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Selection Criteria for Downsizing: How Do You Choose?

written by: N Nayab•edited by: Michele McDonough•updated: 1/23/2012

Choosing which employees need to be let go is never an easy decision. Some of the criteria used includes last-in first-out, performance or competence, expendability, and legal considerations. What is the best method of deciding which employees to keep and which to let go?

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    Downsizing and Restructure

    Selection Criteria for Downsizing and Restructure Downsizing is a permanent reduction of workforce through layoffs and other means. Organizations usually downsize to save payroll costs and prevent bankruptcy during tight economic conditions. Downsizing, when done right, makes the organization more efficient, lean, and mean.

    On the other side, a faulty approach to downsizing can cause the organization to run the risk of losing key talent and intellectual capital, and becoming dysfunctional by breakdown of hierarchies and systems. The criteria adopted for who stays and who goes largely determines the success of the downsizing intervention.

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    Last-In First-Out

    Many organizations, especially traditional ones, in a bid to ensure impartiality and objectivity adopt the LIFO or “Last in First Out" principle whereby those who joined the organization last become the first to leave. The rationale of making seniority the basis of downsizing is that newer employees have spent less time in the organization and are less committed or acquainted with the finer nuances of its running. Also, the organization would have invested lesser time and resources training such employees compared to older employees. A big advantage of the LIFO downsizing method is that is clearly defensible in a court of law, for with such an approach, no employee can claim dismissal for discriminatory reasons.

    The danger of LIFO downsizing is that it does not consider competence and suitability. Newer employees might have come in because the older employees remained incompetent or incapable of facing the new realities in the first place. New employees not bound by traps of conventions or assumptions usually herald a fresh approach and remain more open to innovations. They infuse the organization with much needed energy, and sending them off first could mean the organization would be losing out on valuable talent.

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    Performance and Competence

    Other organizations make the combination of competence and performance, or the ability to do required tasks well, the basis of retaining an employee during downsizing. A fresh performance appraisal should precede downsizing, or the last appraisal can be the basis for determining who goes and who stays. Those at the bottom of the appraisal list usually get the layoff notice first.

    While making performance the primary selection criteria for downsizing and restructure is apparently a just and equitable method, two major concerns remain:

    • The soundness and objectivity of the performance appraisal method adopted. A poorly designed performance appraisal method that does not assess the true indicators of performance might churn up a wrong list, causing the danger of the organization dispensing with true performers and retaining people who cleverly mask or cover up their inefficiencies.
    • Whether the performance or competence of the employee remains relevant for the organization.

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    The expendability of the person to the organization is another sound basis for determining the selection criteria for downsizing and restructure. This approach primarily considers the value added by the employee to the organization more than any other factor.

    Regardless of the performance of an employee, an employee might remain critical for the functioning of the organization, or conversely not needed. For instance, with technology taking roots, most companies do not require specialist stenographers or typists, no matter how skilled or efficient they may be in their work.

    Similarly, closing down the marketing arm of the business and outsourcing the marketing effort might lead to the lay-off of all marketing executives, no matter how skilled or successful they may be. On the other hand, a highly connected public relations officer who has a strong rapport with the media and important officials might remain critical for the company’s operations, even if his performance is below par.

    Organizations would, however, do well to identify people with good generic skills, and the right attitude and commitment, and retain them in other jobs even if the jobs they remain competent in become irrelevant to the organization.

    Image Credit: Hampel

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    Legal Considerations

    The commercial interests of the organization notwithstanding, legal considerations play an important role in determining who goes and who stays during downsizing.

    The federal Worker Adjustment and Retraining Notification Act (WARN) requires employers to give employees, state and local officials a 60 days notice to mass layoffs when reducing their workforce by 33 percent or more, or laying off 500 employees within a 30-day period. WARN further requires employers of unionized employees to give the union 60 days’ notice before lay-off of their members, and provide individual notice to non-unionized employees.

    The major downsizing legal consideration is discriminatory lawsuits. Laid-off employees dragging the employer to court on grounds of discrimination based on various legislation such as the Americans with Disabilities Act (ADA), Title VII, California’s Fair Employment and Housing Act (FEHA) and others are commonplace.

    The threat of possible lawsuits and unions adopting a tough position during bargaining might prompt organizations to adopt any of the following approaches:

    • Adopting the last-in-first-out approach, especially when considering employees with marginal skill differences.
    • Retain employees with average competency but professing multiple skills rather than specialists to show courts that they have retained talent to get the job done, and that downsizing is not an excuse to ease off non-confirming employees.
    • Target employees with a previous bad record but who nevertheless remain competent.
    • A heavy percentage of the laid off employees being of a particular race, sex, or age group is a sure way to attract discriminatory lawsuits, and as such, most organizations strive to make sure that the proportion of protected groups based on age, gender, race and other factors remains the same before and after the downsizing.

    The selection criteria for downsizing and restructure notwithstanding, consistency in the methodology remains the key to avoiding lawsuits and preventing the erosion of employee morale.