How companies decide to lay off workers

Amazon is laying off workers again. It started making cuts in November and is continuing with another round, bringing the tally to more than 18,000 layoffs — or roughly 5% of its workforce. This comes a day after Salesforce said it will cut 10% of its staff. Both companies say they’re doing this because they overhired during the pandemic.

Layoffs are often one of the first ways companies cut costs. But they don’t take them lightly because there’s a lot at stake, not least employee goodwill and public image.

Layoffs are all about numbers. The process starts off pretty formulaic, said Paul Wolfe, an independent HR advisor. “What do we need to save? How much do we need to cut?” he said.

And then how many people does that include? That requires that companies make bets on the future and how the economy is going to impact their business. In an uncertain world, Wolfe said it’s better to overshoot, “rather than realizing in two or three months, ‘Oh crap, we underestimated and then I have to let more people go.'”

Because another round of layoffs creates another round of headlines — and a greater feeling of uncertainty for employees who remain.

Who gets cut is a little less formulaic. A company might start with voluntary buyouts, but that rarely gets firms close to their target. So they’ll identify departments that have too much slack or business ventures that underperform or are too experimental. After that, it usually comes down to performance, per Jason Winmill at the consulting firm Argopoint.

“Employees of any corporate organization perform on a bell curve, meaning some are super performers, most are around average performers, but some are underperformers,” he said.

Laying off underperformers makes financial and legal sense if companies can show someone’s not making their sales quota or customer service call volume.

There are some alternatives to layoffs. Companies can make pay cuts or furlough workers. But “there’s been historically mixed results in this area,” said Michael Sturman, who chairs the human resource management department at Rutgers.

Because even though in the short term employees may feel like it’s a better deal — they keep their jobs and help save colleagues — any cutback signals trouble. And no worker wants to stay on a sinking ship.