It’s hard to ignore The Wall Street Journal article with the headline about more big layoffs in 2024. What’s also hard to ignore are the mixed messages about the job market and what they mean to your business in the short- and long-term.
As we all know by now, the job market data indicates a very robust job market with
unemployment remaining surprisingly low. I blogged a few weeks ago on the December data that caught a lot of people off guard and has many worried that there are not enough good people to fill all the job openings.
But at the same time, Google, Amazon, Citigroup, Ebay, Macy’s, Microsoft, Salesforce, Sports Illustrated, and Xerox are just a few of the big companies laying off hundreds of thousands of employees. So what gives? Are things good? Are they bad? And what does the ultimate decider to the answer to that question – Wall Street – think?
During a business acumen simulation workshop we conducted in Asia last week, the topic of job cutting (aka “corporate rightsizing) came up and all of the participants were very resolute that the last thing they wanted to do was cut employees, lower morale, and systemically reduce the quality and value propositions you offer to customers.
Here are some thought questions and perspectives on what's going on and what it means to you.
Why Cut Employees and Not Other Operating Expenses?
The answer to this question is simple; employees make up about 65%-70% of any business's operating expenses. Most companies have already reduced pure investments in Sales tools, Digital Marketing, Manufacturing, and R&D in order to pay their employees.
The Positive Impact on Stock Price
From a business acumen perspective, the idea is that if you reduce headcount, operating profit goes up, free cash flow goes up, and ultimately the stock price goes up because investors believe the company value is increased with greater profitability.
Here’s a look at some of the stock values of the big cutters:
- Alphabet (parent company to Google) was up 15%
- Microsoft was up 6%
- Meta (parent to Facebook and Instagram) was up 50%
The Negative Impact on Stock Price
For as many positive reasons and examples why to cut jobs, there are a lot of negative reasons as well:
Why hire in the first place?
Somewhere, someplace a senior executive team authorized the hiring of all those people that were recently laid off. Does that reflect poorly on the team?
Morale, engagement, and effectiveness
Based on my observations and conversations with many large company leaders that I know and trust, the impact of cutting jobs on morale, engagement, and overall effectiveness starts to go down gradually and then increases in velocity over time. At some point, this will negatively impact stock price.
Innovation
The third and most important thing I wanted to share is that cutting employees has the potential of cutting innovative thinking and breakthrough R&D. These things are the lifeblood of any organization and when you cut the people who are the innovators, you are going to dramatically reduce future cash flows so the stock goes down in value.
In summary, don’t just assume a stock is going to go up just because it cut people. The better approach is to have a disciplined value proposition for your customers, the right people to execute the strategy, and a world-class talent development system that is aligned with the company strategy.
