A recession forces almost every business to make difficult decisions.
Whether it’s cutting back on discretionary expenses, finding a smaller office space to work out of, or (worse case) letting go of freelancers and employees, companies must do whatever they can to survive.
SafeGraph is in a fortunate position entering this recession (we are still hiring and were profitable in 2019). So we will not have to go through the grueling pain of letting our colleagues go (but I have been there before in past companies). However, many of the 100+ of the companies I am an investor in had to do layoffs in the last month and I wrote this piece for them.
There is no good way to lay-off employees during an economic downturn. But some ways are better than others.
Here are some rules and tips for those companies falling on hard times during a recession…
Never, ever, lay off your A-Players.
This may seem obvious (why would any company ask its best people to leave?), but countless companies tell their highest performing people to go. This is really, really bad.
If a company lays off just a few A-Players, first, it loses all of their contributions. Great employees are great because they bring a lot more value than average employees.
But there are second-order consequences too. The remaining high performers will become fearful for their job when they see A-Players let go and will start looking for work. And once your high performers are looking for jobs, they are not going to be focused on helping the company.
A company that is experiencing hard times and distress needs all its amazing people focused on making the company better. Never lay off your A-players.
And even if your A-Players are in an area of the company that you need to lay-off (like maybe you need to cut your restaurant marketing team), keep the A-Player and move them to another team to make a contribution.
Lean on your Exit Transparency policy.
Recessions and lean times are why every company should have a policy of Exit Transparency. Exit Transparency is a deal made between an employer and the employee at the time of hiring. The deal is built on a bedrock of honesty on the way in and honesty on the way out.
In practical terms, it means that an employee promises to tell their employer before they start actively looking for a job. And that the employer will never go behind the employee’s back to look for a replacement. They will be up-front and honest about the situation.
If a company doesn’t already have Exit Transparency, there’s no time like the present to start putting one in place.
If you have to make layoffs, do them quickly and all at once.
If a company does layoffs in waves, good people will become fearful of losing their jobs and start looking for work.
So lay off everyone at once and tell everyone there will not be another layoff (and make sure this is a true statement). That means you’ll likely need to lay off MORE people that you think you need to make sure you don’t have to do another round during the recession.
The employees who remain will be much more motivated when they know they aren’t next.
Always choose who you lay off.
Never allow employees to self-select to be laid off. If you do that, many of your best people may select to be laid off.
Programs like “early retirement” are generally bad as you will have many terrific people opt to leave the company.
When your company is in crisis, you cannot afford to have your top people leave. You need them in the company and engaged.
Tell everyone you are laying off the low performers — and actually do that.
If you have to do a layoff, you want to lay off the lowest performers. Depending on how big the layoff is, there may be a lot of good people amongst these “low performers,” but at least it will not be your very best people. Always do everything to keep your best people.
One thing many companies do wrong is that they tell their employees they are doing a round of layoffs based on some sort of methodology. Usually, this is something like seniority or geography, etc.
Some companies do this to avoid taking responsibility. It’s easier for the “methodology” to make the decision.
This is a really bad approach for a couple of reasons. Let’s say the plan is to fire the newest employees – that’s the methodology. Well, you’re going to end up letting go of some extremely talented people in this group. Seniority does not always mean competency.
Also — the high performers who did not get fired will think that they COULD get fired and they may start looking for other jobs.
Instead, the company should let go of employees based on performance. And the company should explicitly tell all employees about this methodology.
Management should be clear that it’s not an exact science. There may be some Type 1 and Type 2 errors, but at least there will be no confusion over the intended approach to the layoff.
While this performance-based layoff may not make the people being laid off feel good, it will make the people who are staying feel more secure about their jobs (especially your highest performers).
Take care of the people you lay-off.
Getting laid off is really hard on people. Often it can massively change someone’s life for the worse.
A company has a responsibility to these people to take care of them. You should provide them with a fair severance, help pay for education and training if possible, and potentially pay for extended health coverage. It also serves the company to go out of its way to help the employee find another employer.
The goodwill you bank in a recession can last a decade. Don’t underestimate the long-term impact of doing right by your employees. And make sure they become an active part of your company’s alumni network.
Do everything you can to prevent layoffs in the first place.
“An ounce of prevention is worth a pound of cure.” — Benjamin Franklin
The best thing you can do is to never have to do a layoff. Even the best layoffs are demoralizing.
Instead, be very smart about who you hire. Don’t over-hire to begin with. Be realistic about the future. And always make smart bets, even when everyone else is losing their heads around you. Sometimes the best course of action is to do nothing.
If you act conservatively during a great economic run, you’ll be able to take advantage of a downturn and not be taken advantage of in a downturn.
Hopefully, this article helps you make good decisions during a very difficult time. There’s no good way to lay-off employees in a recession, but some ways are better than others.
Special thanks to Thomas Waschenfelder for his help and edits.