Fundamentals
Building the case for making hard decisions and driving change
- The most fundamental thing for any leader to do when entering into a layoff or restructuring is to ensure that everyone understands the reason behind the change. Everyone may not agree with timing or magnitude, but you have to convince them that it must be done, and that you are going to lead the company through it successfully. The lockdown makes this sales process much easier now. But many are likely hanging on unrealistic hopes that “it will not be as bad in India” or “it will pass quickly due to warm weather”. Very few believe this. Show them photos from Italy’s hospitals or from Delhi migrant workers if they need more convincing. The team needs to prepare for an impact of a year or more to the business, maybe coming in progressively smaller waves.
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Most managers who have never been through a downsizing will say “there is no way we can do what we
to do without all of this staff that I’ve worked so hard to hire”. Will Poole’s comment: “Having been through over a dozen downsizings / restructurings over 30 years, I can say that I've never seen a cut of even up to 15% that could not be fairly easily absorbed by current staff and some timing adjustments.” - When you get between 15% and 30% you are starting to reduce muscle, and 40-50% means you may be cutting through bone and losing a digit or limb. But fortunately, companies are more like starfish than humans - new limbs grow back if the entity is healthy. If the entity is dead, having all the limbs attached does not make it less dead.
- Despite being able to get the same or more done with less when in survival mode, you also have to recognize early when it’s time to say “we have to abandon customer X or project Y”. That’s reality when you start cutting. So be sure to do that and take the pain early rather than trying to squeeze too much from already stressed staff. In times like these, leaving behind projects can also be a good way to focus on what is essential to keep the business running and prepare it for sustainable growth once conditions improve.
- Do not say “we’ve done this today, and in a month or two, we will be cutting X more”. Even if that’s a possibility, it’s better unsaid as it creates unneeded fear. But of course you can never promise that there will never be another change - business is unpredictable.
ESOPs
- Now is an excellent time to ensure your ESOP pool is mostly allocated. We recommend you give everyone (that you are confident you will be keeping for a while) a new grant at the time of a salary cut (or very soon thereafter). There are a few ways to think about what the new grant should be. An easy way is to make it x% of their sign-on grant. That could be 25-50%. Another way is that if you have had a financing round recently, take the amount of the salary cut (assuming it is for 1 year) and divide it by last round share price to calculate the number of shares This is imperfect, as common is worth less than preferred and the value of ESOP at issue is 0, but it's a good proxy and makes it clear that you are giving them value for their sacrifice that's very much aligned with how current investors are valuing the company.
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For CxO / founders, discuss with your board proactively. It may be appropriate to compensate some of them for a reduced salary also.
- If you need more shares in the ESOP pool when the next round comes around, your investors will be fine with that.
Layoff timing & legalities
- Making cuts before you are in trouble is the right time. The more runway you have heading into a crisis, the more ability you have to survive.
- Consult your attorney on what’s required under national / state law regarding severance. For some countries, we’ve heard some say 2 weeks, some 4, and some 6 (but at basic pay, which could be < 50% of total pay).
- Do not ever promise “making up” or “deferring” salary. That can lead to personal liability of CxOs and/or board members. And you may not be able to deliver. It’s much better to underpromise and overdeliver in this area.
- Suggest that the cuts will be “for at least six months, more likely 12, or until the business turns around, which could take even longer.” Saying you will re-evaluate as the business recovers, but don’t promise when.
The actual cuts
- Before taking across the board salary cuts, you need to review modest layoff options also. Who is working on future or non-essential projects who could be let go? Who are marginal performers who you'd consider replacing anyhow? This exercise should happen in conjunction with salary cuts, ideally in advance, or minimally at the same time.
- You may want to consider a bold and time-consuming but potentially rewarding action of discussing with every employee what they can handle and what they can’t, with the goal of accumulating enough reductions to avoid having to do layoffs. Seattle-based Gravity Payments did this - read their story here.
- Founders / CxO must lead by example and be clear about doing so - taking the largest percentage cuts or in some cases going to zero salary.
- Some companies may opt to say they are cutting X% across the board, with founders / execs taking a 2x cut. Others may choose to make cuts to lower-income / entry level staff not as deep or even at all. There is no right or wrong, but the need to survive is paramount.
- While many will gripe and be unhappy, it’s hard to imagine that 15-30% cuts will not be tolerable by middle managers and up, other than those who are overly leveraged on apartment or car payments or student debt.
Timing and messaging
Timing and delivering the message(s)
- Get founders / CxO on the same page first, and ensure they are each carrying some of the weight of the change management.
- Announce the changes on a Monday or Tuesday if possible. Never do it before a holiday. Often hard decisions get pushed later in the week and then you’re rushed to do them before the weekend. Better to wait till Monday so there is plenty of time for discussions during the week as the new reality sets in.
- It’s best to have a written communication come out either just-before or just-after an all-hands meeting that’s structured specifically to address the changes. Since we are all working from home, it’s probably best to schedule the all hands meeting a day before (but not much more - as everyone will be asking what it’s for), and then send the slack or email communication 30-60 mins in advance.
- Meet with mid-level managers and project leads 2 hours before the all hands meeting. That way they are briefed and can think about what it means to their teams and for their deliverables.
- Keep broad communications as short as possible. Best for people to spend time listening to leaders speak and asking questions than trying to read carefully crafted prose.
- Remember that anything you write can end up posted on social media and/or in the press. So write well. And mark everything “Company Confidential - Do Not Forward” which may or may not help...
Showing empathy
- While you are in survival mode and are making some very difficult decisions, you also need to always be mindful of the fact that people’s lives are being upended all around them, whether they are still with the firm or not. Communicate this; tell stories where possible to show understanding and connection.
- Managers should always offer to spend time with affected employees 1-1, both to hear about hardships created and to offer advice and support re finding new roles when needed. But always be clear: decisions are final - a discussion w/ a manager is not for an appeal, it’s for support.
Future / forward messaging
- It’s vital that you demonstrate to the team that you as a leadership team are taking control of the situation to the best of abilities, you are confident of the team in front of you, and that you’ll get through it together.
- Saying you very much hope to be in a growth mode again in a few months is a fine thing, but it’s still best to under-promise and over-deliver.
- If you do a good job with your cuts / layoffs, those employees will understand why the change had to happen and hopefully be connections and ambassadors for you in the future. If they feel things were done capriciously and/or without clarity or compassion, they will be haters that will tarnish the brand and future hiring efforts.
Crisis management advice from emerging market portfolio CEOs
- Never waste a good crisis. This can be leveraged to transform and fine tune your company.
- Do not confuse muscle with fat when you are cutting flab.
- Maintain transparency with board and investors and with your team. Focus on communication internal as well as external. Your employees are your extended voice -- be very clear on how and what they need to say. Communicate often and communicate early with all stakeholders.
- Keeping team together and streamline work, without stretching the work hours or creating extra stress is crucial, as employees are stressed out anyway.
- We are all in the same boat from top to bottom. So there should not be any shame or discomfort to start small again and stay so for 6-8 months. Surviving this phase will be considered a huge success by many investors once we pass this crisis.
- The only way we go through this is to be positive, focus on what we can do now, and closely watch what's happening and be nimble to react fast enough.
- The downturn doesn't change business fundamentals but there is less business and less capital available to take a risk. So the key is to remain profitable and continue to build more moat until good time revisits.