There was a time when employee layoffs were considered a last resort during an economic downturn. Instead, corporations placed a high value on retaining highly skilled employees who are the key to continuous growth. But times have changed. Today layoffs have become a standard tool of doing business.

Prior to 1980, American corporations made an attempt to balance the needs of all stakeholders including employees, customers, shareholders, suppliers and management. They viewed each of these groups as essential to their success. Back then, IBM Corp. (IW500/12) Chairman Thomas Watson Jr. spoke often of balancing the company’s interests. He published a seminal document in 1963 that emphasized three beliefs: “The most important was respect for the individual employee, the second was a commitment to customer service, and the thirds was achieving excellence.”

More recently, in 2010 former IBM CEO Sam Palmisano set a course designed to deliver $20 earnings per share by 2015. The plan, called the “2015 Road Map," called for a shift to faster growing businesses, increased productivity, and dividend and share repurchase. The plan  resulted in hundreds of thousands of layoffs.

Later, IBM CEO Virginia Rometty, who replace Palmisano in 2012, pledged to follow the plan. Struggling to meet the goal in 2014, she backed away from the EPS goal, but in interviews stated her commitment to the plan's "framework" saying: "The essence of that [plan] was continue to move this business to higher value, and continue share repurchase. None of that changes."

There are many other examples of companies using layoffs to achieve financial goals:

  1. Carrier Corp., Indianapolis, Ind., has two plants in Indiana, both of which are profitable. But its parent company, United Technologies Corp. (IW500/19), decided early this year to layoff all 2,200 employees and move the work to Mexico. Even though the company’s current rate of sales growth is 8%, the company’s CFO said that Wall Street wants the company to "post a 17% increase in earnings per share for the next two years." The company decided that the only way to meet the earnings requirement was to cut costs and terminate employees.
  2. IBM has been laying off workers since 2011 but the company refuses to reveal the exact number. IBM’s CEO Ginny Rometty has "talked a good game" about focusing on shareholder value, according to the New York Times DealBook Columnist Andrew Ross Sorkin. Since 2000, he notes, IBM has spent some $108 billion on buying back its own shares. To help finance this share-buying spree, IBM loaded up on debt. "While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions," he wrote. "All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.”
  3. The Timken Company was forced to split into two companies, one making steel, and the other making bearings. According to an article in the New York Times the new bearing company then slashed its pension fund contributions to near zero and cut capital investment in half. At the same time it has quadrupled its share of cash going to stock share buybacks.

The strategy to cut employees to enhance shareholder value and boost the stock price does work and there are many recent examples.