Companies are Digging Graves, Laying Off Employees En Masse

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Laying off thousands of workers will either get you fired or get you hired as the CEO. The prevailing trend now is that you will get hired as the CEO.

We have heard of all the firings and laying offs by big American companies in 2022 and 2023. And this continues even now in 2024.

There are many intricacies when it comes to laying off people. It’s the last thing you want to do as the company’s leadership. But that is not how shareholders think.

The keyword here is profits. And a company’s leadership and management have increasingly been infected by it also.

Hence, I think the way most companies operate now is bringing a company’s value to ruin in the long term. Notice how I said long-term.

In this article, I will be talking a lot about the differentiation between short- and long-term and how shareholders and key management personnel think about such things.

And also, why I think they are digging graves, but just not for themselves.

The name of the game is profits

It’s not even close. All shareholders think about are profits and the value of the company. It’s only a matter of whether it’s short-term or long-term.

But what if they also get the top management and leadership involved? Like tying their bonuses to the company’s share price and profits. And allowing them to purchase the company’s shares also.

These are standard practices for many board management now. It makes sense on paper. If you tie the CEO’s bonus to the share price, he or she will do things to boost the share price. How do share prices go up? Expectations of higher profits in the future.

If you bring this to another level, if the CEO also has shares in the company, he or she will be motivated to boost the share price.

Win-win for both sides. But both sides are shareholders and leadership (CEO, CIO and other top management).

It does not include middle managers and the rest of the workforce. For them, they will keep going on earning their regular wages and bonuses unaffected by the share price or profits of the company.

They do not participate in the increased profits or higher share price of the company. And that will prove to be fatal for many people.

We need to think about short- and long-term for different players in the game

It might get complex talking about this. But the best way would be to look at the working horizon for most CEOs and top management. Their working contracts range from 2 years to 5 years. But many don’t work or last the past 5 years.

The higher management is a musical chair game. Many hop across to different companies with better pay, bonuses and incentives. And many will get fired without warning from shareholders.

Knowing this, many top management play the short-term game. After all, no job is permanent for them. They will maximise profits for themselves in the short term.

If the company is not doing well, shareholders will demand that top management bring the company back to profitability and boost the share price. But as we know, getting more revenue is not easy and takes time.

So, in the meantime, what can they do? They can cut costs on certain things. That sports gym membership that you have from your company – cut. That allowance for meals and fuel to visit clients – cut. Petty cash account for team activities and meals – cut.

Once they have cut all these things, what do you think management will cut? No way they will cut their salary. So, they will ask to cut salaries of employees. And of course, employees will not be happy and threaten to sue.

In the end, top management will find a workaround. Let’s just lay off a bunch of people with the reasoning that things are not going well, and profits are suffering as a result. Many of the business divisions are not profitable so they should be wound down. Many employees are not ‘productive’ and ‘non-performing’, so let’s lay them off.

They will bring these proposals to the board and put the main reasonings as ‘challenging operating environment’ and ‘high inflation’. If they do this massive layoff, they will be able to increase profits by 10% to 30%.

The board liked it as it meant more profit so they approved it. As the layoffs are in progress, market investors cheer this as it means that the company is ‘rationalising’ and hence, buying up the shares of the company.

Share price goes up, and top management and shareholders get their ‘cut’ of the higher share prices. After about 6 months, the CEO and CIO got recruited to another company taking with them their fat bonuses.

What’s left is that the company just laid off many employees who are now jobless. The remaining ones have to work extra hard to not get fired or laid off. And they get even more burned out while the top management and shareholders get a bigger pie of the profits.

Of course, not all companies are like that, but big ones are most likely

Not all top management will do these things. The smaller companies typically have more longevity and ‘skin in the game’ as their boards can’t hire high-flying CEOs. And they are normally helmed by their founders who care about the long-term future of the company.

But big companies are run differently. Their founding members are gone now, after exiting from their companies. And they are mostly held by big investment companies.

And these big investment companies have very different ways of running a large publicly listed company. They prioritize short-term profits every quarter and care more about how much dividends are given.

Long-term value could be important but in the face of a rapidly moving market, their holding power is short as they will exit their investments if the price is favourable.

And here is where their interest aligns with top management. A high share price equals good opportunities to exit for shareholders.

That’s why shareholders sometimes are fine with cutting staff. It improves the bottom-line profits and increases dividends and share prices in the short term.

Conclusion

To me, the current trend of laying off staff shows a disturbing tendency of shareholders and top management to reap short-term gains for themselves at the expense of middle managers and employees.

Companies are digging graves for employees, and building stepping stones for shareholders and top management.