Ethical Issues Concerning Downsizing: Alternative Steps to Downsizing

Ethical Issues Concerning Downsizing: Alternative Steps to Downsizing
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What Makes the Issue of Downsizing Ethical?

In a separate discussion about the Most Common Reasons for Downsizing the Labor Force, we examined each reason and the underlying causes. However certain ethical issues concerning downsizing have to be considered, because it is often decided or recommended by management in order to protect the interests of the shareholders and their profits.

Is this objective ethical? In a business sense, it is; but management’s responsibility doesn’t end in the execution of its decisions. There should be equal value placed on the company’s moral responsibility to ensure the welfare of the employees after making such decisions.

After all, a pronouncement to downsize may indicate an admission of management’s failure to make sound business decisions or to foresee and forestall the worsening of a condition that necessitated the resolution to cut down the labor force.

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The employees merely carry out the management’s business projections and forecasting. Hence there should be careful evaluation of whom to lay off in order to determine the extent of the company’s moral responsibility. Laying-off the workforce of an entire plant facility may be necessary, but management should not overlook the value of the services rendered by those who contributed positively to its previous successes.

Otherwise, those who are deemed as survivors to the downsizing syndrome could be demoralized by the company’s insensitivity to the value of the hard work that workers have exerted. In the long run, the objectives of downsizing would not be achieved if the remaining workforce becomes less efficient or seeks other sources of livelihood. The company then is bound to suffer from productivity loss or to meet additional costs in recruiting/hiring or both.

It is a known fact that not all downsizing decisions have produced positive results since the companies also went into bankruptcy or closure even after the layoffs. It strengthens the beliefs of those who do not support downsizing that other factors contribute to business failure and that focusing only on labor costs is not the ultimate remedy. Based on the outcomes of downsizing as solutions to financial dilemmas, there are certain lessons to be learned.

What Steps Can Be Taken to Ensure Ethical Downsizing?

First off, downsizing is considered as ethical if it has been used as a last resort. Questions about morality and propriety arise if it is taken as a shorter route in order to achieve profits, as a means of attracting investors or the capital market.

Hence if management’s concern is to ensure ethical downsizing, the following advice provided by human resource experts have been gathered to serve as your reference:

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Consider salary cutbacks before downsizing, including those on the corporate ladder. Experts believe that if members of the top echelon experience the effects of reduced salaries and benefits, they will be able to convey the reality and the urgency of the financial distress being experienced by the company.

The percentage of reduction will be applied in terms of the lowest salaries having the least cutbacks; while the highest paid executives will have the greatest amount of reduction.

It should be made clear that salaries will be reinstated once the company has sufficiently recovered since this will motivate the entire organization to work for a common goal.

This way, the CEO who wishes to uphold the moral values of the company will have less feelings of guilt in treating his family to fancy restaurants because there are no thoughts of laid-off workers who cannot provide decent meals for their families, tugging at his conscience.

For more information about the alternative steps taken before downsizing decisions are made, please proceed to the next page.

Other Steps Taken to Ensure Ethical Downsizing

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Make an Offer of a Voluntary-Retirement Package for a particular category or qualification. Such qualifications may refer to number of years in service or the position occupied wherein the retirement package will be prorated over the years in service.

Job positions left vacant by those who retire voluntarily should be filled by existing employees who have manifested the skills and abilities to assume the positions. Assumptions of positions could be on the same level if those who are next in line still need further training. Offer stock ownership in exchange for salary increase as benefits of the promotion. As a stockholder, the promoted employee will develop inner conscientiousness about the need to meet profit goals.

Inquire from other industries or related companies about job openings, vacancies, and other possible work opportunities, and post them where they can be visible to the employees. Interested employees can course their applications to the company’s HR department in order to give proper endorsements to the recruiting office, thus increasing their chances for possible employment. Likewise, HR could also screen qualified applicants to endorse, since referred employees are reflective of HR’s hiring methods.

Offer a particular line of product or the operation itself to employees who would be interested in continuing its operation as part of their separation packages.

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Consider adopting other models used by companies that succeeded in attaining their goals without resorting to downsizing. Japan, a highly industrialized nation, has companies also experiencing business dilemmas due to recession. Most of these Japanese companies make use of a series of steps to achieve cost reductions as alternative to layoffs. Below is an example of this model:

  • Fifty percent of compensation is offered as basic pay while the other fifty percent will be earned through profit sharing or share in productivity.
  • If the first step is not enough, salary costs will be further reduced by cutting the number of working hours.
  • If the second step is still not sufficient to achieve the targeted cost, the basic pay will be reduced.
  • In the event that all measures taken are not enough to put the company back to a more stable position, seeking job placements on behalf of deserving employees is undertaken to ensure their employment will be continuous. The aim is not to transfer the burden of an unemployed sector to the government.

The last step is not to discriminate the less performing but only to serve as an example that absenteeism, tardiness, or low efficiency cannot have the same rewards gained by those who have rendered hard work. It is therefore important that any basis for excluding the employee from such benefits should be properly documented and acknowledged by the employee as true and correct.


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Based on the information gathered, we can summarize the ethical issues concerning downsizing in terms of three principles to observe:

  • Downsizing the labor force is the only option left after all alternatives have been considered and applied.

  • The moral responsibility of the employer does not end in terminating the employment. It should extend up to the point that those who have positively contributed and consistently rendered full support to the company will be provided with an alternative source of income, which they may choose to accept or decline.

  • The value placed on the stockholders’ interest should not be about the profits but the investors’ continued confidence in the company’s ability to generate sufficient returns on the shareholders’ investment.

In all cases, the working environment is one where the employees are well informed about the present financial situation of the company. Employees are aware that their cooperation is vital to prevent stockholders from withdrawing their investments where the company will be forced to close shop or go into bankruptcy proceedings.

Based on these three principles, it can be said that downsizing if to be finally implemented was ethically carried out.

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Reference Materials:

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