Worried about a recession? Don't turn to layoffs to stay above water

Layoffs and salary cuts have long been methods to help preserve bottom lines in the face of challenging economies. But do these cost-saving measures actually deliver the most impactful ROI?

In recent months, companies across industries have laid off employees en masse, including H&M, Amazon, Morgan Stanley and Wells Fargo. The tech sector alone lost over 88,000 jobs. But losing employees won't necessarily help employers weather an unstable market — it's finding ways to keep them on board that could prove to be the wisest investment.

"It is hard to get great people — and once you have them, parting ways is really difficult," says Rod McDermott, CEO and co-founder of Activate 180. "Depending on how generous the company severance is, costs can be pretty significant, and sometimes there are even outplacement costs."

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As employers brace for more economic uncertainty, McDermott notes that staffing decisions made in a moment of desperation can have long-standing consequences. Recruiting a new employee to replace those that were laid off can actually cost as much as three or four times the position's salary, according to research from Activate 180. And culturally, employers can pay for layoffs long after desks are cleaned out.

"You've got the cost of the survivors," McDermott says. "All the people that didn't get laid off, where is their employee engagement? Where is their dedication? How much fear do they have? These are the times that firms like us start getting phone calls from employees who didn't get hit in the first round but are nervous for the next round. So you end up losing people that you didn't want to lose, because [layoffs] were your solution." 

An unexpected employee shortage can often lead to the second worst consequence of layoffs, according to McDermott: short-term hires. Thirty percent of new hires leave their workplaces before reaching the 90-day mark, according to a survey from recruiting platform Jobvite, and as the Great Resignation lingers, talent is not going to stick around for a role that feels unstable.

The best thing an employer can do in the face of an economic crisis, according to McDermott, is to focus on the future of business and the satisfaction of the remaining workforce. This means being open and transparent about the state of the company and what it means for remaining jobs.  

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"A recession is a turn, a chance to pass your competition — don't let it go to waste," McDermott says. "Instead of making it a cost problem, make it a revenue problem, and engage all your employees in solving that. Maybe it's not about laying people off, but maybe you slow down your hiring. And maybe you don't replace people that leave, and instead let attrition cut your payroll. With those that are left, work really hard and really strategically to solve the challenge, which is usually profitable revenue." 

In the current economic climate, companies that engage their workforce instead of letting them go will see the highest performance rates, according to McDermott. The labor market today is not the same as that of the last recession. If employers want to thrive on the other side of a downturn, they'll need to work with existing talent and find new ways to problem solve. 

"At the end of the day it's uncertainty that drives leadership strategy," he says. "You have to have faith that if you do the right thing you can solve the problem in a different way than by just cutting costs."