Layoffs are often seen as a tool to reduce costs and improve profits. But reducing payroll expenses to meet short-term performance targets is largely futile.
Studies have shown that layoffs do not reliably improve profits in the long run. While layoffs can lead to short-term savings, they often result in long-term costs:
- Decreased productivity
- Loss of institutional knowledge
- Costly severance packages, which can outweigh the benefits
Research indicates that many companies see a neutral or negative effect on stock prices and a decline in profitability for years after layoffs.
The temptation to lay off a lot of people is a sign your company has a lot of problems – that won’t be easily solved. Simply put, layoffs don’t accomplish the goal.
The temptation to lay off a lot of people is a sign your company has a lot of problems – that won’t be easily solved. Simply put, layoffs don’t accomplish the goal.
Certainly, your human capital is a major cost. And it would seem logical that if you lay off people, your costs would go down increasing your profits.
However, it doesn’t. (More on that later.) Nor is it a socially responsible way to manage people.
True, a lot of companies offer early retirement, retrain employees and slow their pace of hiring. But far too many don’t use these options.
This country has developed a layoff mentality whether the economy is good or bad.
Either layoffs or they’re only hiring part-time workers or independent contractors. That helps to explain why the average American workweek has only been about 34 hours for many years.
Agreed, sometimes layoffs are necessary in a dynamic marketplace. Companies do have to make changes to compete in this technologically advanced Digital Age.
Ordinarily, layoffs do promote a short-term profit bounce but they don’t result in high performance or sustainability. In fact, layoffs give a false hope for profits and should be viewed as a red flag.
It’s easy to underestimate the cost of layoffs, such as in customer service and sales. Why? Sales drop with fewer customer service and sales employees.
Assuming a company rebounds, eventually it has to hire staff. But recruiting, hiring and training are costly.
Lower morale
There’s another residual cost – lower morale among the remaining workers. Employee loyalty becomes problematic. Low morale motivates workers to quit and go elsewhere.
In my experience, companies enjoy stronger performance if they retain talented people who loyally strive for excellence.
For senior management, it requires courage and leadership. There’s no long-term gain without short-term pain.
Finance-centered decisions – to attain quarterly earnings targets at the expense of socially responsible decisions — don’t bode well for the long term. Call it Karma if you will.
Strategic thinking for true performance can outlast obstacles such as geopolitical turmoil, interest-rate change speculation, low-energy prices or stock-market volatility. Talent can help employers meet such challenges.
There are fewer large companies now than there were forty years ago. The trend isn’t likely to reverse itself.
IPO market
True, the 2025 Initial Public Offering (IPO) market experienced a significant resurgence in activity, particularly in the U.S., with notable listings from major technology and fintech companies. As of November 2025, there have been 221 priced IPOs, indicating a strong recovery from previous years.
In 2015, there were fewer and smaller IPOs. There were only 51 IPOs in the second half of 2015. The 2015 aggregate deal value only totaled $30.1 billion.
Finance-centered decisions are apparent in IPOs that benefit a relative few. Many IPOs aren’t issued to raise money for a financial foundation and sustainability. They’re issued to provide a nest egg for the shareholders, and founders who possess dual-class shares. This insures they retain control, and is why many are so focused on short-term pressures.
But if the founders are enlightened, the opposite can happen.
Consider a legacy of the late Steve Jobs at Apple. When the recessionary dot-com bubble hit, he decided to invest in research and development, not layoffs.
Later we saw iTunes, iPod and iPad. The sour economy didn’t hurt Apple. Tepid economies don’t have to hurt small companies, either.
When layoffs might work
Layoffs can be beneficial if they are part of a clear, strategic plan for the future, not just a reactive cost-cutting measure.
In situations of severe financial distress, strategic layoffs can help a company return to profitability, though the market response may still be mixed.
Summary – why layoffs don’t improve profits
Short-term focus: Companies often resort to layoffs as a quick fix, prioritizing short-term cost reduction over long-term strategy.
High costs: The costs of layoffs, including severance, benefits, and the process of rehiring and retraining when business rebounds, can negate the savings.
Loss of talent and knowledge: Layoffs can result in the loss of experienced and valuable employees, along with their institutional knowledge, which harms long-term performance.
Decreased productivity: Remaining employees may experience burnout, stress, and decreased morale, which leads to lower productivity.
Negative market response: While sometimes seen positively in cases of financial distress, layoffs that are perceived as only a cost-cutting measure often lead to neutral or negative stock price performance.
Innovation gap: Companies that lay off workers, especially in technology, may suffer from a long-term innovation gap because they prioritize survival over breakthrough ideas.
In other words, be careful if you think you have to lay off employees.
From the Coach’s Corner, some other articles for you:
Step-by-Step Solutions for a Financial Turnaround — Difficult economic conditions have exacerbated the financial woes facing many businesses. But business success is possible for companies suffering through red ink. Here are financial solutions that will help facilitate a company turnaround.
Overcoming Obstacles for Business Turnaround — 13 Steps — For a successful turnaround of financially troubled businesses, there are usually two obstacles to overcome. They include the ego of the business owner or CEO, and poor advice by the lawyers. It’s difficult for a business owner or CEO to accept the need for a turnaround specialist.
5 Quick Management Tips to Motivate Your Employees — A major quandary for managers is to bring out the best in their employees. Every manager wants to do it, but it’s not always easy. What’s the reason? Usually, it’s because employees are disengaged – disconnected from their managers and companies. Here’s how to fix it.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
-Warren Buffett
__________
