Pavan Jambai, MiM student at ESSEC Business School, takes perspective on the enduring pandemic to draw on the lessons of successful and responsible leadership and the notion of mutualism as a guideline for critical decisions

Leadership and the importance of mutualism in times of crisis, by Pavan Jumbai.

Can one be saved without the other?

What makes a company? Is it the product or service it offers, is it the perception of customers, is it the stock price or is it one of the thousand other components of a company? A rare case of the question answering itself, all those mentioned above are rather the components of a company. Perhaps the most important one being the human resources involved, for dedicated employees can turn a bad company into a good one but no company can achieve long-term success without dedicated employees.

If there were one term to represent the relationship between the company and its employees perfectly, it would be symbiosis or in particular mutualism – the ecological interaction between two or more species where each species has a net benefit. If not for the word ecological, it might as well be a definition from Investopedia.

One of the largest and most successful companies in the world, Starbucks, was built on the competitive advantage of having loyal employees. In an industry where the average turnover rate of employees was around 400%, Starbucks managed to reduce it to a paltry 60% by providing the benefits and respect the employees were rightfully due. By providing employees a stake in the company, Starbucks was able to create a motivated workforce which was the fundamental competitive advantage to its success. It has been scientifically established that providing benefits and treating people with respect are clear motivators for employees.

Efficiency vs Effectiveness

How effective is laying off employees in times like this? There needs to be a clear understanding and distinction between efficiency and effectiveness. As Facilities Management Insights explain, efficiency and effectiveness are not the same thing. Efficiency is defined as the ability to accomplish something with the least amount of wasted time, money, and effort or competency in performance. Effectiveness is defined as the degree to which something is successful in producing a desired result; success. To illustrate better, the efficient way to create leads would be to send mass emails, wherein you can send hundreds of thousands of emails to different customers and the effective way to create leads would be to segment customers and target them specifically based on your positioning in the market.

With the clear understanding of the two terms, it can be understood that while laying off employees may increase the efficiency in cost-cutting campaign of the company in the short-term, it usually is not effective in the long-term. A lot of factors have to be considered when it comes to laying off employees. The benefits, the severance package, and potential lawsuits are few of the many things that surge the cost of lay-offs. Another indirect cost could be the increased cost of customer retention since lay-offs usually make the customers panic and think that you are in trouble.

Another interesting phenomenon associated with lay-offs is survivor guilt–a symptom of post-traumatic stress disorder when a person survives a traumatic event whereas others do not.  According to research published on CNBC late July 2020, roughly one-third of workers said they felt guilty about having a job when others at their company had been furloughed or laid off and the share of workers who feel this way has steadily increased from April through the summer months. The skepticism and fear factor steps in too with remaining employees thinking it’s only a matter of time before it’s their turn. Especially in the wake of a pandemic, when people are confined to their homes, it is not a good idea to impose more work on fewer people: it to increased levels of stress and anxiety.

On the topic of the effectiveness of lay-offs, it is not just with respect to the pandemic. When a new management team comes to an organisation, the new CEO will often carry out a structural reorganization which may lead to lay-offs in an effort to save costs. Time and again, it has been proven that decision rights and information flow in a company are much more important aspects to be focused on than structural reorganization. The effectiveness of decision rights and information flow is almost twice as high as structural reorganisation and incentives to motivate employees – yet many managers do not pay heed to them simply because the alternatives are too easy to implement and provide short-term benefits.

There is always a choice

Leaving aside a few exceptional situations, companies, and the leaders of the companies, always have a choice. Is laying off the employees the only way, or is it the cheapest way, or is it the easy way, or is it the best way to save the company? So, what are the alternatives?

One option would be to segregate the workforce and to reduce the hours of work based on the importance of their work. The most important measure would be to lead by example where top management takes a pay-cut. While laying-off is never good news for the employees, it begs the question are all employees the same? The disparity of pay between the CEO and a typical worker is understandable based on competence and skills, but what is profoundly dumbfounding is the following statistic from the Economic Policy Institute: “From 1978 to 2018, CEO compensation grew by 1,007.5% (940.3% under the options-realized measure), far outstripping S&P stock market growth (706.7%) and the wage growth of very high earners (339.2%). In contrast, wages for the typical worker grew by just 11.9%”.

It could in no way be possible that what’s expected from the CEO of a company has increased by over a 1000% but what’s expected from a worker has increased by just 11.9%. So, as clear from the data, a pay-cut from top management would go a long way in helping the company retain employees at the lower level.

Another option would be to look for economic stimulus from the government which could help them sustain the workforce for a little longer. Adopting an empathetic approach and opening the floor to all the employees for brainstorming is a welcome move, not just during a crisis but at any given time. Good ideas can come from anywhere and everywhere. A classic example of this approach is Gravity Payments, a fintech company that processes payments for 13,000 small business across the USA. Dan Price, CEO and founder, called a companywide meeting to let employees know the state of the business and solicit creative strategies for navigating the next few months and scheduled 40 hourlong meetings with small groups of employees to check in and gather ideas. “We just put all our cards on the table,” Price says. “And we listened.”⁴ This allowed Price to come up with a creative solution. He asked each employee how much of a pay cut they’d be able to take for the next few months. By trimming salaries accordingly, Gravity now has enough reserves to keep everyone employed for up to a year under the current circumstances.

On the external environment, the company could reduce all extra expenses relating to the subsidiaries of the business. The production could be scaled back to accommodate for the change in scenario and save production costs. Vendors and suppliers can be renegotiated with the current situation in mind and a payment scheme can be put in place. Lean techniques could be integrated in the production and operation department to reduce further costs.

When push comes to shove, how do you go about it?

Even with plenty of alternatives, we may realise that there might come a point when a company is forced to lay-off its employees. When it does come to the point, how can a company handle it? Mass lay-offs on zoom and no severance pay or benefits are some perfect examples of what not to do. Consider the case of Airbnb, which laid off 25% (1,900) of its workforce due to the pandemic. It adopted a compassionate, realistic and honest approach which helped reduce the effect of the lay-offs on employees drastically. The CEO of the company sent a transparent email describing the situation a few days before the lay-offs began. All the employees who were laid-off had a one-to-one meeting with their managers where they discussed the employee’s future. The severance package included 14 weeks of pay plus tenure amount, healthcare for a year and mental health support for four months. It treated every parting employee as a shareholder irrespective of how long they had worked for the company. Most importantly, Airbnb organised job support for the parting employees through its Alumni Talent Directory, Alumni Placement Team and Professional Career Services. It also allowed the employees to retain the office laptops. So, the bottom-line of the case is that a company should adopt a transparent and empathetic approach while providing the maximum possible support to the employees.

Catch-22?

Lay-offs, except under rare circumstances, are avoidable. Managers usually underestimate the effect and overestimate the savings of lay-offs. While it may provide some much needed short-term relief, it usually spells a threat to the long-term growth strategy of the company. Layoffs are generally followed by a decrease in the stock price of the company and a decline in the job performance of the survivors. Moreover, there are a plethora of alternatives, both internally and externally, available to the company. Companies can be creative in pay-cuts, reduced hours, furloughs during times of crisis– it is in times of crisis that the company needs to showcase its creativity. If laying-off is indeed the only option, managers might well be advised to adopt an honest and empathetic approach and provide maximum support to the parting employees.

So, can one be saved without the other? The question is in a way a catch-22 situation. You need employees to save the company but you need the company to save the employees. In a mutualistic relationship, it is always wise to save both entities as, by the very definition of it, it is impossible for one entity to function optimally without the other.

Useful links:

• Link up with Pavan Jumbai on LinkedIn
• Read a related article: It takes two to tango: Why employers shouldn’t be so quick to downsize during Covid-19
• Download the CoBS publication Leadership, Governance, and Crisis
• Discover ESSEC Business School and the Master in Management, ranked 6th worldwide by the FT in 2921.

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The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

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