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Why Layoffs Aren't the Answer

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It's said that every cloud has a silver lining. Recessions are no exception; you just have to look very hard for that slender thread of silver. A transcript from a recent conference call by Darden Restaurants (NYSE: DRI  ) -- parent company for The Olive Garden, Red Lobster, Capital Grille, and Longhorn Steakhouse -- reminded me of one of those unexpected benefits.

While many companies these days are listing copious financial shortfalls and blaming the economy, Darden actually pointed out some apparent benefits: "We've noticed turnover reducing in our restaurants, which is a very positive thing because it saves us hiring costs and training costs." That makes sense -- I'd expect that customer service is likely better during economic downturns, because employees feel they have fewer options and are probably happier to be in their jobs (or to even have a job) than at other times.

Turnover adds up
It's interesting to note the effect that employee turnover can have on a company's success. One study found that a decrease of as little as 1% in annual turnover can save thousands for small companies, and millions for big employers. I've read estimates that replacing a worker who earns $80,000 could cost $100,000 in hiring and training expenses.

Having high turnover can also cost a company in other ways, such as flagging morale among remaining workers. Of course, periods of high employee turnover, while not so great for the employers themselves, do generate smiles from job-hunting sites such as Monster (NYSE: MWW  ) and Yahoo! (Nasdaq: YHOO  ) .

Turn over a new investing leaf
Investors may want to consider a company's employee turnover numbers when reviewing its performance. Companies that offer workers a compelling package, with competitive benefits, career development, and rewards for performance, will likely benefit from greater worker dedication. Fortune's annual list of the best companies to work for lists those with the lowest turnover, including the following businesses with annual rates of 5% or less:

  • Devon Energy (NYSE: DVN  )
  • General Mills (NYSE: GIS  )
  • Cisco Systems (Nasdaq: CSCO  )
  • Genentech (NYSE: DNA  )

More about companies with low employee churn:

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

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  • Report this Comment On February 03, 2009, at 12:11 PM, grewjac wrote:

    Layoffs are also an enterprise risk management (ERM) concern. See my blog on this topic at for another slant on this sad, but timely issue.

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