There are no pink slips at the most productive companies

by Jason Jennings

You’re familiar with how the scenario is played out at lots of companies. The CEO proudly tells the workforce they’re valued just like family and then… days later announces a massive layoff and promises a new beginning for the company. So much for caring families huh!

Dr. Linda Trevino, chair of Pennsylvania State University’s Management School said, “Layoffs have become a management fad and companies do them because they think they’re expected to do them because everyone else is doing them. It’s almost as though if you aren’t doing layoffs you’re somehow not lean and mean.”

By stark contrast, the people who head the most productive companies in the world don’t layoff workers in good times or bad. In fact, each has made a promise to their workforce that the corporate coffers won’t be balanced and profits won’t be manipulated through the use of layoffs.

The world’s most productive companies
We began by evaluating the financial results of more than 4,000 publicly traded and privately owned firms searching for glimpses of productivity. Once the yawners and also-rans were eliminated a short list of several hundred emerged whose performance warranted in-depth enquiry.

When the final criteria emerged, a list of 80 were subject to rigorous evaluation in order to find the companies whose annual sales, operating income and return on assets and invested capital per employee (full-time and full-time equivalents) topped the performance of all the others. After all, what could be better indicators of productivity than selling more, spending less and making more per employee than all the other companies in the world?

Once a list of 10 of the most productive companies in the world had been compiled, months were spent crisscrossing the nation and traveling the world interviewing the people who lead and manage the businesses and their workers, suppliers and customers in an attempt to learn how they differed from other businesses.

A few of the companies that made the elite final cut include Nucor, America’s largest steelmaker where the company has managed to reduce the length of time it takes to produce a ton of steel from 11 hours to 30 minutes while increasing earnings 30 years in a row, and World Savings, whose 400 branches attract deposits at nearly twice the rate of its nearest rival while keeping its operating expenses roughly half those of other banks and achieving 20 percent compounded growth for 40 years. Also making the list was Ryanair, the feisty, no-frills European discount airline that outperforms legendary Southwest Airlines in every operating metric and produces four times the annual profit per employee of the average airline industry employee.

All of the strategies and tactics that we discovered to be shared by highly productive companies challenge conventional business wisdom, but one of the most striking is that each has a policy of not using layoffs when demand slackens, the economy hits the dumpster or as a way of pleasing shortsighted shareholders. They understand it’s the responsibility of enlightened leaders and managers to re-ignite demand, not to fire people.

Putting their money where their mouth is
While all executives are prepared to pontificate on the value of their workforce at the drop of a hat, few really mean it as demonstrated by past actions. But, in just a few minutes of conversation with any of the people who lead the world’s most productive companies, it’s obvious that their proclamation of the value of the workforce is genuine. In fact, when any of them speak on the subject, there’s so much authenticity that it’s palpable.

Nucor manufactures rolled steel and steel joists in the toughest and most commoditized business in the world. Buyers want the steel they purchase to be up to their exact specifications and at the lowest price available. Period. Most steelmakers with high fixed-cost structures haven’t proven nimble enough to survive.

More than 40 American steel companies have gone bankrupt in the past few years. Each company's bonds, with the exception of Nucor, are rated junk, and not a week goes by that the steelmakers and their unions aren’t in Washington, D.C., with begging bowls in hand asking the government to rescue them.

Contrast that with Nucor, where revenues and dividends have grown for 131 quarters, where the average steelmaker makes between $70,000 and $100,000 per year and where there has never been a layoff. 

“The right workers are our single most important asset,” said Nucor CEO Dan DiMicco. “When business is bad, as it’s bound to occasionally be in a highly cyclical industry like ours, the first thing to go is every executive perk and bonus followed by every plant manager and supervisor giving up theirs. Only then are the workers affected, and we reduce the work week to five days and then four and, on rare occasions, even three, but we don’t lay people off.”

For the 40 years that Herb and Marion Sandler have jointly headed World Savings, they’ve had a policy of no layoffs. Twenty years ago, Savings and Loans in the U.S. were prohibited by government regulation from making Adjustable Rate Mortgages (ARMs). Keenly aware that issuing fixed-rate mortgages for as long as 30 years without any idea of what they’d be forced to pay for future deposits was risky business, they decided to force the government’s hand and simply stopped making mortgages and publicly challenged the government to change its policy.

During the lean year and a half when they weren’t making any mortgages, World Savings kept their loan salespeople and underwriters on the job doing everything from manning branches to pruning hedges outside the branches. Other Savings and Loans slashed their overhead expenses and personnel costs to the bone.

“After all”, conventional reason dictated, “if we’re not making loans why keep salespeople and mortgage underwriters on staff?”

The reasoning was they’d simply rehire people when the government relented.

Eventually, facing a potential public relations nightmare and economic disaster, the government caved in and allowed World and all other Savings and Loans to begin issuing adjustable rate mortgages. The difference was that World Savings, which kept everyone employed, was first out of the blocks and gained a huge competitive advantage over all its rivals who had to begin recruiting, staffing and training.

In the aftermath of 9/11, as airlines worldwide began slashing schedules and laying off hundreds of thousands of workers, Ryanair gave away 300,000 free seats, priced another 1 million seats at $30 and plastered posters across Europe proclaiming, “Don’t let the terrorists win!”

While other air carriers went on to collectively lose billions of dollars, Ryanair hired people, placed an order for 150 new airplanes, added routes and scored its biggest profits in the quarter and year that followed the terrorist attacks.

Five ugly truths about layoffs
Leaders of highly productive companies figured out long ago that the high costs and hidden expenses associated with layoffs means that significant increases in productivity would always remain elusive without the right people.

1. When workers see layoffs happening around them, they become preoccupied with their own personal finances and the security and protection of their family unit. Why would an airline flight attendant care about delivering exemplary customer service when they know their head might be the next one lopped off? Maslow taught us that a person's first concerns are food, clothing and shelter.

2. Because they’re afraid they might be the next in line, valuable workers begin seeking more stable environments and leave uncertain or insecure work environments, leaving the business staffed by the undesirables and misfits unable to find better or more secure jobs elsewhere. 

By contrast, one Nucor steelmaker said, “I’d never leave this company. My paycheck each week reflects how much steel my team made last week, they pay each of my kids in college $2,500 a year and they don’t lay people off. It doesn’t get any better than this.”

3. After a company has completed a layoff and when demand for the products or services it makes has returned, it willl find itself in the unenviable position of facing the expense of recruiting, hiring and training to fill the same jobs they earlier eliminated.

Consultant Darrell Rigby, in the June 2001 issue of the Harvard Business Review writes, “Although employee layoffs will reduce costs in the short term, the combination of severance expenses, loss of knowledge and trust and the subsequent hiring, training and retention costs can quickly overwhelm any expected savings.”

4. As workers are laid off, institutional memory becomes lost forever.

5. No culture, certainly not one based on productivity, can exist in an enterprise where people fear for their jobs and are engaged in a constant game of CYA and looking over their shoulder.

Is it coincidental that the most productive companies in the world don’t engage in layoffs and are able to prosper and thrive in a roller coaster economy? Or, is because each truly believes that the right people possessing the institutional memory, the processes, connections and forming the culture are their single biggest asset and the formula that allows them to be among the world’s most productive companies?

Perhaps Pennsylvania State University’s Dr. Trevino summed it up best when she said, “Any company which sweepingly lays off workers is unlikely to be productive and must be judged as poorly managed. If a layoff is needed, it’s because the company wasn’t managed very well to begin with.” 

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