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Layoffs: Which Way Does A Company Cut?

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'Tis the season, again, for cutting costs. GM is doing it, Disney is doing it, Yahoo is doing it, and well, everyone is doing it. Even Goldman Sachs and GE (parent company of CNBC), two of the most admired outfits in America.

So, if you're an executive, chances are you are in some kind of discussion with your fellow management team leaders about how to reduce spending.

Since we're hip deep in the Information Age, most of us have a sizeable percentage of costs invested in human capital. That means it's pretty hard to cut significantly without addressing payroll. The interesting part is that most companies - especially the big, public kind – achieve their cuts by layoff (a vertical approach) rather than salary reduction (a horizontal approach.)

A friend of a friend, who happens to be a senior executive at a New York based media conglom, was lamenting this recently as he braced for another big RIF (reduction in force) at his company. His point was that fewer people inevitably meant fewer products, fewer ideas, and less quality being produced for his company's consumers. And that gets to be a vicious, downward cycle. Another friend of mine calls it, "The going-out-of-business Business."

Surgeon, Cut Thyself
His idea, which doesn't go down well for most executives, is that companies should cut more horizontally. Keep the workforce intact, or try as much as possible, by asking everyone to take pay cuts. Oh, specifically he means us executives. And, he's willing to be the first in the pool. Mathematically, it makes sense. Execs make more than everyone else, so if we all forego bonuses and/or take salary cuts, significantly more savings fall to the bottom line than cutting or even eliminating lower paid employees.

The benefits, according to this theory, center on the aftermath of horizontal cost cutting. Once everybody adjusts personally and psychologically to their individual "new realities" it can be argued the company is stronger because it has more resources (people) to compete. And a side benefit, not to be underestimated, is that perceived fairness in the cuts would likely result in higher morale. More people and higher morale might well lead to better productivity for the company moving forward.

It's fairly obvious why this approach isn't used more frequently. For one, most companies bear a heavy cost per each employee (benefits) which aren't as easily addressed by this approach. Eliminating positions eliminates not only the benefits cost, but also all kinds of overhead expenses which tend to hang around when large numbers of employees stick around. Secondly, there's the argument that top performers (especially in the middle of the organization) are highly employable even in a downturn so they will typically depart when confronted with a pay cut. So much for "good morale."

The final reason why the horizontal approach is rarely chosen is perhaps the most cynical (though I believe there is truth in cynicism and humor.) Here goes: the decision-makers (executives) have "the most" to lose. Like everyone, but perhaps more precariously perched, they have their standard of living to uphold. And like everyone, they are not used to making sacrifices in this rapidly-ending generation of high growth (and easy credit.)

So, we'll weigh the pros and cons, mull the alternatives, consider our options, and typically preside over yet another RIF. But perhaps we should weigh, mull, consider and preside differently in the weeks ahead? Maybe we should go "horizontal." Or maybe we should do both? Maybe, just maybe, that frustrated senior media exec is right?

What do you think? Let the shrieking begin.

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Erik Sorenson is chief executive officer of Vault.com, Inc. Mr. Sorenson, 52, oversees the strategic direction of the global, New York-based media company. He is widely regarded as an expert on media strategy and industry trends, with experience spanning radio, local and network broadcast television, cable and syndicated TV, and the Internet. From 1998 through 2004, Mr. Sorenson served as president of the MSNBC cable news channel. He has won more than twenty Emmy awards as a writer, producer, and television executive.

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