another time.
Layoffs have a purpose, and that purpose is that if a company is about to go under, it cuts enough costs to allow the company time to get back on its feet. Like triage in a medical practice, layoffs are not a generic tool to make investors happy because they can have a massive impact on the firm’s productivity. This is because layoffs typically are not surgical, though with Generative AI there is a potential to make them so, as a result, you often lose critical resources that you cannot replace.
The first layoff I experienced was at IBM and it was executed very well, and, at that time, it was done for the right reason. The company was looking at failure and needed time to recover. But, even so, the layoff caused the failure of the AS400’s manufacturing line and this was our most profitable product at the time, and this required us to hire back a lot of now really pissed off IBM workers at a premium to get that line back up.
The other problem with layoffs is that they break the unwritten contract between the worker and the employer, which says that if you perform your job adequately, you will keep it. But a layoff terminates people that are doing their job well, sometimes even people who are doing an extraordinary job, and the folks left behind see this and realize they can no longer trust the company, with many of the most valuable almost immediately looking for work elsewhere.
Finally, the people you lay off are terribly upset and may end up someplace where they can and are motivated to do the firm harm. In one instance, one of the people Gateway laid off ended up as the buyer for Best Buy, and Best Buy was one of Gateway’s most important resellers. He canceled the contract with Gateway, which predicated the firm’s being sold off and never really recovering. Another example was Carly Fiorina at HP, who later ran for office and lost by the exact number of people (and their immediate families) she laid off.
In short, employee actions should always be surgical and be done in a way to preserve the trust of those that remain and that are departing to help avoid the collateral damage that otherwise will result.
Often management gets the idea that rather than downsizing, they will reduce employee salaries, indicating these managers never studied either Maslow or Hertzberg in college. This research, done in the 1960s, highlighted how compensation works. And the way compensation works is that it is ineffective as a motivator, you give someone a raise and they do not work that much harder, but is super effective as a demotivator; you cut someone’s income and they will get terribly upset. Often unions and strikes are the direct result of bad compensation practices, and, remember, it is not the actual income that people are reacting to but the perception of that income.
For instance, a happy hardworking employee finding out that a peer doing the same job is being paid more will almost immediately be an unhappy disgruntled employee. Their income did not change; only the perception of that income changed. When you cut someone’s salary, you create the impression you are paying them less than they are entitled to do the job, and they will be upset. Some may act out, some may steal from the company, and some may put their resumé out (though that can be problematic because it will now be based on the lower income number, which will further make them angry).
The worst situation is to both do a layoff and a salary reduction as that will assure that those that remain from the layoff believe that they were the most disadvantaged while those that left at least had the chance of getting a new job at the same or higher salary.
Messing with compensation is a dreadful thing. At IBM, I once saw a new GM come in and decided that sales force compensation (which I ran at the time) was too generous because several salespeople made more than he made. So, he adjusted it down and we lost 2/3rds of our revenue without 3 months. I walked into his office and called him an idiot (not my most brilliant move) and a few months later, someone tried to blow up his private plane with him in it.
You are better off firing someone than reducing their income because the collateral damage is lower for terminating someone than it is for reducing their income.
Some companies have fostered a culture where managers and co-workers are allowed to abuse others. Whether this is looking the other way when it comes to affairs between management and workers, managers who are naturally abusive (often particularly to women, minorities, or anyone they feel threatened by), or where people abuse their privileges for personal perks, an abusive culture is a productivity killer and it can result in workplace violence.
The two instances where I came close to being shot at work were both the result of abusive behavior that had nothing to do with me. In one instance, the husband of a manufacturing worker who was being abused by her manager showed up with a shotgun, couldn’t find the manager, and went hunting for the head of HR (I was interviewing for that job at the time and decided not to take it as a result of this).
The second time an abused worker at an adjoining firm just showed up one day and started shooting people and was not too particular about where they worked. In both cases, the company culture had allowed behavior that resulted in an extreme reaction by the worker, thus maintaining a culture where workers, regardless of sex or minority status, are treated with respect and, if they have a complaint about mistreatment, they are listened to.
One of the problems is that over the last few decades HR, instead of being focused on the care and feeding of the employees, has largely become a compliance organization that tends to cover up rather than address problems, and I think this goes to why Unions are finally penetrating the tech segment because the result is that workers don’t trust management and that is having a massive adverse impact on productivity.
Unions have one real tool, and that tool is a company killer like we just saw with Yellow Lines Freight and may shortly see with a number of movie studios. If you cannot create and maintain trust with your workers, you are on a path to failure that could have been avoided and increasingly will have a unionization effort before the fall.
It is easy to treat employees like you might treat equipment or real estate, but employees are far more complex and there have been extensive studies on how to motivate them (typically status and awards work) and how to keep them from getting demotivated (remind them of the benefits you provide, the fairness of their income, and treat them with respect).
If you are in a company that does layoffs often, does downward salary adjustments, or has a hostile culture get the heck out. There will be better places to work, and if you have ever worked in a place that truly values its employees, you will remember looking forward to going to work and developing relationships that will last your lifetime.
In the end, there are better ways to manage costs than treating your employees like equipment and I strongly suggest that executive management, when given a choice, use them. If you can maintain trust, focus, and a healthy work environment, there are few things a company can’t do; if you can’t, there are few things that the company can do because it will be fighting itself.