Floor
the accelerator, then hit the brakes. That's the way many
companies handled staffing during the U.S. economy's latest
boom and bust. As business turned white hot in the late 1990s,
they added employees as if the world's population was going
to run dry. In part, the "driving factor was fear that
you weren't growing fast enough, or that your competition
was going to get there first," says Clark Dong, co-founder
and chief executive of HereUare, a San Jose [Calif.] wireless
networking company. And, of course, growth is impossible without
enough people to do the work.
Then, in one of the fastest reversals of fortune in recent memory, the Internet pileup occurred. Suddenly, companies were laying off employees -- Dong sent pink slips to 15% of his staff -- and ordering pay freezes or wage cuts. Now that the dust has cleared a bit, managers are reassessing how and who they hire, and how to make sure employees perform. In short, they're looking for employment policies better suited to a much more variable business climate.
Dong expects to start hiring again this year but much more cautiously than in the past. He'll take on only proven talent -- people who've worked as contractors for his WiFi, or broadband wireless networking, company. And one more thing: Forget hiring bonuses. New hires will start at perhaps 20% less than they would have a couple of years ago. "We have grown up a little bit," Dong says.
A SINGULAR SLUMP. For as long as anyone can remember, economic slumps have delivered pain and suffering of the kind that 2.2 million furloughed U.S. employees have felt over the past 18 months or so. This time, however, there are a couple of differences. One was the huge staffing buildup that preceded the more-sudden-than-usual bust. Then, instead of rising gradually, job reductions took place in more of a shock wave.
Another difference was that this downturn affected a generation of managers and employees who had only known prosperity. Mild as it has been when compared with past slumps, this one for the first time exposed twenty-, thirty-, and even fortysomething managers to the harsh realities of a normal business cycle -- and made them focus on an aspect of managing that few had to worry about before.
Not the least of those realities is that layoffs don't always impress Wall Street. True, a perverse effect developed during the late 1990s, when anything that was good for employees -- such as declining unemployment -- seemed to give the Street chills. Nothing like a scary dip in business, however, to restore the market's sense of perspective.
DISTRESS SIGNAL. In a study published recently in the Harvard Business Review, Darrell Rigby, a director at management consultant Bain & Co., found that from August, 2000, to August, 2001, the stocks of companies in the Standard & Poor's 500-stock index that had no layoffs rose 9% on average. Meanwhile, the shares of companies that announced layoffs of more than 10% of their workforces fell by 38% on average during the period spanning 90 days before the announcement to 90 days after.
The reason, Rigby says, is that investors viewed the job reductions as cost-cutting that reflected distress. Instead, "to give you a strong payback, layoffs should be part of a consolidation plan, or the result of renewed focus on a company's core business," he says.
Not
every company got swept up in the hiring-firing fervor of
the past few years. According to Rigby, only 25% of S&P
500 companies got rid of people during the period he studied,
with layoffs for that group totaling 500,000, or 2.2% of total
employment. The other 1.2 million or so who lost jobs during
that time worked in smaller companies, many of them dot-com
outfits.
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