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Friday, July 18, 2008

Layoffs or Buyouts?

Well managed companies are able to identify which of their employees are stars, which are decently good enough, and which are really not up to the standard required.

Jack Welch, when he was CEO of General Electric, was famous for a ruthless application of this process: employees were categorized as top 20%, middle 70%, and bottom 10%. His prescription was to fire the bottom 10% which is harsh but effective.

Poorly managed companies are often overstaffed and react to the presence of idle or unqualified employees by hiring more people. Lack of knowledge - and cowardice - prevents them from removing those who are not earning their keep.

As much to avoid making hard decisions as for any other reason, these companies often resort to "buyouts". That is, they offer substantial incentives, in cash or additional retirement benefits, to those who will leave voluntarily.

It is not hard to predict who will take the buyouts!

Those who are competent and who believe that they can get a comparable job elsewhere, will leap at the chance to leave with a significant payoff. Those whose skills and work ethic are marginal will, conversely, seize the opportunity to remain - and continue to contribute little.

As bad as a buyout is the "across the board layoff" which takes no account of the tasks facing the company or in which departments and subsidiaries the star employees can be found. It isn't always as bad, initially, as a buyout because it is cheaper and, also, some of the poor performers will be removed. On the other hand, the effect on morale is often devastating.

It is a cliche that good management is necessary to keep a company profitable and healthy. Unfortunately, good management is about dealing honestly with people and that requires courage - something that is often in short supply - particularly when addressing poor performance. The stars must be rewarded, the adequately ordinary must be developed, and the poor performers must be removed after a reasonable, although not lengthy, effort to bring them up to speed.

It is not easy to find courageous managers.

So, when you hear of a company engaging in buyouts, across the board layoffs, and other actions that indicate lack of courage, sell your shares because the company simply does not have competent management in place to flourish in the long term.

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