Organizational Behavior: Damage Control

By Robert I. Sutton  |  Posted 04-01-2003

Organizational Behavior: Damage Control

The 21st-century workplace is a lot less fun than what the crystal ball-gazers told us to expect just a few years ago. Alas, books like The Long Boom, Dow 30,000 by 2008 and Dow 100,000 seem almost absurd in retrospect.

Bankruptcies, involuntary job transfers, forced and unpaid vacations, layoffs, hiring freezes, tiny or nonexistent bonuses, pay cuts and business travel on the cheap—they've all become facts of organizational life for most of us. Don't even think about holding an office party: You just might have to pay for it yourself.

Maybe you've been able to avoid such nastiness. But if not, consider this: How companies take such painful actions is just as important as which actions they take. The previous two recessions, as well as the business process re-engineering movement, prompted many companies to slash costs and invoke layoffs. Unfortunately, though, some of the most crucial lessons learned from research of those tough times are being ignored during the current downturn. I am especially surprised by how many firms turn to layoffs rather than less drastic measures at the first hint of trouble.

According to a 1997 study by Professor Oded Palmon at Rutgers University, companies that announce layoffs in response to adverse market conditions often experience declines in their stock prices. Similarly, a 2002 study by Darrell Rigby of Bain & Co. shows that firms which ordered layoffs to cut costs had substantially lower stock prices 90 days later. This research and related studies all suggest that layoffs send a negative signal to the market. True, payroll is reduced, but there are hidden costs, such as severance pay, reduced productivity and less innovation, fueled by employee fears that any risky ideas or out-of-the-box thinking—even ideas that could help the company boost profits—might put their jobs at risk.

A careful case study of Analog Devices Inc. by Nelson Repenning, an associate professor of management at MIT's Sloan School of Management, showed that a once-thriving total quality management (TQM) program ground to a halt after a 12 percent layoff in 1990 because "people didn't want to improve so much that their job would be eliminated." Indeed, Hewlett-Packard listed Analog as one of its best suppliers in 1987, but listed it as one of its worst after the layoff.

Even if a company can't avoid layoffs or other cost-cutting moves, the manner in which such steps are taken can have a huge impact on employee commitment and a company's subsequent performance. Psychological research on negative events and case studies of troubled companies suggest four basic management guidelines that matter most:

Prediction. Be sure to give employees as much information as possible about what's happening and who will be affected. Even if you don't know the details just yet, provide some predictability, like, "we can't promise you that no layoffs will happen, but we promise that none will happen in the next 60 days."

Understanding. Give people detailed information about why actions, especially those that could upset and harm them, had to be taken. Err on the side of too much information rather than too little.

Control. Give people as much influence as possible over what happens to them, when it happens and how. Give them the chance to make as many decisions as possible about the way things happen to them, even though they might not be able to influence what ultimately occurs.

Compassion. Convey concern for the emotional distress and financial burdens that laid- off workers face. Look them in the eye, express warmth, and don't hide from or ignore them.

And there's another lesson: It pays to be nice—literally. In the late 1980s and 1990s, as executives from companies like Procter & Gamble, General Motors and General Electric gained experience in layoffs, executives realized, somewhat to their surprise, that productivity often increases after plant closing announcements. Further, sabotage is rare, partly because people don't want to ruin their chances for re-employment or their reputations as team players. Executives also learned that telling employees why the downsizing occurs can help those getting laid off to better accept their fates. When given an understanding of how the company works and what challenges it faces to remain in business, employees who survive a round of layoffs can be motivated to do better work.

It also helps when managers offer those on the firing line different jobs within the company, or a variety of outplacement options (e.g., choice over the mix of cash, retraining and healthcare benefits). Not only does this have a positive impact on displaced employees, it can encourage loyalty among remaining employees and foster fewer negative feelings about the layoffs inside the community.

For Example

Procter & Gamble Co.'s experience has been exemplary. About three years ago, during a management seminar I led with P&G's top managers, I described the importance of prediction, understanding, control and compassion during tough times. That prompted then-Chairman (and former CEO) John Pepper to describe how, in the "bad old days" P&G closed its plants as quickly as possible, with as little explanation as possible. As Pepper put it, "we tried to get out of town as fast as we could." But they learned that giving advance notice, telling people why the closing was necessary, giving displaced people as much help as possible, and being compassionate about the layoffs helped protect P&G's reputation as a caring and well-managed company. It also helped P&G boost productivity after the announcements.

Jerald Greenberg, a management professor at Ohio State University, has conducted perhaps the most compelling study of the power of compassion during tough times. Greenberg studied three nearly identical manufacturing plants in the Midwest; two of the three plants (which management chose at random) instituted a ten-week-long, 15 percent pay cut after the firm had temporarily lost a major contract. In one plant where pay cuts were imposed, management conveyed the news in a curt and impersonal manner, through an executive who announced: "I'll answer one or two questions, but then I have to catch a plane for another meeting." In the second plant, a detailed and compassionate explanation was given, along with apologies and multiple expressions of remorse. The executive also spent a full hour answering questions, including inquiries about how long the pay cut would last and who would be affected (increasing predictability) and about steps that workers could take to help themselves and the plant (increasing control).

Greenberg found fascinating effects on employee theft rates. At the plant where no pay cuts were made, rates held steady at about 4 percent during the ten-week period. What was striking, however, was the difference in theft rates in the two plants where cuts were made. Where a curt and inadequate explanation was given, the theft rate rose to more than 9 percent. But in the plant where managers took time to explain the pay cuts compassionately, theft rates rose only to 6 percent.

After pay was restored at the two plants, theft rates returned to the pre-pay-cut level of about 4 percent. Greenberg suggests that employees stole more in the two plants where cuts were made to "get even" with their employer, but stole the most from the plant where managers exhibited no compassion and offered no good explanation for the cuts. The reasoning? Workers there felt they had more to get even for!

What all of this suggests is clear: How managers choose to implement change is critical to the success of the changes. Compassion is vital to good management, and adds corporate value, in good times and bad. And the best part? It's free.

Robert I. Sutton is co-author with Jeffrey Pfeffer of The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action. He co-leads Stanford University's Center for Work, Technology and Organization. Professor Sutton's next column will appear in June. Please send comments to