Layoff Anxiety Is Extremely Costly To Your Bottom Line… And Few Know That Much Of It Is Preventable (Action steps for reducing employee angst during layoffs)

Top leaders know that those anxious over layoffs either quit, get angry, or get distracted from work. And unfortunately, all of those actions are extremely costly to the business.

Of course, almost everyone is already aware that there have recently been a number of large-scale layoffs that have generated record levels of employee anxiety at companies that should know better, including Twitter, Meta, and Alphabet. In fact, recent research covering the growth of this phenomenon showed that “layoff anxiety” was present in more than half of the employees studied.

And because of these multiple anxiety-producing failures, I have concluded that most executives have simply failed to take the time to first calculate the tremendously high dollar costs of “layoff anxiety” to both business and employee health. And second, to determine the most effective ways to reduce this anxiety before it is created. I’ve also calculated that these mostly preventable anxiety costs have likely run into the hundreds of millions of dollars at any large corporation. And as a result, in my view, at least one individual in each company that has recently messed up a layoff should get fired over their colossal blunder. 

This easy-to-scan article covers the three most important anxiety prevention areas. The anxiety cost factors, the recommended anxiety-limiting actions, and a few tips for preventing future layoffs.

Part I – The Extensive Costs That Result From “Layoff Anxiety” 

In addition to the direct out-of-pocket costs that occur as a result of executing layoffs (reorganization, severance, and outplacement costs). There are many other identifiable and costly unintended consequences that result from the anxiety that occurs in your employees before and after large-scale layoffs. The top eight areas of anxiety costs are listed below, with the costliest areas of business damage listed first.

  • Layoff anxiety may essentially end innovation and stall future planning – leaders at companies that rely heavily on innovation as their primary growth or revenue generator. The loss of innovation is the most expensive cost area as a result of layoff anxiety. And that anxiety will likely cause it to come to a grinding halt during the 3 to 6 months around your layoff. This loss of innovation occurs because even your most innovative individual employees. Won’t be able to continue to innovate on a team where as many as half of its members are deeply worried about their job security. Also, realize that the essential collaboration between allied teams may also be reduced because of the same anxiety. Other reasons for increased concern among the team will be a result of member anxiety over whether their innovation project will still be funded under the new severe cost-cutting environment. The same “six months stall” will likely also occur on workforce planning teams and on multi-year projects. Because team members won’t know whether they will even be employed or if the project’s funding will continue after layoffs and budget cuts.
  • The distractions created by layoffs will reduce the amount of work done by every employee – the furor around layoffs is the second most costly area. Because rumors about the possible upcoming layoffs will serve as a major distraction, even among those that are not likely to be laid off. This extremely costly “distraction period” may last up to four months. And the work volume and quality produced by your most anxious employees will decrease by up to 25%. And those less concerned employees that they bother with their gossip and constant messaging will also produce less work. 
  • Preventable costly employee turnover will increase – often, the third highest unintended cost item is employee turnover. That is caused by the higher anxiety levels that occur among employees immediately after the rumors of layoffs begin. Your top performers will be the first to begin looking for outside opportunities. Even though they are the least likely to be laid off. However, because their new ideas simply won’t be explored or funded under your new cost-cutting environment. The fact that great recruiters will specifically target them is another reason why your top talent will be the first to go. And obviously, they will be targeted because of their performance level, their advanced skills, and valuable experience. Unfortunately, your weak employees (who will be the most anxious) will also try desperately to leave. But most won’t be able to in the recently flooded talent market. So if you don’t lay them off … unfortunately, they may stay forever!
  • Recruiting, referrals, and employer branding will suffer – potential applicants and candidates that are already in your recruiting pipeline will immediately begin reconsidering your job opportunities. As soon as they hear the rumors about how your business is struggling or no longer growing. Your top and diverse candidates will also worry that if they got an offer, it would likely be rescinded. And also, candidates would become concerned that they would now be working in a lean cost-cutting environment. And if your recruiting relies heavily on employee referrals, expect those referrals to essentially dry up for at least six months. 
  • The remaining “survivor employees” simply won’t forget this painful period – long after this layoff is over. The “surviving employees” at your company will likely remember for a long time all of the bad things that occurred during this painful layoff. So expect a long-term negative impact for at least a year on the engagement and loyalty of those remaining employees.
  • Anxiety will be even higher unless you have a strong internal movement process – for those “keeper employees” (i.e., those adaptable ones that perform well and learn quickly). That happens to work in a team, location, or business unit that is being completely eliminated. You can dramatically reduce their anxiety level by informing them that they are eligible for fast internal redeployment under your internal movement process. You will further reduce anxiety among the keeper employees if you proactively tell them that they can say to potential employers that they were laid off simply because of the elimination of their entire team. So that they can honestly say that they left without any deficiencies in their performance or skills.
  • Your customers may react negatively if you create high employee anxiety levels –if the perception of your recently completed layoff process was highly publicized and negative. Realize that many of your customers may reduce their purchasing of your products. And your product brand may also be permanently damaged.
  • The anxiety may impact your shareholders – and finally, in the case of companies like Twitter and Meta. The publicized employee anxiety that was caused by the layoff process also affected the stock price. Which is important to current and future shareholders, as well as current employees. 

Part II – Proactive Actions That Limit The Employee Anxiety Levels 

Once you realize that there are immense anxiety-related costs that occur during all poorly designed layoff processes. You will realize that it makes sense to study the benchmark successful and unsuccessful layoffs that occurred at other major companies. During that research, you will find that there are many proven action steps that you can take in order to reduce the anxiety levels of both those employees that are leaving and those that are staying. The top nine anxiety-limiting actions that you should identify and consider include:

  • Become knowledgeable about the actual value of layoffs and “talent hoarding” – it’s important to realize that in many (and often the majority) of cases layoffs have produced a negative ROI. And even know their goal is to cut workforce costs. Most don’t actually end up with reduced labor costs over the long run. Instead, it pays to find ways to keep as much of your valuable talent as you can with the conscious use of “talent hoarding.” Learn more about the value of this surgical approach to reducing labor costs here.
  • Periodically assess whether your workforce is “right sized” – it’s a mistake to assume at any point that your labor force is at its optimal size. So instead, conduct a “right size audit” at least every six months. Because this data can enable you to periodically assess if you have too many workers or the right ones in the wrong positions. So that you can gradually “vent the surplus from your workforce.” Without the need for a painful large-scale layoff.
  • Create a list of the previous areas that caused the most anxiety problems – because significant layoffs at a particular company occur infrequently. Most generally find little layoff documentation on what worked and what didn’t work during the last layoff that your company. So before you put together your layoff plan this time. Proactively reach out and learn from the successes/failures of other benchmark firms. In particular, make a list of the problems that occurred and the factors that had the most impact on raising employee anxiety. And after this current layoff process has been completed. Conduct an extensive “postmortem” on your completed process. Which should include identifying each of this process’s successes and failures. So that they can be used should future layoffs be necessary.
  • Develop a process for quickly countering rumors – one of the top causes of employee anxiety is hearing continuous rumors about the layoff. And it’s a serious problem when management is not able to identify and verify if each rumor is actually true. So in order to squash as many of these false rumors as possible. The company must set up a website, employee meetings, or a “hotline” phone number. That layoff managers can use to identify, affirm, counter, or even prevent additional rumors. Executives must also keep individual line managers continually appraised of the latest facts and rumors.
  • You will need to provide counseling and mental health assistance – realize that despite all of your extensive efforts. That some employees will still face the anxiety that may reach levels of depression and thoughts of suicide. As a result, HR must work with mental health professionals in order to provide both on-site and remote assistance and mental health counseling for employees. HR should also be aware that impending layoffs also affect the physical well-being of your employees.
  • An effective severance package will reduce employee anxiety – one of the most common employee concerns is financial. Because almost everyone worries about their economic survival if they were to be laid off. You can reduce much of this economic anxiety. By working with your employees to put together a severance package that the employees judge as sufficient and fair. Some firms give as much as six months of pay in order to soften the economic blow and the economic anxiety around it.
  • Let survivors know that layoff won’t likely happen again soon – once you have determined which employees will be laid off. You can lower the anxiety level among your surviving employees. By assuring them that this level of layoff isn’t likely to be repeated in the near future. Now obviously, you can’t legally promise no further layoffs. However, you can and should tell the employees that given your current business and workforce projections. That in good faith, you have projected that there is a low probability that another major layoff will occur again within a year.
  • Assigning accountability to an individual will improve your results – the best way to ensure that a layoff process minimizes anxiety. Is to require the use of anxiety level employee surveys and to also track anxiety cost metrics. And finally, to make a single individual accountable for meeting each layoff process goal.

The most important but often the most disregarded action is… 

  • Widely communicating and fully explaining each of your layoff criteria – finally realize that in most cases, the most powerful cause of high employee anxiety is when your employees are not made fully aware of the criteria that will be used. To determine which employees will be kept, in which will be laid off. Of course, every company must determine its own “keep or let go” criteria. But each of the individual criterion should be widely communicated, easy to understand, and highly objective in nature. Also, don’t forget to communicate “why” you know that each of the individual criteria will lead to significant cuts in costs with minimal damage to the business overall. Below I have listed some common “keeper criteria” that many companies use when they prioritize individuals, jobs, skills, and teams. In the following list, the highest priority keeper criteria are listed first in each group.

Criteria for selecting the individual employees that will be kept

  • Innovators with a successful track record 
  • The designated backfill individuals for executive jobs
  • Those on the succession plan
  • Holders of key patents that you rely on

Employees in these positions and business units that will be kept

  • Those working in and managing revenue-generating positions
  • The leaders and those working in mission-critical teams 
  • The leaders of strategic business units
  • The product development and the product managers of your top selling and fastest growing products/services
  • The top recruiter that successfully recruits for key jobs
  • Your best sales manager 
  • Your chief technologist 

Prioritize the keeping of those employees with essential current and future skills, knowledge and experience 

  • Those with critical industry and customer contacts
  • Employees skilled in machine learning and the latest technologies
  • Employees skilled in data usage and security 
  • Employees with “future skills” that we will need
  • Employees with effective customer service skills 
  • Managers that successfully develop and launch talent 
  • Managers that make data-driven decisions 
  • Top-performing employees that are proved to be highly agile
  • Experts in social media

Employees that should be released

  • All toxic employees 
  • Those working in jobs that soon will be replaced by technology
  • Those with obsolete skills in any noncritical job
  • Low performers in any noncritical job 
  • Employees that are on performance management plans
  • Those with bottom 20% performance appraisal scores across at least two managers
  • Employees that are not adaptive and that have failed to learn
  • Note: don’t let individual employees self-select themselves for layoffs because we may need them. And to avoid being political. Don’t let individual managers select any of their employees without showing how they meet at least one of the objective criteria.

Part III – Limiting The Possibility Of Future Layoffs 

Obviously, the best way to limit employee layoff anxiety in the future is to prevent the need for actual layoffs altogether. There are five basic prevention approaches that I recommend, they include: 

  • Insist on permanently maintaining a “flexible workforce” – a “flexible workforce” is one that is specifically designed to make it easy to quickly change the size of your total workforce. Because in order to provide that flexibility. Your workforce must be made up of at least one-third of contingent and part-time workers. So that it is quick and hassle-free to release surplus contingent workers when their contracts expire. And you can also quickly add any additional needed talent and skills because of your robust contingent labor and permanent job recruiting talent pipelines.
  • Begin data-driven workforce planning – because what today commonly passes as workforce planning is literally a joke. So instead, you must replace it with a data-driven workforce planning approach for the future. Where your demand for labor (i.e., the size and the skills of next year’s workforce) at your company are accurately projected at least six months into the future.
  • Periodically “vent your workforce” to release “surplus workers” – periodically assume that you have too many employees and that some are in the wrong position. 
  • Prevent overhiring by continually meeting your revenue per employee workforce productivity goal – the easiest to calculate and compare workforce productivity measure for any company is its revenue per employee. And that metric is the number of dollars of revenue generated each year divided by your number of employees. Continuing to meet this revenue per employee target will keep you from “overhiring.” So set it as a primary workforce productivity goal that is to be measured at least twice each year. And as an alternative, the best single bottom line measure that includes profit is your profit per employee metric. 
  • Utilize alternatives to layoffs to cut costs in a less disruptive way – each possible alternative to layoffs must be fully evaluated and, when appropriate, applied. Some of the most common alternatives include hiring freezes, furloughs, job sharing, and the use of contract labor. You can find out more about these alternatives to layoffs here
If you only do one thing proactively calculate your revenue per employee each quarter. And whenever it falls significantly below your target dollar amount. Alert management that they should begin considering small but significant workforce cost-cutting measures. So that your surplus of labor won’t eventually lead to the need for a painful layoff. 

Final Thoughts 

In our highly volatile up-and-down business world, it’s a mistake not to expect more frequent large-scale layoffs in all industries and in every country. So in my view, as a layoff expert, you can expect to accrue large dividends when you conduct a thorough analysis of the actual ROI of layoffs. As well as the dollar benefits that occur when you practice talent hoarding. And don’t be surprised when you learn that the costliest aspects of layoffs come as a result of employee anxiety that could have been largely mitigated. So if you want to do your part in limiting that anxiety even as an employee, share a copy of this article with your boss.

Author’s Note

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About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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