Compensation committee rewards to CEO's for downsizing work forces is one of the issues that fuels the anger over income inequality. Frankly, some of the bonuses awarded by compensation committees to executives after they have laid off 100's of employees seem inexplicable. Layoffs are typically a response to declining sales, not exactly an event that deserves to be rewarded. A question that seemingly should be asked more critically before bonuses are awarded after layoffs is whether shareholder value has truly been increased. Can a company that is so stagnant that it is eliminating employees offer much of an opportunity for outsized long term returns? Also, the damaging impact on employee morale and customer perception should probably be given additional weight in these considerations. Further, creating the impression that a corporation is blind to the issues of income inequality and corporate ethics may lead to terrible publicity.
In regard to the impact of layoffs on shareholder value, one commonly accepted myth that should be debunked is that layoff announcements lead to increased stock prices. Actually, the impact of a layoff announcement on the short term price movement is directly related to how the company spins the announcement. Numerous studies have indicated that the reaction of the markets depends upon whether the layoff announcement is considered to be: 1) a strategic reorganization; or 2) a defensive response to declining sales and lowered expectations for future demand. Thus, the positioning, or spin, put on a layoff announcement has a huge impact on short term stock price movement. According to Gunther Capelle-Blancard and Nicolas Couder:
"Markets will receive a positive signal when they consider that the firm is in good financial health and that the announcement is part of a wider reorganization program. The layoffs plan will then probably be interpreted as the proof that the firm is trying hard to become more efficient. This is referred to as the pure efficiency hypothesis (Lin and Rozeff, 1993).
Conversely, if the company is in a more delicate situation, the markets will probably receive a
negative signal because they will interpret this as the proof that the firm is facing real difficulties with lower growth and demand opportunities than anticipated (Worell, Davidson and Sharma, 1991). This is referred to as investment decline (Elayan and al., 1998) or demand decrease (Lin and Rozeff, 1993)."
Research debunks the generally accepted wisdom that layoffs are usually good for a company and its stock price because expenses will be reduced significantly and quickly.
As reported by Rethinking the Economy, "studies of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects. An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing. Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement."
Looking at the stock market results for the U.S. companies with the largest announced 2011 layoffs illustrates that the conventional wisdom on layoffs is faulty. The average stock price for both day after the layoff announcement and year to date are both down. However, it should be noted that the short term decline has been skewed by Merck's drop, as three of the five did get small next day bumps. Also, the 7% decline in prices is in large part due to overall market conditions, with the DJIA down about 5% since the late July layoff announcements of four of the five firms.
On a personal note, I adamantly oppose legislation that restricts that capability of U.S employers to layoff employees. However, I also believe than any executive that lays off large numbers of employees should have an ethical obligation to sit through a number of the termination meetings. It seems too easy and cold blooded for someone that continues to take home enormous compensation to sit in an ivory tower while devastating the lives of 100's of families simply by signing a piece of paper. They should personally be exposed to the pain they are causing. Laying off employees at the very least should lead to numerous sleepless nights for those doing the cutting.