Buyouts Or Layoffs? A Hard Call to Make

The pain of cutting back on staffing is spreading far beyond the tech sector. But in today’s world, deciding how exactly to do that—via layoffs or buyouts—has become more complicated.

In recent months, layoffs have made the most headlines, particularly those carried out by many tech giants. In the last half of last year alone, nearly seven million workers in the US were laid off; in the first month of 2023, layoffs increased by 12% over the prior three months. But experts say the number of companies offering buyouts is surging too. “It’s a risky decision that can come with unexpected costs,” says compensation expert Tom McMullen, senior client partner for ESG and inclusive rewards at Korn Ferry.

Buyouts can have an immediate appeal in today’s environment, with many firms struggling to retain highly skilled talent. In this age of the so-called purpose movement, many companies strive to maintain good relations with workers, even the ones they ask to leave. “I always thought of buyouts as being a bit more employee friendly in situations where costs do not necessarily need to be cut immediately,” says Jeff Constable, a Korn Ferry senior client partner who leads the firm’s Financial Officers practice. “It can be a way to avoid layoffs, if enough people take the buyouts.”

But experts say the cost savings of buyouts, depending how they are structured, isn’t necessarily immediate or predictable. Employees are kept on board while they decide whether or not to accept buyout offers, and some remain on board months longer if layoffs are subsequently necessary. Buyouts also tend to skew toward more experienced employees who were planning on retiring anyway, meaning that substantial skill and knowledge walk out the door. Layoffs, on the other hand, are fast and precise: the axe is swung, and the company moves forward. Still, some layoff packages can be substantial: recently, tech companies have offered severance packages of three to four months to high-paid employees, putting their overall exit compensation on par with many buyout packages.

“Layoffs are certainly unpleasant, but they allow the company to cleanly stay within its vision of where it’s going,” says Bradford Frank, senior client partner in the Technology practice at Korn Ferry. Layoffs allow firms to control which skills depart, and from where—which is essential when entire teams or businesses are being closed down.

Layoffs come with a heavy brand cost, however. Former employees can be depended upon to get out the word about their experiences, and that word might not be kind. No one likes to be laid off, even if they understand why it’s happening. “The brand’s potential reputational damage is significant,” says McMullen.

Buyouts arranged with the best of intentions can easily go south if either the wrong people leave, or not enough people. Strong HR practices can prevent most of this, say experts, particularly by keeping tabs on which employees would be pleased to exit or retire early. “Ideally, they’ve already been in touch with people and know which pools they’re losing,” says Dan Kaplan, senior client partner in the CHRO practice at Korn Ferry. In larger companies where buyouts can be offered to tens of thousands of employees, this means maintaining clear communications with workers, and managers conveying those findings to their bosses or HR departments.

Experts also advise exhausting all other cost cutting options first. Both layoffs and buyouts should be last resorts, after strategies such as belt-tightening around perks and travel, closing open positions, limiting contractors, and recruiting employees in-house from lagging to thriving businesses. Whether layoffs or buyouts are chosen, experts suggest close attention to the unintended consequences of losing large skill sets. “A lot of these people might be called back in two or three years to consult, because the company has lost the knowledge base,” says David Vied, global sector leader for medical devices and diagnostics at Korn Ferry. Better to measure twice now, and cut once.

For more information, please contact Korn Ferry’s Financial Officers practice.

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