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- RBC and CIBC CEOs recently publicly stated they do not intend to make any Covid-19 related layoffs in 2020.
- Many are interpreting these statements in different ways. But I think most are missing the point.
- The decisions by the RBC and CIBC CEOs actually make smart financial business sense.
The CEOs of Royal Bank of Canada and CIBC recently made public statements both suggesting their companies will not make Covid-19 related layoffs in 2020.
I’ve read the public reactions (e.g. comments on various news sites) to these statements and they vary quite widely. Many suggest RBC and CIBC doing the ‘right thing’ by being good corporate citizens. Others argue these companies are not charities and should do what’s right for the bottom line, and instead allow shareholders to decide how they direct charitable efforts.
While I’m sure the impact to society and individuals was considered, the decision to retain employees is ultimately probably a good financial decision that benefits RBC and CIBC shareholders.
1. These are quasi-government entities.
Let’s make no mistake. As systemically important institutions tied to the lifeblood of the Canadian economy, both RBC and CIBC are highly controlled (via regulation), monitored and supported by the Canadian Government. There are so few large banks in Canada that it has to be this way. It is for the benefit of the country to have solid, stable banking institutions.
Given that, Canadian banks are not typical cut-throat enterprises that can simply eliminate thousands of jobs without political (and public relations) repercussions.
While I have no evidence of this, I suspect the tacit need for a government backstop factored into the consideration for avoiding layoffs. I would argue it is part of an implicit (or possibly explicit) agreement that Canadian banks can’t receive taxpayer money with one hand and push taxpayers en masse to the unemployment lines with the other.
In fact, with the extreme volatility, I wouldn’t be surprised if over the past few weeks the big Canadian banks actually received some kind of direct or indirect support from the Federal Government and Bank of Canada. Assuming government or central bank support was delivered over the past couple weeks, I also wouldn’t be surprised if it came with clear direction from the Feds that banks cannot lay anyone off this year.
If you were running the government, wouldn’t you include this clause as part of the deal?
2. Layoffs kill morale.
Even if an employee survives a round of layoffs, they’re left forever wondering if they’re next. More personally, they miss their colleagues and the new void becomes quite apparent in the office.
Compound that with the fact that remaining staff must pick up the work of those let go. The work doesn’t stop just because there are fewer staff. Often, those remaining envy the departed.
By the time the dust settles after a round of layoffs, many remaining staff have one foot out the door. Many will also perform worse – either by choice (due to eroded morale) or by force (because so much additional work has landed on their desk). The remaining top performers will quit, leaving only those who couldn’t find anything better.
If you were running RBC or CIBC, is this the type of organization you’d want?
3. Laid off employees take value with them.
During a period of massive layoffs, the baby is often thrown out with the bathwater. Good employees are forced out with the bad.
As employees leave, they take massive amounts of intellectual capital, forever lost by the company. Worse, these employees are often eventually re-hired by competitor firms that benefit from the intellectual capital at the expense of the firm that originally conducted the layoffs.
Intellectual capital not only refers to knowledge of history, processes or functions. It includes client relationships and other forms of intangible goodwill.
When people leave a company things break, clients are lost and elements of value are forever destroyed. This greatly reduces a firm’s capacity to actually perform, delight clients and compete.
4. There will be a time to re-hire.
Layoffs tend fluctuate with the business cycle. When times are bad companies require fewer staff. However, when business improves more staff is needed.
Therefore, looking past the current economic recession it is inevitable that RBC and CIBC would have to re-hire staff sometime in the future, if they decided to let people go in the first place. At that time, these companies would be competing with every other employer for good talent. This would prove difficult and costly, likely impacting the ability to serve clients.
Ultimately, the solution (layoffs) to a temporary issue (recession) could result in long-term staffing and business performance problems. Given the choice, many companies therefore are better off retaining their talent throughout the cycle.
5. Layoffs are expensive.
This might seem counter-intuitive to many, but it costs money to conduct layoffs.
For example, the cost to layoff (and eventually replace) a full time employee earning $30/hour is about $20,000 (source: calculator). This estimate isn’t all-inclusive, however. The big missing variable is severance, which can be a hefty sum depending on tenure, age, common law precedent (these companies mainly operate in Canada), etc. Severance pay can add up to 1x, 2x+ annual salaries in some cases. This is why many big companies create a large reserve to pay for planned layoffs.
In addition, there are other potential costs related to lawsuits, administration, and so on.
Clearly, it is not cheap to let staff go. When all factors are considered, layoffs are a very expensive (financially and strategically) proposition and any benefit is quickly eroded.
So when do layoffs make sense? I would argue that the organizational structure of a large company should be relatively indifferent to the business cycle. Of course there are some variable elements, but I think, whenever possible, staffing should align to long-term strategy. If a certain level of staffing isn’t required to achieve long-term goals, it might make sense at that point to cut staff.
Given these 5 points, I think the decisions made by RBC and CIBC go beyond virtue signalling and social responsibility. They make smart financial business sense.