Employee Downsizing

The First Phase Contd...

During this period, many companies started downsizing their workforce to improve the image of the firm among the stockholders or investors and to become more competitive. The chemical industry came out strongly in favor of the downsizing concept in the early 1990s. Most chemical and drug companies restricted their organizations and cut down their employee base to reduce costs and optimize resources. As the perceived value of the downsized company was more than its actual value, managers adopted downsizing even though it was not warranted by the situation. A few analysts blamed the changes in the compensation system for executive management for the increase in the number of companies downsizing their workforce in 1990s.

In the new compensation system, managers were compensated in stock options¹ instead of cash. Since downsizing increased the equity value (investors buy the downsizing company's stocks in hope of future profitability) of the company, managers sought to increase their wealth through downsizing. Thus, despite positive economic growth during the early 1990s, over 600,000 employees were downsized in the US in 1993. However, most companies did not achieve their objectives and, instead, suffered the negative effects of downsizing. A survey conducted by the American Management Association revealed that less than half of the companies that downsized in the 1990s saw an increase in profits during that period. The survey also revealed that a majority of these companies failed to report any improvements in productivity.

One company that suffered greatly was Delta Airlines, which had laid off over 18,000 employees during the early 1990s. Delta Airlines realized in a very short time that it was running short of people for its baggage handling, maintenance and customer service departments. Though Delta succeeded in making some money in the short run, it ended up losing experienced and skilled workers, as a result of which it had to invest heavily in rehiring many workers. As investors seemed to be flocking to downsizing companies, many companies saw downsizing as a tool for increasing their share value. The above, coupled with the fact that senior executive salaries had increased by over 1000% between 1980 and 1995, even as the layoff percentage reached its maximum during the same period, led to criticism of downsizing.

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1] Stock option is an offer given by the company to purchase its common stock at a grant price, regardless of the stock's price at the time of offer. Stock options as part of employee compensation techniques had earned high popularity during 1990s. Stock options were believed to increase the commitment of the employees towards the company as they had vested interests in the performance of the company's stock.

Case Details

Case Code : HROB016
Themes: HR concepts and issues
Case Length : 09 Pages
Period : 1990-2001
Organization : Varied
Pub Date : 2001
Teaching Note : Available
Countries : USA, India, etc...
Industry : Varied

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