Implementing the Headcount Solution

The headcount solution for cutting compensation costs involves seven steps that are covered in Part Two of this book. These steps can be taken quickly and will leave the organization with a foundation for recovery that will help win competitive battles in the future. The headcount solution allows companies to preserve work, retain human capital and knowledge, and cut costs at the same time. Some people may still lose their jobs and some may have to be relocated, but overall the headcount solution will set a company on a path for an increased return on investment, sustained value of its stock prices, and opportunity for profitable growth.

The headcount solution takes a company from the beginning of a crisis through recovery by cutting compensation costs and retaining the human capital to survive and thrive in the future. Figure 1-2 is an overview of the process.

Figure 1-2: The Headcount Solution

It begins by preparing employees for what is to come with a comprehensive communications plan. Then it puts the company on a path to plan for the three rounds of cost cutting. This includes the basic cost cutting and economic analysis where alternative scenarios are prepared and compared. It results in putting cost cutting budgets into place. Once this is done a consideration of who to cut and who to keep, including a human capital analysis, comes into play.

The company is now prepared to initiate the three rounds of cost cutting. The first round involves across-the-board cost cuts that concentrate on voluntary separations and reduced compensation costs without involuntary layoffs or forced reductions in the work force. Next comes alternative work arrangements, including a number of ways to cut compensation costs by restructuring work, again avoiding involuntary separations or layoffs.

The last round involves the implementation of layoffs, which will be minimized by the previous two rounds of cost cutting. And the final step involves helping the survivors get back to work.

Following these seven steps will not only reduce layoffs, but it will also ensure that the company has gone through the paces to retain critical human capital. Layoffs alone don’t work; they provide a false sense of security. Research over the last 15 years shows that companies that lay off employees to get costs in line with revenues rarely improve on their return on investment or assets.^[1] And they never regain the stock price they had before the layoffs.^[2] Following the headcount solution will take you on the road to a healthy rebound and recovery.

^[1]See for example, Wayne F. Cascio, “Downsizing: What Do We Know? What Have We Learned?” Academy of Management Executive, 1993, Vol. 7, No.1, pp. 95–104; James R. Morris, Wayne F. Cascio, and Clifford E. Young, “Downsizing After All These Years: Questions and Answers about Who Did It, How Many Did It, and Who Benefited from It,” Organizational Dynamics, Winter, 1999, pp. 78–87.

^[2]See, for example, Darrell Rigby, “Look Before You Layoff,” Harvard Business Review, April 2002, pp. 20–21, for a comparison of cost-cutting layoffs to company strategy and stock performance.