Some business make layoffs the last option

Costco Wholesale CorpEven as the recession cuts deeply into their revenue, some companies are opting to do the unconventional: They’re keeping all their employees and finding other ways to trim costs.

Their strategy isn’t about mercy. It’s built on the notion that layoffs bring high costs and hassles of their own.

Profits at Costco Wholesale Corp. are down 27 percent from a year ago, but the discount store has not laid anyone off. The only workers let go have been holiday seasonal hires.

To trim costs, Costco imposed a hiring freeze at its corporate offices. But the company says it recognizes that labor remains its most valuable – if costliest – resource.

“We’re certainly sharpening our pencil everywhere we can,” said Bob Nelson, Costco’s vice president of financial planning and investor relations. Nelson couldn’t recall any layoffs at Costco since the closing of some stores in the 1980s.

Clearly, companies that have avoided layoffs are the exception, not the rule. Employers have cut 5.1 million jobs since the recession began, including 663,000 last month alone.

Economists say it’s a wise move for some companies to keep their workers and cut elsewhere.

“If you overshoot on the downside and lay off workers, it puts the company at a disadvantage when the economy comes back to life,” said Sean Snaith, economics professor at the University of Central Florida.

The other steps companies are taking to cut costs are not exactly harmless to workers. Chief among them: capping the number of hours employees can work, cutting or freezing pay and suspending matching payments to 401(k) plans.

Casino operator Wynn Resorts is trimming pay and cutting back on retirement fund matches. Credit agency Equifax Inc. froze pay for all U.S. employees for 2009 and at some of its foreign offices as well.

A survey by job placement firm Challenger, Gray & Christmas this year found 71 percent of companies polled had laid off some workers. More than a quarter had implemented pay freezes or cuts.

Despite the alarming job losses nationwide, John Challenger, the firm’s CEO, said it’s more common now than in past recessions for companies to find other paths to savings than laying people off.

That’s because many companies have concluded that layoffs could be costlier down the road. Employers who have laid people off have to find, hire and train new ones when the economy recovers. Workers with specialized skills or strong customer contacts aren’t easily replaced.

Marvin Windows and Doors, a Minnesota company, hasn’t laid off any of its 5,300 workers ? despite the collapse of the housing market. Its sales were flat in 2008 and have fallen this year.

“We can’t easily replace skilled craftspeople and their decades of experience,” said Susan Marvin, president of the company.

Instead, Marvin Windows and Doors has trimmed the time factory workers are on the clock ? from 40 hours a week to 32. It’s a sacrifice David Peterson, who is 56 and has worked there for five years, is willing to make.

“You may have your hours cut, and that’s not easy,” said Peterson, who maintains machinery for the company. “But you still have your job, which gives me a lot of peace of mind.”

Layoffs typically mean companies have to pay severance costs, which vary widely by occupation and industry. A retail clerk, for instance, might cost a company $1,000 in severance. A low-level white-collar manager paid $50,000 a year could get $5,000.

And higher-paid professionals who earn well into six figures ? accountants and lawyers ? could get $50,000 in severance, estimated Terry Connelly, dean of Golden Gate University’s Ageno School of Business in San Francisco.

There also are other costs that are harder to put a price tag on, including the loss of talent and leadership. Layoffs can drag down the morale of those who managed to survive the job cuts but fear they could be next.

And when it comes time to rehire people, a company usually ends up paying a new hire more than what the laid-off worker got paid. That’s because an improved job market gives workers more negotiating power than if they’d remained at the company, Connelly said.

Some companies that have had layoffs say they’ve done so in targeted ways. Many have decided they can’t cut any more. Defense contractor ITT Corp., for example, plans to cut about 1,200 jobs, mostly factory and office staff.

“We are certainly not looking to cut engineering positions, because of how valuable those jobs are and how difficult they are to replace,” said spokesman Andy Hilton.

Manufacturing has been clobbered by the recession. The industry lost 161,000 jobs in March and has lost 1.5 million since the recession began. But “a lot of these companies are hitting the limit of where they’d like to be,” said Craig Giffi, U.S. head of consumer and industrial products at Deloitte LLP.

From lathe operators to specialists in computer-controlled industrial machinery, some manufacturers have made costly investments in skilled workers and want to keep them.

“When you have talent that is really special, and you know what you got ? it would be costly to let them go,” said economist Ken Mayland, president of ClearView Economics.

Economists say unemployment, now at 8.5 percent nationwide, could climb above 10 percent by year’s end. Some economists say the labor market may not return to normal, meaning a jobless rate of about 5 percent, until 2013.

And once the economy rebounds, companies that didn’t slash payrolls could emerge with an edge.

“You don’t want to lay off 15 percent of your work force, because you want to be prepared to move quickly when the economy turns around, and that will obstruct your ability to do so,” said Dean Baker, co-director of the liberal-leaning Center For Economic Policy and Research.

Copyright 2009 The Associated Press.