Layoff is not the last answer

Companies that consider layoffs usually do it in a bid to cut costs and overcome their financial crisis. The global economic crisis that began in 2007 forced many companies to lay off their employees, but studies showed that it had a very minimal relationship with their profits. Any layoff has both costs and benefits associated with it. Layoffs boost firms' profits as it results in significant cost savings. But, on the other side, costs are associated with low productivity of the existing employees, adopting any new system, hiring new employees etc. The investors consider layoffs as an effective cost reduction tool that enhances firm value. But they overlook that any decision on layoff induced by adverse market conditions indicate negative information. Many companies use layoffs to improve the situation temporarily, but in the long run such an initiative costs a company more than they save. It takes time to process a layoff. Managers need to discuss with other employees, reallocate time among the existing employees and handle the lost employees' issues. All these kill managers' and administrative staffs' time and ultimately cots money.
There are some short-term costs associated with a layoff. It directly affects the morale and productivity of the employees. The company experiences low morale, lost innovation, fear of more layoffs, angry customers and ultimately loss of its due market share. There are some other indirect costs, which can adversely impact on a company's performance. These costs can be lost knowledge, skill, contacts and even customers, which are all hard to quantify. The company also needs to orient and train new employees and make supervisers available to guide and support those employees. Sometimes, the employer needs to pay overtime salary to those supervisers for supporting and training. These costs sometimes act as a hidden cost, which most of the companies overlook.
There are also many arguments regarding the relationship between the stock price and layoffs. It actually depends on the reason of layoff, not the execution. When the reasons given for a layoff indicate slow demand, the stock price goes down. But when the reason is cost-effectiveness or reorganisation, then the stock price reaction is positive. The stock price response to layoff also depends on a firm's characteristics or profitability. There will be a negative reaction when a layoff is perceived as an indication of financial difficulties and the company's growth or efficiency will draw a positive reaction.
The layoff is related with a company's restructuring, especially in the case of a plant's closure, merger or acquisition. If the plant's closure is related with the company's achievement of net present value, then the stock price reaction is positive. But if a plant's closure indicates a serious future problem, then the stock price will go down. Merger and acquisition are also closely related with layoff. In most cases, merged firms go for layoffs significantly, which ultimately affect the stock price.
Any layoff affects compensation of a chief executive officer (CEO) and it depends on how intensified the layoff is. The CEO's power also influences how much compensation will be reduced. The reduction of CEO's power and compensation has an inverse relationship. A more powerful CEO experiences a smaller reduction in compensation and higher equity compensation than a less powerful CEO. The Board of Directors compensates the CEO both to reward him for good performance in the past and value contribution to the company in future.
CEO cash compensation, stock-based compensation and salary vary depending on a layoff announcement. Layoffs are also associated with the shareholders' value creation. Changes in the CEO compensation that occur after layoffs result in high pay levels.
There has always been an increased concern about the consequences of layoffs. We can measure financial performance of any company based on five measures: 1) Profit margin, 2) ROA, 3) ROE, 4) Ratio of sales to total assets, and 5) Stock value vs stock price.  If any company conducts layoff, then there should be a decline in the profit margin, because sometimes a company does not get time to correct the poor performance after a layoff. It also directly leaves effects on asset efficiency and the ratio of market to book value.
Some of the companies still survived in the market by avoiding layoffs. They formulated some other strategies which offset the layoff. In some companies, workers take unpaid leaves, but stay with the company. The company does not layoff any single person. Rather, they keep the option open to the employees to take unpaid leaves. This makes the company's image really good in the market. Here are some recommendations for companies to follow, if they want to avoid layoff:
1. A company should develop the human capital strategy in such a way that this asset can also contribute when the company is in a bad shape.
2. Most of the service-oriented companies heavily rely on employees in order to retain customers and earn revenue. If they lose employees, they also lose customers. So better to "retain employees before retain customers".
3. Companies can develop much more sophisticated training programmes so that the employees become loyal to the company and they contribute in the bad time of the company.
4. Companies can focus more on cost efficiency and cut or control other avoidable costs.
5. Companies need to discuss the situation and communicate options or suggestions to employees so that they will be in touch with the reality.
6. Sharing employees could also be an option to the company. They can share their employees with another, the business cycle of which runs counter.
7. A losing company can also cut salary but not employees and by doing that it can avoid losing the talent or killing morale.
An economic recession will not last forever, but the loss of an employee through a layoff may remain uncompensated. Therefore, companies need to develop their human resource management strategies properly so that they can be an asset.
The writer is an MBA student at            Ashland University in Ohio, USA.                       amyfahmina@yahoo.com