A Look Back on 2009

As 2010 begins, it seems most of us hope for a year far less grim than 2009. Many who have managed to stay one step ahead of the corporate survival tool known as layoff still hold onto jobs white-knuckled while others not so lucky search relentlessly for the job that might not come for another month. As we look back on 2009 to analyze mistakes with resolve to avoid the same in '10, it is interesting to watch businesses do the same. Slightly more interesting when we realize that many of the business mistakes of 2009 were made with the intention of saving short-term costs, and are what have created the country's staggeringly high rate of unemployment. Some economists have claimed the national unemployment rate has hit its peak, yet dismal state unemployment rates ranging from 12-16% give evidence that the economy is quite far from recovery and perhaps such claims are a bit premature.

One of the highlights, and interestingly, huge business mistakes, of 2009 relates nicely to the scandal surrounding compensation and severance. Throughout the year we heard nonstop news rotations about "golden parachute" severance sums paid to highly compensated executives, or minimal severance provided to long-tenured employees laid off in massive cost-cutting initiatives, or sizable severance packages awarded to individuals with high reemployment potential. Daily reports came in from hundreds of companies reducing headcount by thousands to get salaries and benefit costs off the books. Should we think of what may be assumed was a very widespead use of severance in 2009 as a successful short-term cost-saving measure? Probably. As an avoidance of risk? Somewhat. As a balance of interests? Not really. Strategic tool for the economic recovery that will eventually arrive? Not at all.

Severance does provide immediate cash savings, and it has been shown to increase a company's protection from litigation by unhappy former employees. But severance does not consider the needs of employees, either those terminated or those often unfortunate enough to remain to do twice the work. Nor does severance put in place a strategy to protect a company from similar losses in the future.

In 2009, reported layoffs of approximately five million occurred across all industries. What one company offersed as a severance benefit typically differed significantly from what another provided, and some terminated personnel walked away with upwards of a year’s salary while others were lucky to receive a two-week payout. Two weeks' salary in any economy does little to support an employment transition. But 39 weeks? 52? 65? Here is the mistake. When a company seeks to cut costs, how might it be beneficial to pay anyone 52 weeks of salary in return for a signature on the dotted line? Seems a good deal for the person leaving, who, more often than not, will go back to work in approximately 26. What about those workers who are left to pick up the slack? Or the millions of shareholders whose returns are more greatly reduced because billions were spent on severance?

When layoff seems such an easy answer to a financial challenge, a business will typically take advantage of the in-place severance process when necessary without seeking potential alternatives. It seems to be forgotten during a layoff that when an employee is on a company's payroll, tax dollars are paid to federal and state agencies by the employer to cover potential unemployment benefit expenses for that employee. During force reductions, why don't companies take advantage of those dollars, already in place for such use, as supplemental funds when doing a layoff? The IRS offers benefit structures precisely for that purpose. To offset severance funds paid out by a company with dollars previously paid by that company in the form of taxes offers a company not only an immediate savings on that severance payout, but also a long-term tax advantage.

Think about it this way. Five million people are laid off and each person awarded two weeks of severance benefit. The former employer offsets each of these two weeks with state unemployment funds already paid into the unemployment system by the employer, let's say $200 per week. That's $40 billion saved. $40 billion which could have probably saved a few, maybe more than a few, jobs. Maybe some of it reinvested in the company to develop other employee-centric programs. Or strategize to avoid future financial black holes.