Corporate Downsizing

This weekend, it was reported that challenges in the auto industry extend beyond domestic producers.  Porsche is going to shut down production for eight days, Volkswagen is considering a three week shut down and Audi is preparing to announce a temporary shutdown.

As the world economy slows, companies are struggling with how adjust their cost structure to meet following demand.  Many firms are working to lower labor costs.  Past recessions can help predict how companies will act.

In the more recent recessions, we have watched different tactics for reducing labor expense. Some companies have laid off workers across the board. Others have reduced wages or benefits. There have been some that have reduced hours per week.

There is an interesting article from the Wharton faculty talking about how companies react to recessions and strive to reduce costs.  In particular, the article talks about how companies may utilize pay, benefits and hours reductions over mass layoffs. 

In the past, the priority was retaining key talent. Recessions were expected to be short and maintaining the core of a talented workforce was the priority. This led to across mass layoffs with the goal of eliminating the least experienced or productive workers.

This tactic was chosen over reductions in pay, benefits or hours. The companies hoped to keep their top employees happy even if the layoffs hurt morale substantially in the short run. Although poor morale hurt, the fear was that a cut to compensation would motivate top employees to leave for a competitor.

In more severe recessions, few if any companies are hiring. The risk of a top employee leaving for a competitor is extremely low with few options for the employee. In this situation, more company should resort to pay, benefit and hours cuts. Although this does cause significant hardship for the employees, it usually does not hurt morale as much.

If our economy declines substantially, it will be important to understand what you can expect from your employer. Layoffs may be a possibility, but so could reductions in compensation. If your employer reduces pay or hours, it may show a commitment and belief by the management that they can maintain their workforce at the reduced labor expense level.

To read the full article from Wharton, go to As Layoffs Spread, Innovative Alternatives May Soften the Blow