Layoffs also harm shareholder returns in the long term, says report

Layoffs can inadvertently reduce shareholder returns when taking actions to protect them, as companies tend to underestimate the organisational drag created by large-scale workforce reductions, a report has revealed. Given that personnel are a key cost driver for most organisations, it`s not surprising that business leaders look for job cuts while trying to contain costs in an uncertain business environment.

However, a Gartner analysis suggested that forecasted savings tend to become offset by the unforeseen consequences of layoffs within three years and in many cases can be detrimental to shareholder returns in the long term.

"Given a higher cost of capital, renewed investor focus on profitable growth and widespread forecasts of a global recession, CEOs are asking their CFOs to reduce costs," said Vaughan Archer, senior director, research and advisory in the Gartner Finance practice.

"In many notable bellwether companies, particularly in the technology, retail and financial services industries, this is taking the form of layoffs," Archer added.

The first thing to recognise, he said, is that there is an immediate upfront cost to layoffs as a business will need to reorganise itself around a smaller group of employees and typically incur costly upfront severance payments.

"Thereafter, a business is likely to see an increase in both costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden," Archer explained.

Many businesses will see any cost savings from layoffs eroded, and that`s even if a business manages to avoid a vicious cycle of employee turnover driven by overstretched staff and lower morale.

Moreover, at some point the business cycle will turn, and businesses will need to rehire the headcount anyway, likely at higher rates than the employees who were laid off, the report mentioned.

"CFOs need to work cross functionally with peers in HR, recruitment, sales and service to ensure they are properly accounting for the potential cost of layoffs," Archer noted.

In order to reduce personnel costs, many employees may willingly take a reduction in hours and commensurately lower pay.

"It is likely that even where headcount reduction is necessary, there will be transferable skills in demand elsewhere in the business. Laying off staff while failing to contain executive pay is likely to damage staff morale and the wider reputation of a business," the report said.