The Correct Way To Lay People Off

Business protocol isn’t something we come out of the womb with. How could it be? University studies are a very brief period of time and focus more on how to think than what to think. It is not much of a surprise that things like etiquette and processes around firing or laying off an employee get left out of education. Typically the school of hard knocks is the only institution left to provide what is missed in traditional education.

In this discussion, we cover the process for laying off employees and executives as well as demoting employees within a business.

Business is a wonderful game, the best in fact because people and organizations are dynamic. But, even the best teams don’t win all the time. Sometimes combinations of even the best players fail to execute. When that happens, businesses often need to lay off or restructure a part or all of the organization.

Layoffs should always be about helping the company execute its objectives. In most instances, employees that are not aligned with the company’s mission, or unable to contribute to it in a material way, should not be retained.

The most effective companies are utilitarian in nature. Competition makes it harder for a company to survive if it has more employees than it needs.

Layoffs should always be about helping the company realign to execute its objectives. No amount of data gathered by research will remove subjectivity in the hiring process. Getting the right people in the right jobs will be a perennial problem. Terminating bad hires will always require facing reality as it is.

“Face reality as it is, not as it was, or as you wish it to be.”

― Jack Welch

Management and employees would all be better served if the world adopted universal standards around the practice of terminating employees. Until that happens, executing effective messaging and processes must be done as professionally as possible.

Changes to personnel and responsibilities can affect everyone in a company. Doing it the right way is often critical to continued or renewed success.

What is the only justifiable reason for a layoff?

From the standpoint of shareholders and a shareholder-oriented CEO, the only reason for a layoff is a failure of the company to perform. This reason should be made expressly clear to the employee(s) affected.

A layoff can be of an individual or group. But everyone affected needs clear, honest, factual reasons why the event has occurred. The human mind operates by taking shortcuts. In so doing it often draws bad conclusions with unproductive or destructive ends. When the dust settles after a layoff the message every party should take away with them is performance as the central reason for the decision.

Either the company failed to execute on its objectives and or faced a process problem. Here, process is defined as hiring poorly or training incompletely.

Choosing to terminate an employee won’t always be the correct decision. But when a decision to terminate employees is made, it should be clear in execution and message.

Why does laying people off the right way matter? What are the risks in conducting a layoff?

Leadership is a constant exercise in building and selling trust to employees, clients, stakeholders, and the market.

• Execution risk– Everyone is replaceable. But the cost to the organization could be significant if the wrong person is removed. In larger companies, it can be far more difficult to account for the impact of losing key people performing one or several critical functions. It is entirely possible that misjudgment can result in letting go of an employee that was more valuable to the organization than not. A company may be incurring greater costs by letting go of the wrong people. Over and above this error, morale, continuity, and the message sent to other market participants factor into execution risk.
  
• Morale – People are rational and emotional creatures. Most folks, deeply associate their job with their identity. Even the most introverted tend to make strong associations with a work identity. Anyone can see that losing a coveted job can be a devastating blow to a person’s self-confidence. Importantly, it should be observed that the confidence of the employees who remain will also be affected.
  
  The friends and associations of the terminated will be affected. They will have concerns tied to their ongoing employment. They will question their identity. They will question the trustworthiness of management and ultimately the company as a whole. Every layoff is a question mark against the character of the company.

• Loss of business and cultural continuity – Forming culture is difficult. When hiring, managers can’t easily screen for fit. Building a culture is more art than science. Businesses also have dominance hierarchies. The closer the number of resources in a group is to 150, Dunbar’s number, the flatter that hierarchy will be. Unless the organization is uniquely structured, it will follow a much more strict dominance hierarchy. Alpha, beta, theta roles, etc. In larger organizations, culture always starts at the top of the dominance hierarchy.
  
  Executive structures are more efficient for decision making than democratic structures. Employees in executive structures look much more directly to the chief executive for directions on culture. The responsibilities and expectations of employees flow from what is provided to senior management by the chief executive.
  
  When an executive vacates a role or is excused from a firm, employees need a concise reason why this occurred. They may also need someone to step into the role played by that executive, at least temporarily. This should be done both to ensure that the specialized function the employee performed is continued but also to create urgency to fill the role. When an executive or CEO fills can fill the role themselves they may be able to provide continuity and ensure that the group doesn’t fail to perform its duties.

• Market message – competitors and future employees may or may not be able to discern the health of the company after a layoff. Positive or negative opinions on layoffs will be distributed by word of mouth. The message employees communicate determines how future hires may view the company and its leadership. These opinions will affect the company's prospects for talent well into the future. Strong, competitors seeking to poach talent will use knowledge of internal strife to their advantage. Sniping the best people. Investors and lenders constantly evaluate character when looking to deploy capital. A layoff done for the right reasons but with the wrong message may trigger the principle of double effect. Harming the company's ability to raise funds when they may be needed most.
  
• Litigation risk – a lawsuit, even a frivolous one, can be damaging and costly. Following a defined process with clear communication mitigates legal risk. Layoffs are often charged with emotion. A process where the message is concise and devoid of significant emotion helps everyone involved.

What is the appropriate tone when laying someone off?

Tone, and attitude matter considerably more than they are given credit. This is where most organizations fall very short of professionalism.

There are only two appropriate stances for a company to take in a layoff. These are a stoic demeanor in most cases and a righteous demeanor in rare cases requiring the defense of the company’s reputation.

We will cover a righteous demeanor first because it is a more interesting subject. From time to time, market volatility and scandal will rock even the best firms. As with any layoff, these are problems that require preparation, post mortem evaluation, and clear communication. When an employee is terminated for cause by damaging the reputation of the firm, it should be the prerogative of the CEO and board to take an assertive stance.

Defending the broader reputation of the firm, the stand should be against the issue at hand, not the person. In effect. Hate the sin not the sinner.

A stoic demeanor should accompany all other forms of layoffs. Individuals should never be thrown under the bus. Managers observing this behavior in others should politely take aside anyone participating in it and share this explanation.

Even under the worst circumstances, the company and management shouldn’t issue edicts about an individual’s character. People can change. And, everyone makes mistakes. The natural cost of those mistakes in a corporate environment may be punishment enough. In instances where the law is involved, it should be left to courtrooms to decide not public opinion. The company preserves its reputation by behaving in a manner that is reserved.

CEOs and managers should put forth special effort to remain positive and ensure that no derogatory talk is occurring. It is common behavior to trash the individual or executive being terminated. CEOs should not let this happen. Some employees will undoubtedly be close to these persons who are being verbally tarnished and will resent it. A permanent message will be sent that cannot be recalled.

Failures should be defined as team failures and always portrayed as such. An apology is appropriate, but too much flagellation is improper.  

Employees will respond better to being treated like adults. If you regularly or periodically overreact, people will mirror the behavior. Employees nearly always see the behavior of superiors as appropriate. If you never lie you don’t have to remember what you lied about or who you lied to. Employees will do the same.

What are the types of layoffs and how should they be conducted?

1. Demoting an employee
2. Firing an individual employee
3. Firing an executive
4. Large scale layoffs, reorganizations, and restructurings

1. How to Demote an Employee

Demoting an employee may be as difficult as firing an employee for a variety of reasons. First among them is the issue of motivation. How do you tell an employee that they are no longer a good fit for their position? How do you tell them you are hiring someone above them? How do you keep them motivated if you want to keep them around?

The rationale for demoting an employee mirrors the same logic as terminating one. The firm is failing to achieve its objectives with the person in the role. The activity and role need to either be eliminated or the person does. Or both.

The life cycle of a company is such that a rapidly growing firm may need new skills quickly. A division within a company can just as easily shrink and be over resourced. If the organization does not have the ability or time to train the individual into the role needed they should be demoted or removed from the organization.

When to Demote Someone and When Not To:

Demotions should only occur if the value to the organization as a whole to retain the individual is calculably greater than the costs of terminating them. In general, a demotion is a rare thing and not something that should be done regularly.

In the event that an employee is critical to the organization, or if there is too much uncertainty over termination, the decision should be shelved until the risks associated with a transition can be more fully defined.

For decisions that result in deadlock, the best approach is to time-box the decision. Put a hard date on the calendar for when the issue needs to be re-evaluated. When an employee’s performance is actively harming the firm this evaluation should not be delayed but be put back on the table for immediate discussion and resolution.

Any other delay should be no longer than a week. During that time, clear justification for retaining the employee must be defined along with any risks in terminating the employee. If no consensus is can be made by the end of the next week then the employee should be terminated so as to prevent further delay.

Under most circumstances, the time to fix an operations problem is immediate. Employees who would otherwise be detrimental to a company after a demotion should be terminated instead of demoted.
Demotions will be difficult for the following reasons. Employees that are demoted will run the gamut of feelings of betrayal, fear, embarrassment, denial, and possessiveness over their current role and responsibilities.

At every instance where emotion rears its ugly head, the facts such as performance and skillset should be repeated and wholly separated from the emotion of the situation.

How to combat motivation problems in a demotion

• If the demotion allows for additional responsibility across another domain where the resource would be competent, grant that responsibility.
• If the demotion can be just rank and not compensation have compensation remain the same.
• If compensation can increase with a move to a new department, grant an immediate, same-day increase to salary.
• Give the person a very clear path back up the corporate ladder. They will be most impacted by not seeing a path back to their present position. They will struggle to see their place in the organization without help.

The process of demoting someone

• A personal conversation should be had with the individual by the hiring manager.
• The manager should state reality plainly. Explain to the employee that they are underskilled for what is needed and that the capacity to train them does not exist in the timeframe needed. Contributions to the team should be clearly acknowledged and the objectives and future needs of the firm should be restated.
• Language should be clear and confirmatory with no room to lobby for their old position.
• HR should be kept in the loop before and after the meeting.

2. What are the processes management should follow when laying someone off?

The majority of layoffs that occur are decisions about individuals. When an individual’s performance is an issue rather than a collective group a different approach is warranted. There may be time to help the employee change their conduct or performance. Different states have different laws on what specifically needs to be communicated for a termination event but management should generally follow the below process.

Before firing the employee, a minimum of three formal notices should be presented to the employee. These communications should be simultaneously recorded with human resources. All notices should accompany a written warning that is stored and retrievable at a later date.

As much as possible, we encourage emphasizing the positives and leading with positive affirmations. Threatening with negative outcomes will likely produce no positive results.

Note - The process for executives is slightly different and defined in a later section.

First Notice – Performance Discussion

• The manager and a peer (if possible) should meet with the employee in person.
  • Tell the employee their performance is under review.
  • The in-person meeting should discuss the specific areas where the employee is underperforming.

Second Notice – Warning

• Follow the steps in the first notice and add the following:
  • Specifically, tell the employee that performance improvement is expected or it may result in termination.
  • The manager should plan to meet with the employee at set intervals during the next two weeks to reiterate the cost to the employee.

Third Notice – Final Warning

• Follow the above steps and inform the employee it is their final warning.
• Management should make preparations for business continuity to fill the individual's role and responsibilities if not already done at this date.

Termination

• Always prioritize communication that is as close to in-person as possible. Send a follow-up communication to human resources and the employee once the message has been communicated.
• The only 'why' message the employee should receive is performance-related, nothing more.
• HR should quickly follow up with any items that need to be turned in such as keys and equipment. Management should communicate to HR the notice to terminate and access should be restricted.
• There are three ways a termination event can go:
  • Amicable and continued value add 
  • Amicable but no value add
  • Hostile

In an amicable situation, the employee should be permitted to exit on their terms within a two week period. Grant the employee time to have lunch with his or her colleagues and offer to pay for it. In an amicable but no value add situation, encourage the employee to be out within two days but no later than the end of the week. Amicable partings should only be done with employees who will not speak ill of the company or any of its members during the transition.

A hostile termination may be defined as any instance where an employee may harm the company, other employees, take intellectual property. Harm is doing as little as badmouthing the company, managers, or other employees during an exit. Preserving morale and professionalism is critical.

If an employee is terminated for cause, the notice to the employee should cite the handbook and policies of the company. Managers should delegate this responsibility to HR for employees not directly under their purview but be personally involved in the termination if they manage the person.

Who should do the firing?

The manager that hired the employee should do the firing. It should not be HR or another executive. It is important to connect the pain of the experience with the joy of bringing in personnel and vice versa.

In instances where relationships pre-exist the business, they are best preserved by having the hiring manager deliver the news.

What is the best day to terminate an employee?

The day of the week an employee is terminated is very important and often overlooked.

The best day of the week to terminate any employee is Monday or the start of the week. Terminating an employee on a Friday, weekend, or before a holiday places them in a situation to do little activity.

Terminating an employee early into the week allows them to make use of the week to be productive and seek out new opportunities. Terminating an employee in advance of a weekend or holiday may give them too much time to brood. On weekends people would otherwise prefer to be idle or conducting leisure activities, carrying the stress of termination immediately into what should be a relaxing period of time won't help.

What should management communicate with human resources before laying someone off?

Before starting a review process with an employee it is best to communicate with human resources in advance. Ideally, the resource that brought in the employee gets some information in advance of the termination. There are costs to a bad hire, not all of them transactional.

Following the procedures outlined above. Managers terminating an employee should communicate with human resources at every step of the process. Where appropriate, management, in conjunction with HR, should communicate to all respective departments where the resource has access to premises and company IP. Access should be revoked right before the termination.

For staff-level resources, management directly responsible should conduct at least quarterly post mortem analysis on any hires that have churned. Information should be shared to help better qualify candidates for roles and share what characteristics in hiring have worked and what have not.

3. How to Fire an Executive

Firing an executive should be conducted differently than a staff-level employee. In all sense of the word, the transition should be done more carefully. Executives are not inherently owed more respected than line employees because of their position within a firm, their pay, or any single quality.

A primary reason for treating them differently is that significantly more resources have been poured into an executive than a traditional hire. Removing them from your company warrants a careful evaluation. Executives should be treated differently for the simple reason that they are often more effective people, more professional in their interactions, and have a much higher opportunity cost when joining a company. Add that they were typically sold on joining the firm by the CEO and are often referred by the board.

For better or worse. The interplay of relationships an executive has inside and outside of a company will have a generally greater impact than a staff employee.

There are three primary steps that should be followed when laying off an executive. There are obviously varying levels of action and communication depending on the size of the organization.

The steps are preparation followed by conducting a formal post mortem. The third is communicating with the board, the executive, and the company.

Step 1 -  Preparation for terminating an executive

The preliminary communication with the board, the executive, and the company should be drafted in advance. It is important that a decision to remove an executive have some formalized finality before starting the process. Having a physical document will help drive home this finality.

Determine the severance package that would be appropriate. Generally, an executive severance package is going to be larger than a traditional severance because it takes an executive much longer to find a comparable role. They have a unique skillset and were hired for it.

A template for a post mortem analysis should also be drawn up to be conducted as the next step.

Step 2 - Conducting a post mortem on an executive termination

Few organizations will take the time to properly evaluate why a hire didn’t work out. This is a mistake.

In instances where companies do a post mortem, the tendency will be to come to a singular or overly simplistic view of why a failure occurred. Don’t succumb to simple conclusions. Correct answers in hiring will almost always contain more than one datapoint.

As stated previously, when an executive or employee doesn’t work out, the result is because of some broader failure of the organization during the screening and integration process. Define what isn’t working so it can be corrected. 

A root cause analysis will generally turn up some of the following questions:

Was the role poorly defined in the first place?

• A role and its specific objectives should be defined in advance of hiring a resource.
• Was the position a long term need for the company or was the company growing or slowing down and in need of a better long term fit?

Was there a training and integration problem?

• A role and its specific objectives should be well defined in advance.
• Expectations should be clearly defined and understood from the perspective of management and the executive before the ink dries on a job offer.

Does the executive have prior experience?

• Experience and a track record for growing an organization quickly and successfully are different from being hired into a position as a replacement. Generally speaking, an executive with experience in scaling firms should not be hired unless you can deploy significant capital into their efforts. A board may advise you to hire this type of resource before the organization is ready.

Was there a correct cultural fit?

• Did the resource meet the needs of the organization and did their goals personally align with the organization?

Was the timing right?

• Did you hire in advance of the company’s immediate need? Ideally, you only want to hire for an immediate need.
• Companies of different sizes demand different skillsets to facilitate growth. These problems can be too small or too big.
  
  Too small problems - Did you make the mistake of hiring for scale in advance of demand? Venture-backed startups have a serial tendency to hire ahead of demand and unsurprisingly do a poor job of predicting demand. A company should hire for immediate needs otherwise the company will waste capital and reject the candidate, sometimes without merit other than bad timing.
  
  Too big problems - Alternatively, if the company grew too rapidly it may have outgrown a hire’s skill set or ability.

Was the employee hired for their strengths?

• An employee should always be hired for their strengths. Not necessarily for the weaknesses of the company’s present management or the lack of weaknesses of the employee. If a company is hiring its first VP of sales, they should not hire a resource simply because he or she has experience in the role. They should hire them only if they are exceptionally strong in the role. There must be no compromise. When specialized roles are important, companies should avoid the trap of average hires. Hire slow and fire fast is apt here.

Is the role better outsourced?

• Certain functions for an organization are so specialized that they are better left to outside contractors because they can be done at a greater scale and efficiency externally. Marketing frequently falls into this category. Creativity is finite as is the value of certain distribution channels.

Step 3 - Communicating with the board, the executive, and the company

Communicating the message correctly is as important as making the determination to terminate an executive. Given resources spend on the hire, the post mortem provided to the board needs to be well reasoned.

The board should be informed first because of the materiality an executive role can play in the performance of the company. A well-run business is no different from a well-run car. All parts need to be in peak condition to go down the track at full speed.

A board may have referred the person or have a prior relationship with the executive. It is universally better to remove the executive rather than let them fail and harm performance.  A well-written root cause analysis will assist with buy-in. And the board may be able to assist in finding a better fit. Approval on the severance package before communicating with the executive allows the executive to focus on their next steps and eases tension.

After the board has buy-in on the transition, including the severance package, review the materials prepared for the conversation with the executive, and make any necessary changes. Plan to inform the executive as quickly as possible.

Communicate with the executive in person, if possible. In contrast to a deposition, give specific, to the point reasoning that is conclusive and devoid of feelings. There is no room for negotiation. Be direct and tell the executive what happened and keep the reasoning tied to the performance objectives of the firm. If appropriate, allow the executive to dictate how the message will be shared with the company and any external stakeholders.

If you are worried about verbal conflict. Practice makes perfect.

Once the conversation with the board and the executive is squared away, communicate with the other stakeholders. Company-wide communication should be sent out. Inform team members in the order of the hierarchy of the business. Tell executives who will then tell direct reports. Then tell other members of the staff followed by the broader company if appropriate. Immediate reports will generally have pointed questions. Ideally, communication to each tier of employees happens within a few hours of each other.

Direct reports need to be given direction related to how the role is going to be replaced, transformed, or changed. A clear plan of who they should report to in the interim should be provided. For the highest level roles, CEOs should step into the role to provide continuity.

At all stages of the termination of an executive, human resources should remain in the know.

4. The best way to lay people off during a reorganization and or restructuring:

Large scale layoffs are similar to the process of terminating an executive with important differences. The process should include preparation, postmortem analysis, and communication at a greater scale. Below, we reiterate those three steps with important qualifications.

Step 1 -  Preparation for conducting a layoff

Preparation for a round of layoffs differs from individual layoffs in scale and scope. Increased scope means increased pressure to communicate clearly and effectively.

Preparation should include preparation for the emotional burden on the exercise. Understanding and accepting that the company must hit financial objectives and deadlines to continue to function. It is important to focus on the future rather than the particular failure that occurred.

Preparations should allow for a plan to be enacted swiftly. Delays in executing the layoff will allow disfunction to be sown within the company. As a result, getting information out at the time of execution without leaks is ideal. Delaying the inevitable will result in others lying and fear may reach a broader audience than desired. Honesty is the best policy.

A plan must include training for management on any additional responsibilities that need to be filled or they must bear themselves. Management should be guided on how to deal with the situation including a clear explanation of what happened. The coming post mortem should be provided to add further clarity.

Just like with individual layoffs, management in the know must be informed that they must lay off their own people and cannot pass the task to someone else.

Step 2 -  Post mortem

It is likely the case that at the point a layoff is determined there is either major urgency or the decision has taken slightly longer than it should have to become a reality, costing slightly more than what was projected.

A CEO should be prepared to rub management’s nose in the past failure in the future. For a larger company, at least one analyst should be assigned to detail all the reasons for the failure in a formal memo as a matter of record.

Step 3 -  Communication

The company should be formally addressed in some capacity.

The role of the CEO is to preserve trust and to provide coverage for managers. This includes being available to answer questions. CEOs should be as helpful as possible without committing to promises they can’t possibly deliver on. The tone of management should mirror that of terminating individual team members.

The post mortem prepared previously should be available for discussion with senior executives.

A layoff can easily become filled with self pitty sought by the CEO from the board and other team members. Some cajoling is natural. During this time, the reasons for failure should be repeatedly stated and reinforced. If the facts are allowed to change from the company failing to perform and the resulting loss of talented individuals overlooked, it becomes more likely that no real learning will result.

The CEO bears the burden of the failure and must also maintain trust with employees. Vulnerability is appropriate in so far as failure needs to be admitted plainly. This is the best way to rebuild trust at the same time it is being brought it into question.

Internal managers need to hear and deliver the same message, understand that the layoff is a company failure, not a personal failure. The remaining managers should be well informed about the benefits available to persons being laid off including any support the company is going to provide. It should be clear that the layoff for their staff is non-negotiable.

What to remember when laying off employees

The role of a manager is to ensure that an organization is being as efficient as possible with its capital.

That includes hiring employees to meet the objectives of the firm and removing employees when the firm fails to hit those objectives. Blame should never be placed at the feet of any particular employee. If an employee fails in their specific responsibilities it is because the company as a whole failed as a matter of process and or operations.

Management is responsible for the health of the organization. If the organization stops functioning, far more people will be impacted. Sometimes this means removing lots of people from an organization.

When running a company there is no moral equivalency. The organization cannot run effectively unless the best people are in the best positions for them and the firm.

Business is a contact sport where the best teams win games. Don’t forget that.