Law Practice Management

Layoff ‘Herd Mentality’ Ignores Greater Savings of Pay Cuts, Prof Says

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Snowballing layoffs may be evidence more of a herd mentality than a careful evaluation of costs and benefits, according to a business school professor.

“The fact that virtually every company, despite their varying circumstances, ends up pursuing exactly the same approach to cost-cutting suggests that the processes involved have more to do with psychology—herd mentalities—than to any rational processes,” says management professor Peter Cappelli of the Wharton School of Business, in a post at Human Resource Executive Online.

Cappelli asserts that a 5 percent salary cut saves more money than a 5 percent layoff because companies don’t have to pay severance and don’t have to fight lawsuits over job cuts. Nor is time wasted on “the agonizing administrative process of figuring out who has to go and getting them out in a dignified manner.”

“Morale might actually improve through a collective effort to save jobs, certainly as opposed to the morale-killing effects of layoffs,” he writes. “And, of course, the ability to ramp up when business improves is dramatically accelerated.”

The Project for Attorney Retention is making the same point in a legal context. The group says law firms could save as much or more money by cutting associates’ pay along with hours rather than laying them off, the National Law Journal reports.

According to PAR, a law firm laying off an associate making $200,000 a year saves about $211,000, based on a calculation that takes into account saved salary and benefits and the payment of three months’ severance, the story says. If the firm instead reduced work hours and pay of six associates by 20 percent, it would save $240,000.

Part of PAR’s argument centers on lost billable hours caused by associate layoffs, according to the NLJ story. If a laid-off lawyer was billing 1,500 hours a year, only about 1,200 of that lawyer’s hours could be transferred to another person because not every lawyer has the same skill set, the group argues. The result is a 20 percent billing loss.

PAR calls the pay cut alternative “flexible downsizing.”

PAR co-director Joan Williams told the NLJ that the plan has benefits beyond the cost savings. “Flexible downsizing also helps firms retain their investment in high-performing attorneys and avoid certain legal risks,” she said.

One London-based law firm is giving the approach a try. Norton Rose plans to put everyone at the international firm, including partners, on a reduced schedule for one year. Lawyers can opt for a four-day work week with a 15 percent pay cut, or a sabbatical of up to 12 weeks while earning 30 percent of their base pay, according to Legal Week.

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