The Downside of Downsizing

Merrill Lynch's sad subprime saga worsens as news unfolds about $6 to $8 billion in new write-downs, marking a total of over $30 billion in write-downs since October. The Wall Street Journal reports that the firm will try to dig itself out of its subprime mess by instituting a cost-saving plan that includes staff reductions of 10 percent to 15 percent of its non-broker workforce -- as many as 7,000 people. According to CNBC, Merrill's CEO will finish a review of its current head count by the end of this month. Then heads will roll, which is terrible for the individuals forced to exit, but potentially even worse for the company.

A new study released by University of Wisconsin-Madison business professors Charlie O. Trevor and Anthony J. Nyberg released in the Academy of Management Journal, finds that companies that conduct layoffs often end up with more turnover than they had bargained for, which can take a toll on performance (free article summary here).

One of the study's big takeaways is the size of an employee exodus that even a small downsizing could set off. For example, according to the research, companies that eliminated 0.5 percent of their workforce registered an average turnover rate of 13 percent -- 2.6 percentage points higher than the average turnover rate of non-downsizing firms. In other words, say the authors, an extra 2.6 percent of the workforce left under their own volition, more than five times more workers than were laid off.

The research also shows that companies sustain higher rates of quitting the more layoffs they implement. Merrill may be better off cutting those 7,000 jobs in one fell swoop rather than leaving employees wondering if they're going to be next and risk the exit of people the firm will need to turn red ink to black.