- Researchers look at the factors influencing whether a business decided to retain or cut staff during the early months of the COVID-19 pandemic
- Companies with better financial flexibility were less likely to implement layoffs, but factors such as governance and worker treatment also played a role in decision-making
- Study suggests that taking steps to retain talented workers during crises can be a valuable strategy for businesses
Summary by Dirk Langeveld
When the COVID-19 pandemic and its associated shutdowns caused many companies’ revenues to plunge in the spring of 2020, employers were faced with difficult workforce decisions. Although the Paycheck Protection Program was established to provide forgivable loans and help businesses maintain payroll, companies often had to reduce their staff or take other steps such as reducing pay and hours in order to reduce expenses.
Naturally, businesses were better able to weather the situation if they had a healthy financial reserve set up for such emergencies. A recent study suggests that other factors also played into employers’ decisions on whether to retain or cut staff, including governance, cost structure, and how well they had treated the workforce.
The analysis by Harvard Business School professor Ethan Rouen, co-authored with Stanford professor Rebecca Lester and University of Texas professor Braden Williams, looked at the actions of 354 of the largest employers in the United States between March and May 2020. These businesses covered a wide range of industries, and 70 percent saw their sales drop during the outset of the pandemic. Twenty-eight percent implemented layoffs or furloughs, while 25 percent increased pay for essential frontline workers.
The researchers concluded that firms facing a negative demand shock were 28.8 percentage points more likely to reduce their workforce and 17.2 percentage points less likely to provide pay increases to essential frontline workers.
Companies with greater pre-pandemic financial flexibility were almost half as likely as other firms to lay off employees, although this situation had little effect on their decision to hire new employees or offer raises. Financial flexibility was defined as having adequate cash holdings and easier or less costly access to external debt financing, making the company better able to weather the financial distress of negative shocks as well as fund investments in new profitable opportunities.
However, the effect of financial flexibility was most pronounced in companies that had better governance scores, a more asymmetric cost structure, and better treatment of workers. For example, companies with less commitment to their workers were still likely to implement layoffs or furloughs as a cost-cutting measure even if they had adequate financial flexibility. Meanwhile, companies that had greater commitment to their workers, such as investing in their training, were less likely to lay off staff out of concern that rehiring and retraining in the future would be more expensive than maintaining the current workforce.
Workforce reduction was 41.3 percentage points less likely in better governed firms, 38 points less likely in firms with asymmetric costs, and 17.4 points less likely in firms with more commitment to their workers.
The researchers concluded that while maintaining an adequate emergency fund can always help companies endure unexpected financial downturns, it is also important to take steps to retain valuable employees during crises. This point has become more apparent as the economic recovery progresses, as many companies struggle to attract applicants for open positions or cope with employees quitting to pursue opportunities elsewhere.
