65 million reasons why CEOs like layoffs

One of the hazards in writing a book is that as soon as you're done, you find great material you wish you could have used. Here's an excerpt from the final chapter of my new book Supply Chain Management Best Practices (click here for the description page on Amazon).

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While no company in its right corporate mind would ever refer to it as a 'best practice,' one of the most frequently used tactics to initiate a quick turnaround is a workforce reduction – “delayering,” as they say these days, or to put it less euphemistically, laying off employees en masse. Supply chain professionals, especially senior level CSCO-type executives, are learning the sad truth: With healthcare costs skyrocketing beyond all reason, some companies are making the decision that an experienced (read: older) supply chain expert will cost more in salary, healthcare, and other benefits than a less experienced (read: younger) person. The fact that Wall Street tends to immediately reward massive layoffs with a bump in the share price only perpetuates the ritual.

This short-term mentality, though, ends up costing a company in the long run when it starts noticing key operations aren’t being managed as efficiently any more. Companies lose a wealth of business wisdom when they lay off seasoned professionals, and they’re just as myopic when they don’t consider these professionals for job openings, notes Lynn Failing, vice president of executive search consulting firm Kimmel & Associates. The push towards outsourcing non-core supply chain activities to third parties also means that the positions who used to manage these jobs are being eliminated, Failing adds.

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As it turns out, laying off employees actually is a best practice, at least for CEOs. Craig Rennie, a professor with the University of Arkansas, studied 229 firms that laid off employees at least once between 1993-1999 (sorry, I couldn't find a link to the study online), and guess what? In the year following the layoffs, the CEOs of these companies received 22.8% more in total pay than the CEOs that did not have layoffs.

"Based on a comparison of CEO cash and stock-based pay for several years following layoffs, we believe CEOs receive pay increases as rewards for past decisions and motivation for value-enhancing decisions in the future," Rennie states.

"Our results were consistent with the view that layoffs create shareholder value," he adds. "Layoffs are followed by an increase in operating income and a decrease in expenses. In addition to reducing direct labor costs and related overhead costs, layoffs also appear to increase future operating efficiency."

The press release announcing the study goes on to say: "Not surprisingly, increases in income and decreases in expenses pleased investors, Rennie found. They responded favorably to layoffs by generating abnormal stock returns immediately after the announcements. Rennie and his colleagues estimated that during this period of study, the typical layoff created a one-time labor-cost savings of at least $65 million."

I guess that explains a few things.