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Should We Resort to Layoffs this Time? One Company’s Difficult Choice
By Michael Naughton and David Specht
“In 2001 the high tech bubble burst and we were particularly vulnerable because of our laptop hinge
business,” recalled Reell board member Bob Carlson, shaking his head. “I was co-CEO of Reell at the time, and our laptop business had been growing rapidly. We had just made a significant investment in an expansion of our manufacturing capacity to keep up with the growth in the business, so the crunch hit us especially hard.” Signs of economic trouble began to first surface in the fall of 2000. Carlson explained, “We couldn’t figure out what was going on at first. Neither could our customers. At the same time, one part of Toshiba was calling us to say that they needed more hinges, while another part of Toshiba was calling us to cancel orders. We lost money in the 4th quarter of 2000 and then lost money again in the 1st quarter of 2001. In one year we lost 35% of the business—some seven million dollars in this strategic business line alone.” The company tried to improve sales, but the entire laptop market had dropped off. “Even if we had been able to develop new business,” Carlson clarified, “it wouldn’t have paid off for another year or two. Next we moved to cut everything else we could – education and training, temporary employees, building improvements, contributions to the ESOP [Employee Stock Ownership Plan] and 401(k)s, etc.—in ways that wouldn’t hurt our revenue producing ability.
Cookie Day
“We had a tradition of regularly gathering the employees for something we called ‘pie day’ to update
them on what was going on with the business and the company. When times were lean, the employees knew right away because instead of enjoying pie at our meeting we would gather instead for ‘cookie day.’ So when we gathered that day around cookies, the employees knew that things were serious. Even after all of the cuts we had been able to identify, we were still left with 80% of expense budget, with a large portion of that being payroll.” This was not the first time in its history that Reell had faced a significant shortfall in projected revenues. As a privately-held and employee-owned company, Reell had a historical precedent of willingness to live with shrinking profitability even down to zero before putting the possibility of payroll reductions on the table.
By February of 2001, it was clear that the combination of the costs related to the recent investment in increased manufacturing capacity and the unanticipated revenue shortfall had brought the company to this zero profitability benchmark, jump-starting a dialogue at the senior leadership level of Reell. The options on the table for reducing payroll were relatively clear:
1. laying off co-workers to achieve the necessary reduction in costs
2. implementing a program of reducing wages to prevent layoffs for as long as possible
It wasn’t at all clear, however, which of these options Reell ought to pursue. Further muddying the waters for leadership were problems which until now had remained hidden beneath the waterline and now emerged as conspicuous.
Will We Lose Our Best People?
“I recall our leadership conversations being rigorous with disagreement about what we should do,” reflected Phil Billings, Reell’s Director of Technology Development. “My own perspective was that we should consider layoffs for several reasons. For one thing, the depth of the pay cuts necessary to make up the loss would affect the entire coworker community both financially and morale-wise. Also, there were some in the company who contributed on a performance level much more than others, making it seem unfair to distribute the costs of a pay reduction evenly. The truth is that this whole conversation brought to light problems at Reell that we hadn’t sufficiently addressed. We hadn’t been doing an adequate job managing the performance of our people, and we hadn’t made an adequate commitment to a disciplined process of pursuing efficiency improvements.”
“There was a concern,” Bob Carlson agreed, “that if we elected to go with pay cuts instead of lay-offs, we would run the risk of losing our best people, those best able to leave for other work elsewhere. While none of us liked the idea of layoffs, there was significant concern about the problems associated with implementing a program of pay reductions.” “The conversations were good, active, intense and we couldn’t reach agreement,” recalled Kit Mundahl, VP of Corporate Service. “Along with everything else, there was real uncertainty about whether the lost business would return and, if so, how long it would be. We really didn’t know if the future would sustain our current workforce.”
“Following extensive conversation,” Carlson recalled, “Steve Wikstrom and I indicated that as the co-CEOs we would make the call on which path to follow.”
A Time to Decide
“During the time when Steve Wikstrom and I (Reell’s co-CEOs) wrestled with the decision about whether to reduce the cost of Reell’s payroll through layoffs or salary reductions,” Bob Carlson recalled, “I kept thinking about another company named Tennant that I had worked for. It had been growing nicely, breaking into the Fortune 2000. Up until 1979, when faced with financial difficulties Tennant had not resorted to layoffs, but had instead implemented pay cuts. In the 1980s, though, Tennant laid off employees and the company fundamentally changed. The sense of ‘we’re all in it
together,’ the sense of humor and good spirit was diminished. It wasn’t that it became a bad company, but there was a real loss to the culture, and we wondered what it would take to get it back. It was like a really big wound that wouldn’t fully heal.”
Other Reell employees had similar experiences to Carlson. As an aid to their discernment about whether to resort to layoffs or pay reductions, Bob and Steve invited another member of Reell’s leadership cabinet, Jim Grubs (VP of Co-worker Services), to draft a statement examining the current dilemma in light of Reell’s declaration of beliefs. Jim was regarded by Reell’s leadership as something of a theologian in residence. One of the explicit responsibilities assigned to his role was the care and nurturing of Reell’s unique values-based culture. “When Jim returned with his statement several days later,” Carlson recalled, “Steve and I were really pleased. Jim’s piece really captured well what many of us had struggled to articulate – our commitment to the people we worked with and our conviction that we must do everything possible before taking the measure of laying someone off.”
“At that point, we were pretty sure which direction we were going. Before announcing the decision, we polled the cabinet twice – once about the decision itself, and again about their readiness to support the decision once it was announced. When it was clear we had their support to implement a program of pay cuts in order to avoid layoffs, we then wrestled with the question about how best to distribute the pain. “Some advocated that we should all take the same percentage pay cut as a symbol of our all being in this together. In the end, we opted for a differentiated pay cut in which upper level management absorbed a 12-16% salary reduction, with a lower percentage of 7% for our salaried production workers, and management implementing their own pay cuts 30 days earlier. Those at or below the target wage were exempt from the pay cut. “We announced the decision at an all-company meeting. When we announced it, everyone stood up and applauded. I still choke up when I remember it. It was one of Reell’s finest moments.”
Reell’s Direction Statement
Reell is a team united in the operation of a business based on the practical application of spiritual values to promote the growth of individuals and advance the common good for the benefit of co-workers and their families, customers, shareholders, suppliers, and community. Rooted in Judeo-Christian values, we welcome and draw on the richness of our spiritually diverse community. We are committed to providing an environment where there is harmony between work and our moral/ethical values and family responsibilities and where everyone is treated justly. The tradition of excellence at Reell was founded on a commitment to excellence rooted in the character of our Creator. Instead of driving each other toward excellence, we strive to free each other to grow and express the excellence that is within all of us. By adhering to the following four common spiritual principles, we are challenged to work and make decisions consistent with God’s purpose for creation according
to our individual understanding.
- DO WHAT IS RIGHT: We are committed to do what is right even when it does not seem to be profitable, expedient, or conventional.
- DO OUR BEST: In our understanding of excellence we embrace a commitment to continuous improvement in everything we do. It is our commitment to encourage, teach, equip, and free each other to do and become all that we were intended to be.
- TREAT OTHERS AS WE WOULD LIKE TO BE TREATED
- SEEK INSPIRATIONAL WISDOM: We look outside ourselves, especially with respect to decisions having far-reaching and unpredictable consequences, but we will act only when the action is confirmed unanimously by others concerned. We currently design and manufacture innovative products for a global market. Our goal is to continually improve our ability to meet customer needs. How we accomplish our mission is important to us. The following groups are fundamental to our success:
- CO-WORKERS: People are the heart of Reell. We are committed to provide a secure opportunity to earn a livelihood and pursue personal growth.
- CUSTOMERS: Customers are the lifeblood of Reell. Our products and services must be the best in meeting and exceeding customer expectations.
- SHAREHOLDERS: We recognize that profitability is necessary to continue in business, reach our full potential, and fulfill our responsibilities to shareholders. We expect profits, but our commitments to co-workers and customers come before short-term profits.
- SUPPLIERS: We will treat our suppliers as valuable partners in all our activities.
- COMMUNITY: We will use a share of our energy and resources to meet the needs of our local and global community. We find that in following these principles we can experience enjoyment, happiness and peace of mind in our work and in our individual lives.