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No-layoff policies and corporate financial performance.


Throughout the 1980s, large-scale layoffs of employees by American companies were commonplace. The layoffs were not confined to industrial workers; clerical, technical, professional, and managerial employees were also let go in large numbers. Among the reasons for the dismissals were economic recession, competitive pressures (including those stemming from foreign competition and from deregulation of previously regulated industries), mergers and restructurings, and the belief that the best staff is a lean staff (Nielsen, 1985; Nulty, 1987; Sanderson and Schein, 1986).

Employee layoffs are by no means a recent phenomenon. They have long been used by American companies to reverse declines in their economic fortunes. Reduction in staff has been accepted by U.S. business as a quick way to get rid of surplus employees, reduce costs, raise productivity, and increase profitability (Hansen, 1986).

However, not all companies have responded to economic pressures by laying off employees. Some employers have opted to protect their workers against loss of employment, thereby providing them with job security. Employers offering job security have adopted a variety of practices such as developing long-term and short-term hiring plans, maintaining a lean staff, hiring temporary workers for temporary increases in work and then letting them go when the work slackens, training employees to perform a variety of functions so that they can be shifted to other work if there is a slowdown, re-training employees whose jobs have become redundant to learn new jobs, transferring employees to other jobs and other job sites, work sharing, voluntary early retirements, bringing back work from sub-contractors, and taking on sub-contract work for other employers (Rosow and Zager, 1984).

Table I shows U.S. firms that had a policy of job security in the mid-1980s, including 23 that Companies. Some of these firms (e.g., IBM and R.J. Reynolds) had practiced employment security for 50 or more years and sought to continue it. Others (e.g., Eastman Kodak, Texas Instruments, Data General, Advanced Micro Devices, and American Telephone and Telegraph) that had long provided their employees with job security gave up the practice in recent years (Mills, 1988).

The fact that a relatively small number of companies have continued to provide their employees with job security in the face of adverse economic conditions has prompted writers to examine the reasons for this policy and to seek to understand the differences between companies that practice job security and those that do not. Unfortunately, there has been a paucity of empirical research into this area. Rather, most of the writers have presented opinions or sought to identify advantages and disadvantages of providing job security.

Among the advantages claimed for job security are the following: protected employees are more receptive to changes in their jobs and more amenable to performing a wider range of tasks than are unprotected workers (Foulkes, 1980); protected employees are more loyal (Foulkes and Whitman, 1985) and more motivated than unprotected ones (Holusha, 1987); job security brings about savings both in costs associated with layoffs and in hiring and training costs that result from the need to replace periodically laid-off workers (Hansen, 1986; Holusha, 1987); firms that provide job security enjoy greater recruiting advantages than firms that do not (Foulkes and Whitman, 1985); job security increases profitability (Lawrence, 1984), productivity (Mooney, 1984) strengthens organizational performance (Rosow and Zager, 1984), and enhances prospects for the firm's survival (Lawrence, 1984).

These benefits of job security may be viewed as enhancing a firm's competitiveness in that more flexible, loyal, and motivated employees are more potent contributors to a firm's productivity. Also, by avoiding the expenses of first laying off and then subsequently re-hiring people, employers are likely to have lower production costs (Atchison, 1991). Furthermore, a job security policy will contribute to a positive image of the firm and attract superior candidates for employment. In addition, there have been numerous reports in recent years attesting to the competitive advantage that Japanese companies have enjoyed by providing their employees, both in Japan and the United States, with job security. The practices of these Japanese firms include those used by American firms practicing job security, e.g., training employees to perform a variety of tasks, reassigning workers to other duties in slack periods, hiring temporary workers, and so on. (Abegglen, 1958; Calonius, 1983; Chira, 1986; Morita, 1986).

The disadvantages that have been put forth include substantial increases in costs (Foulkes, 1980; Greenhalgh, Lawrence, and Sutton, 1988) and a drain of needed cash and reduced profitability (Gordon and Goldberg, 1977). Some writers contend that it is not possible to determine whether the benefits of a program of job security exceed the costs (Foulkes, 1980).

It appears, then, that there is limited and seemingly contradictory evidence on the relationship between a firm's adhering to a practice of job security and the firm's financial performance. On the one hand, it has been suggested that the financial performance of companies offering job security will be better than the performance of companies that do not. On the other hand, it has been argued that the financial performance will be worse.

This study was undertaken in an attempt to resolve this disagreement. Accordingly, the following hypothesis was formulated: There is no difference in financial performance between companies that practice job security and companies that do not.

The Study

Financial performance was defined by three measures: net income as a percentage of sales, net income as a percentage of assets, and net income as a percentage of equity. The source of the financial data was the information published annually in the listing of the Fortune 500 U.S. industrial corporations.

From the list of the 1987 Fortune 500 industrials, 23 companies were identified from prior reports as having a policy of job security (job secure companies). The Fortune 500 list also contained 41 firms (within the same industries as the 23 job secure ones) that did not practice job security (non-job secure companies).

To be included in the study a firm had to have attained a place on the Fortune 500 list every year in the 10-year period 1978-1987. This period was selected because during this time the United States experienced economic fluctuations and changing market conditions. Application of the 10-year criterion reduced the number of firms in the study to 17 job secure and 13 non-job secure ones. Table II lists the 30 companies by industry.


For each year, the averages of the three measures of financial performance of the job secure companies were compared with the averages of the non-job secure firms to determine if there were statistically significant differences between the averages. In making the comparisons, we applied the widely used test of significance called the t-test.

Results of the Study

Table III presents the results of applying the statistical t-test. For each year from 1978 to 1987, and in each of the three columns labeled net income as a percentage of sales, assets and equity, there is shown a t-statistic which was calculated by comparing the job secure and non-job secure companies. The two groups of companies were compared for each of the three measures of financial performance. The asterisked entry (2.128(*)) is the only one showing a statistically significant difference between the two groups of companies. None of the other differences is statistically significant. The one asterisked figure means that the chances are less than 5 in 100 that there is no difference between the two groups. Therefore, for every year in the 10-year period, there was no significant difference in either net income as a percentage of sales or net income as a percentage of assets between the job secure and the non-job secure companies. For net income as a percentage of equity, there was a significant difference between the two groups in only one year (1978). The reason for this deviation was not readily apparent.
Table III
Comparisons Between Job Secure and Non-Job Secure Companies
Net Income as a Percentage of
Year Sales Assets Equity
 t t t
1978 1.265 1.358 2.128(*)
1979 0.513 1.299 1.405
1980 1.074 0.686 0.414
1981 0.257 0.377 0.010
1982 0.111 0.231 0.596
1983 0.107 0.059 0.450
1984 0.973 0.398 1.114
1985 0.167 0.711 0.022
1986 0.070 0.070 1.063
1987 0.323 0.236 0.810
* p|is less than~.05

Hence, the hypothesis that there is no difference in financial performance between companies that practice job security and those that do not was supported.

Implications of The Study Findings

The study found that, on average, the financial performance of the job secure companies did not differ significantly from the non-job secure ones. This result lends support to the proponents of job security. The findings suggest that firms may provide their employees with job security without jeopardizing their financial performance vis-a-vis firms that lack such a policy. The implications of this conclusion are enormous for management, employees, stockholders, and society. For example, companies that provide job security may reap the benefits of a motivated and flexible work force (claimed by advocates of job security) without suffering financial disadvantage, and society would not be confronted with the problems of large-scale layoffs.

Concluding Points

Nevertheless, the findings need to be viewed with caution. The study did not demonstrate that a policy of job security leads to or brings about better or poorer company financial results. We recognize that other variables may have a bearing on financial performance, including product competition, technology, management practices, general economic conditions, place of product in the life cycle, and changes in customer tastes. We attempted to control for some of these factors by matching companies of similar size in the same industry.

Second, the study focused on a relatively small number of large industrial firms in a limited number of industries. Hence the findings may not be applicable to smaller industrial firms, to firms in other industries, or to non-industrial companies. In addition, while the measures of financial performance used in the study are standard indicators used in financial analyses, performance of the firms might have been assessed by other financial measures, raising the possibility that different results might have been obtained.

We also recognize that, at different times in the 10-year period, some firms in the study may have been in a stronger financial position than other firms. By matching companies by size and industry, we aimed to compare firms in similar circumstances. In this connection, another point to consider is that companies that adhere to a no-layoff policy view it as a long-term commitment that would enable them to reap benefits over time. Negative short-term financial results and periods of economic recession do not cause job secure companies to waiver from this commitment.

A tantalizing question that might be raised is whether the job secure companies would have had better financial performance if they had had a non-job secure policy. Unfortunately such a question could only be answered by turning back the clock and having the job secure companies drop their policy at the start of the period under study.

However, an alternative that might be a possibility for future research is to examine the financial performance of companies that once followed a policy of job security and then abandoned it.

Another pertinent line of inquiry is to find out what has happened to the job secure firms since 1987. Have they retained their no-layoff policies amid the turbulent business environment of recent years? With one notable exception, the job secure firms have continued to maintain these policies into the 1990s. For example, IBM, which has experienced intense competitive pressures, has nevertheless managed to adhere to its job security policy even while reducing its work force from 405,000 in the mid-1980s to approximately 320,000 in 1991. Employment is expected to be reduced by another 20,000 in 1992. To achieve these reductions, IBM has offered a voluntary early retirement program, transfers to other parts of the company, and retraining for other jobs. The company has also reduced overtime, asked employees to take unused vacation, curtailed hiring, and brought back work from sub-contractors (Bernstein, 1986; Faltermayer, 1992).

Hewlett-Packard has reduced its work force by 5.5% since 1989 without abandoning its no-layoff policy. It has accomplished this staff reduction through voluntary early retirement packages (Faltermayer, 1992).

Exxon announced in May 1992 that its salaried work force would be cut by about 12,000, with most of the reduction expected to be accomplished through a voluntary early retirement program. In addition, some workers would be moved to other jobs within the company (De Rouffignac, 1992).

At 3M, the company relied on voluntary departures and transfers in the 1980s, to keep its work force at desired levels. In 1991, when the company's earnings declined, it instituted a hiring freeze and relied on attrition to reduce employment by 1.25% (Faltermayer, 1992).

Du Pont has offered early retirement programs to trim its work force. In 1985, about 9% of its domestic employees took advantage of the company's early retirement offer, exceeding Du Pont's estimates. The company had expected 6,500 to retire; instead, almost 12,000 chose to leave (Freedman, 1985). Du Pont has continued to maintain its no-layoff policy by using voluntary retirement offers to cut costs. In 1992, all 6,500 employees who were offered early retirement agreed to retire (Faltermayer, 1992).

The notable exception has been Digital Equipment Corporation. In 1991 and 1992, this company, which had had a no-layoff policy for 34 years, suffered huge losses which threatened its very survival. Forced to retrench, it first offered a voluntary retirement program to its employees. When that failed to reduce the work force to the desired level, DEC was compelled to let go approximately 3,500 of its 125,000 employees. The layoffs were selective, not across the board, involving employees that did not fit into the company's immediate needs and future plans (Margolis, 1991).

Firms with no-layoff policies do not take their commitment to their employees lightly. Only a catastrophic turn of events, as in the case of DEC, will lead a company to abandon a long standing policy of job security.
Table I
U.S. Companies Practicing Employment Security
(*) Advanced Micro Devices
(*) Avon Products
Bank of America
Bell Laboratories
(*) Boeing Corporation
Chaparral Steel
(*) Control Data
(*) Dana Corporation
(*) Data General
Delta Airlines
(*) Digital Equipment Corp.
(*) Du Pont
(*) Eli Lilly
(*) Exxon
Federal Express
Fel Pro
(*) Fort Howard Paper
Hallmark Cards, Inc.
(*) Herman Miller
Hewitt Associates
(*) Hewlett-Packard
H.P. Hood
(*) International Business Machines (IBM)
Levi Straus
Lincoln Electric Company
Manufacturers Hanover
Materials Research Corporation
(*) Minnesota Mining & Manufacturing
Morgan Guaranty
(*) Motorola
Nissan U.S.
(*) Nucor Steel Corporation
Olga Company
People Express Airline
Piggly Wiggly Carolina
(*) Pitney Bowes
Provincetown-Boston Airlines Inc.
Quill Corporation
(*) R.J. Reynolds Tobacco Company
S.C. Johnson
(*) Tandem Computers
(*) Tektronix
(*) Upjohn
(*) Worthington Industries
Wyeth Laboratories
* Fortune 500 Companies
Data Sources: Across The Board, January 1985, 37.
Harvard Business Review, July-August 1985, 32.
Employment Security in a Free Economy, 1984, 19.


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Nielsen, J. "Management Layoffs Won't Quit," Fortune, October 28, 1985, 46-49.

Nulty, P. "Pushed Out at 45 ... Now What?" Fortune, March 2, 1987, 25-30.

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Peter Allan is professor of management at the Pace University Graduate School of Business. He was formerly with the New York City Department of Personnel both as Deputy City Personnel Director and Director of Research. He holds a Ph.D. degree from the New York University Graduate School of Business.

Paul H. Loseby has held managerial positions in a number of functional areas with both IBM and the General Motors Corporation for more than 25 years. He has taught college-level management courses for more than 16 years as an assistant professor. He holds the Doctor of Professional Studies degree from Pace University.
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Author:Allan, Peter; Loseby, Peter H.
Publication:SAM Advanced Management Journal
Date:Jan 1, 1993
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