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Chip Conley Headshot

It's a Pink Christmas

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You know the economy is getting rough when smiley-faced American Greeting cards announces they're laying off 275 folks just two weeks before Christmas. Pink (as in slips) has replaced red and green as the dominant color this holiday season. But, as the CEO of an enterprise with 3,500 employees, I need to ask a really basic question, "Are layoffs necessary?"

Layoffs last. Some business executives gravitate to layoffs because they allow the company to prune the proverbial dead branches of their corporate tree which can have a lasting positive impact on the bottom line. There's a natural logic in that as a walk through a forest shows you that life and death are happening simultaneously all around us. The problem, though, is there's some evidence that shows that layoffs last in terms of the impact they have on a company's sustainable culture.

Dr. Gregory Burns, a neuroeconomist who uses brain-scanning technologies to decode the decision-making systems of the human mind, has shown that when fear becomes a predominant emotion in many companies, it negatively affects innovation, proactivity, and, human relationships. His experiments uncovered the fact that people would prefer to experience a big shock now rather than wait for a small one later, partly due to how fear messes with people's decision-making. His research suggests that fear can become a contagious negative spiral that can affect any group and it has a decided impact on a company's enduring culture.

I like to think of companies as being like ponds. When you toss a stone in the middle of a pond, you see ripples. In most companies, the predominant ripple is fear. And, in difficult times, the fear of layoffs can be paralyzing to an organization so getting clear about layoffs, and whether they're going to happen or not, is sage advice.

So, what's an executive to do? Well, seven years ago due to a combination of the dot-com bust, 9/11, and a souring economy, my company was facing the biggest percentage revenue drop in the U.S. hotel industry since World War II. We stood by the motto "Layoffs Last" in that we told all of our employees that layoffs were the last thing we would do after we'd explored every other option. That meant we did 10% pay cuts for the top execs in the company, we did salary freezes for two and a half years for everyone else in the company, we stopped our 401k match for a period of time, we put a hiring freeze into effect, and we cut certain positions back from five days a week to four. And, as the CEO, I took a salary sabbatical for three and a half years. Just think about the 10% pay cut alone. If your top execs make twenty times the salary of your entry level employees (which is not that far off for most companies), for every 10% pay cut you make for a top exec, you are saving two full-time jobs. And, of course, we all know that the employees who are most vulnerable and, in a service business, sometimes most valuable are those line level hourly workers making $10-20 per hour.

Those may sound like harsh measures, but unlike our competitors who fired indiscriminately which led to all kinds of morale challenges, we preserved our company culture. Our employees -- who truly appreciated that their survival needs were being met -- were able to focus their attention on how we served our customers better. And, the results after we came through the recession were profound. Our employee satisfaction scores were world class (we were ranked the #2 Best Company to Work For in the San Francisco Bay Area which is difficult for a low-paying hotel company in the land of the high-tech giants), our employee turnover was one-fourth the industry average, our workers comp claims were extremely low, and our customer satisfaction scores shot through the roof.

In this recession, we once again are living by the rule "Layoffs Last" but it looks like the severity of the downturn will lead to a certain amount of job losses at some of our hotels, restaurants, and spas. This is the natural order of things, but the key is transparency with the workforce so that those ripples in the pond don't become tsunamis of fear. And, at the end of the day, just realize that your intangible asset of corporate culture -- which is the magnet that attracts employees, customers, and investors to you -- is truly tested, shaped, and on view in times like these.

One CEO said to me recently, "These are the times when you make sure you get rid of the deadwood." My response -- beyond the fact that the term "deadwood" was truly objectionable when referring to people -- was, "When did your employees become deadwood -- was it when you hired them or due to the leadership they experienced while at the company?"