Boosting Employee Morale After Downsizing

Introduction: Downsizing as a Business Reality

Downsizing has become a significant feature of today's economy, and maintaining the trust of employees when reductions occur has become a serious business challenge (Brockner, Konovsky, Cooper-Schneider, Folger, Martin, & Bies, 1994). The question is not whether a company should downsize its employees, but how to do so properly so that as few employees as possible are harmed (Brockner et al., 1994). There are several approaches that companies can take when downsizing that will help retain much of the loyalty of the workers who remain.

Companies that downsize through attrition and buyouts, that work to help downsized employees find new jobs, and that provide outplacement services to departing individuals often end up in far better positions than companies that simply terminate workers without support (Brockner et al., 1994). These companies demonstrate care for the workers they must let go, and as a result have a much greater chance of retaining the loyalty of the employees who survive the downsizing process (Brockner et al., 1994).

Trust is a very important asset for these companies, but it is difficult to achieve and equally difficult to hold on to (Brockner et al., 1994). Companies willing to downsize in a manner considered humane by their workers will fare better in the long term than those that treat workers as disposable (Brockner et al., 1994). Beginning in the late 1970s, companies started to downsize in order to improve their bottom line and cut costs (Brockner et al., 1994). Even though some companies today record substantial profits, they continue to pursue the idea that they must be as lean as possible in order to compete (Brockner et al., 1994). Since 1989, over three million jobs have been eliminated each year (Brockner et al., 1994).

Since 1979, this amounts to 43 million jobs eliminated in the United States due to downsizing (Brockner et al., 1994). Over one million of these jobs were lost after 1987 in the defense industry alone due to government budget cuts, and in 1998 another 700,000 layoffs were expected in that sector (Brockner et al., 1994). To put this in perspective, approximately 50% more people have been victims of layoffs and downsizing than have been victims of violent crimes (Brockner et al., 1994). Downsizing has become a basic way of life for many United States companies, and there is usually a first round of downsizing followed shortly by a second round: sixty-seven percent of firms that cut jobs in any given year will do the same in the following year (Brockner et al., 1994).

The Mixed Payoffs of Workforce Reduction

Unfortunately for many companies, the payoffs expected from downsizing have been rather sparse (If, 1996). These expected payoffs include better stock performance, greater flexibility, and higher productivity. Although some gains have been observed, they have not appeared in all companies that have downsized, and even where they have appeared, they have not been as large as anticipated (If, 1996). There are several reasons why these expected gains have not been achieved, and effective strategies for maintaining employee trust during downsizing deserve careful attention.

One particular study found that reducing a company's workforce by 10% only reduced costs by one and one-half percent (If, 1996). The same study found that the stock price for the average firm that had downsized rose only 4.7% over three years, while firms in a similar situation that had not downsized saw stock prices rise in excess of 34% (If, 1996). Half of the firms that had downsized increased their profitability, but the other half had not, and productivity results were inconclusive (If, 1996).

Some of these mixed findings stem from the substantial costs associated with downsizing (If, 1996). Severance payments to laid-off employees often include a week of pay for every year of service, as well as accumulated sick pay and vacation pay (If, 1996). In addition, supplemental unemployment benefits and outplacement services can accumulate to roughly 15% of each departing employee's salary (If, 1996). This represents significant financial hardship for businesses that downsize a large number of individuals within a short period.

Financial problems are not the only issues these companies face. Much of the talent and institutional knowledge that departing employees carried is permanently lost, along with crucial skills and organizational memory (If, 1996). When companies downsize believing they are gaining a competitive advantage through a leaner operation, they often realize — too late — that the very employees they cut were the ones needed to maintain that advantage (If, 1996). Over 50% of firms that downsize eliminate too many workers and are subsequently forced to rehire many of them as consultants, who typically command higher rates of pay than original employees (If, 1996). The indirect costs of lost opportunities while seeking to replace that talent are also significant (If, 1996).

The principal reason that many of the anticipated benefits of downsizing are not achieved, however, has to do with the morale of the employees who remain. Surveys have indicated that just over 30% of individuals who remain after an organization downsizes believe the company can be trusted (If, 1996). When employees feel the downsizing process was unfair, they often reduce their commitment to the organization (If, 1996). Studies have also shown that many survivors exhibit strong resistance to change, withdrawal, fear, and paralysis in their job duties — outcomes linked to increased cynicism and burnout (If, 1996). Much of this distrust is compounded by the double or even triple workload these employees must shoulder as their departments shrink by one-half to two-thirds of their original size (Cole, 1995).

How Downsizing Erodes Trust and Empowerment

Employees who work under top management are not the only ones who suffer when layoffs occur. Managers who must implement these layoffs often experience significant distress as well (Cole, 1995). Researchers have found that many of these managers become withdrawn and alienated from their employees, display apathy, become depressed, and in some cases grow narcissistic and abrasive (Cole, 1995). Many blame themselves for the pain they have inflicted on others, even when the decision to downsize was not theirs to make (Cole, 1995). Ironically, many companies that downsize in search of a competitive advantage end up destroying the very qualities — employee trust and empowerment — that are needed to maintain that advantage (Cole, 1995).

During downsizing periods, many companies simultaneously advocate for total quality management and high-involvement work systems (Cole, 1995). Yet these initiatives depend fundamentally on employee empowerment and trust — qualities that are routinely undermined by the downsizing process itself (Cole, 1995). In order to have effective work relationships, employees and managers must trust one another, particularly in environments characterized by conflict or uncertainty (Cole, 1995).

Trust is often defined as the willingness of an individual to be vulnerable to another person, based on the belief that the other party is reliable, genuinely concerned about that individual's interests, open, and competent (Cole, 1995). Empowerment, in turn, is defined as a proactive orientation to one's work in which an employee experiences a sense of meaning, confidence, and personal control over the surrounding environment (Cole, 1995). Empowerment is a critical prerequisite to initiative and risk-taking on the part of employees (Cole, 1995). Organizations that downsize depend on both trust and empowerment because the reduction in hierarchical layers means fewer managers are available to monitor employee behavior (Cole, 1995). This was especially true in the 1990s, when reductions in white-collar workers far outpaced reductions in blue-collar workers (Cole, 1995).

As hierarchies weakened, many employees found themselves in situations where traditional sanctions and moral controls had disappeared, making trust essential to organizational action (Cole, 1995). Some scholars argue that empowerment and trust have effectively replaced transactional contracts and hierarchy as the primary control mechanisms in many organizations (Cole, 1995). Trust and empowerment decline markedly during downsizing for several reasons: surviving employees may no longer trust the openness of top management, may feel that information is being withheld, and may believe that management sacrificed employees for personal gain (Cole, 1995).

Survivors may also question management's competence, aware that morale plays a central role in how well a company performs (Cole, 1995). If the company has broken promises or acted inconsistently, surviving employees may view the organization as fundamentally unreliable (Cole, 1995). Feeling increasingly suspicious of management, many survivors begin to see themselves as independent contractors rather than integrated members of the organizational culture — a perspective that undermines long-term commitment (Cole, 1995).

When empowerment languishes, survivors often lose their sense of meaning due to communication breakdowns between co-workers and between employees and management (Davidow & Malone, 1992). Survivors frequently take on the job functions of laid-off colleagues, sometimes requiring skills they do not yet possess, further undermining their sense of competence and personal control (Davidow & Malone, 1992). Frequent layoffs leave employees wondering whether they will be next, and even management reassurances ring hollow when trust has already been lost (Davidow & Malone, 1992). The willingness to take risks declines steadily, and resistance to change increases — preventing both individual growth and organizational progress (Davidow & Malone, 1992).

Stage One: Making the Decision to Downsize

There are ways to mitigate much of this damage and transform downsizing into an effective, well-managed process. Maintaining trust and empowerment throughout is essential, and this begins with how the decision to downsize is made (Davidow & Malone, 1992). Any downsizing process that wishes to succeed must involve careful planning that begins long before a formal announcement is made (Davidow & Malone, 1992). Unfortunately, many organizations focus only on damage control after an announcement, reactively managing employee negativity rather than proactively preserving trust and empowerment (Davidow & Malone, 1992).

There are four distinct stages most commonly examined when companies downsize (Kozlowski, Chao, Smith, & Hedlund, 1993). The first is the decision to downsize. This decision must be made very carefully — it should never be easy or painless (Kozlowski et al., 1993). Downsizing because competitors have done so is not a sound reason, and many managers move too quickly without fully examining all relevant issues (Kozlowski et al., 1993). Downsizing should be used only as a last resort. Employees often interpret downsizing as evidence of management's failure to control costs and hiring, or as evidence that management does not value people beyond their function as cost centers (Kozlowski et al., 1993).

When senior managers visibly address the needs of both laid-off and surviving employees, they counteract much of the mistrust that would otherwise develop (Kozlowski et al., 1993). If management can demonstrate that all possible alternatives were exhausted before downsizing was announced, this signals genuine concern and helps preserve employee trust (Kozlowski et al., 1993).

Downsizing is frequently unnecessary for short-term economic declines. Many companies implement overtime restrictions, salary freezes, hiring freezes, pay cuts, shortened workweeks, unpaid vacations, or the elimination of bonuses as alternatives (Kozlowski et al., 1993). Some companies find even more creative solutions: Rhino Foods, for example, lent several of its key employees to suppliers and customers who needed workers until its own business recovered (Kozlowski et al., 1993). Such gestures build significant trust between management and employees (Kozlowski et al., 1993). However, these strategies are inherently short-term, and if used as a substitute for addressing structural problems they can eventually reduce employee motivation (Kozlowski et al., 1993).

If all alternatives have been exhausted, companies can offer voluntary separation with severance pay and benefits, as well as early retirement for employees nearing retirement age (Kozlowski et al., 1993). Some employees may welcome the opportunity to consult independently or to start their own businesses (Kozlowski et al., 1993). The danger with voluntary separation programs, however, is that the most capable employees — those with the most alternative options — are often the first to accept and leave (Kozlowski et al., 1993). Companies must manage voluntary separation carefully to avoid losing key skills and competencies (Kozlowski et al., 1993). Companies that have downsized successfully often make a point of communicating directly with high performers, ensuring those individuals understand how highly they are valued and how strongly management hopes they will stay (Kozlowski et al., 1993). Only after voluntary separations and early retirements have been offered should forced layoffs be considered (Kozlowski et al., 1993). There may be upfront costs and a longer timeline with this approach, but the increased trust generated by surviving employees will more than compensate over time (Kozlowski et al., 1993).

A credible organizational vision must also be developed. Downsizing is not a short-term fix, and it must be made clear to all stakeholders how workforce reduction will create a genuine competitive advantage and why it is the best available choice (Kozlowski et al., 1993). A corporate improvement plan that articulates the company's strategic direction is often created for this purpose (Kozlowski et al., 1993). Aaron Feuerstein, chief executive of Malden Mills Industries, downsized virtually continuously without harming workforce morale because employees understood that reductions stemmed from technological advances and good industrial engineering, not from any scheme to harm them (Kozlowski et al., 1993). When the company grew quickly enough, displaced workers could be redeployed into new roles (Kozlowski et al., 1993). A clear, credible vision reinforces employee trust in senior management, strengthens survivors' sense of purpose and direction, and reduces the ambiguity and uncertainty that accompany announced layoffs (Kozlowski et al., 1993).

Works Cited

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