Why do companies typically choose to implement layoffs affecting numerous employees rather than considering salary reductions for top executives like the CEO?
In: Economics
Say you have 10,000 employees and they earn $50,000 a year. And say you cut 10% of them. That’s 1,000 x 50,000, so 50m in “savings”. That is waaaaay more than you could get by trimming salaries of executives.
Not saying it’s right. Especially if they take no hit at all. The best examples of leadership usually have a ceo say they’ll reduce their pay by x% when they reduce salaries or work time or whatever it is for however long.
But in terms of what shifts the bottom line the fastest, it’s an order of magnitude greater the largest the company is to cut labour. If you think of why the company lost revenue and needs to cut costs, maybe they lost a contract (so they don’t need to produce as much), maybe demand is down (so they don’t need to produce as much), maybe there’s a better tech allowing an individual worker to be much more productive (so they don’t need as many workers). Most reasons center around they don’t need as many works as before. They still need the executives and sales agents and so on. It’s the people producing the product who are most at risk cos that’s usually the main issue. They just don’t need to produce as much (or they don’t need as many people to maintain productive levels). A good sales agent can almost always sell more.
One good example I remember – I think from John Collins Good to Great – was that a large company lost a big contract worth around 20% of their revenue. They said they needed to cut costs by around 20% to survive the year. So the executives took a 20% cut first. This doesn’t move the needle. But they start there to show the workforce and lead by example kind of thing. And they reduced everyone’s hours by 20%. Rather than fire everyone. They figured better everyone suffer a little than 1/5 suffer a lot. Then the workers swapped shifts – so those who really needed the income would take extra shifts and those who could afford an extra day off would swap with them.
This was a more empathetic and transparent way and this company survived and came back stronger. Production increased in profitability by more than they lost over time because of that ‘team’ aspect now.
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