Alternative to layoffs in recessionary situations?

Alternatives to Layoffs:

When faced with a recessionary like situation or prospect of one, most firms seem to find it easiest to start with layoffs.In the west this is acceptable but in India layoffs is not taken kindly even by government as seen in recent times.

There are options that can be explored with underlying principle for tackling recession as mentioned in our last piece- try to make as many expenditure items countercyclical as possible so that effects of recession are moderated.

Challenge is to provide firms with alternative to layoffs so that they can save costs but at the same time minimize cuts in spending that may add to recessionary pressures. Here are a few ideas

1. Add cyclicity to PF contribution rule with some flexibility. So if 12% is contribution to PF with equal contribution by employee. Slashing this to 6% or more for a limited time (making it acyclical) will save firm 6% straight away. Secondly employee's wealth effect due to lower incremental addition in PF will be minimal. Thirdly salary in hand of employee will go down ( EDIT: SALARY IN HAND WILL GO UP NOT DOWN)by 6% and in after tax sense perhaps even less (MORE). Hence his/her salary available for spending will actually increase in recessionary times. However this may require legal changes. Employees will have the option to plough back "increased salary in hand" to savings such as PF
2. Salary cuts of higher level staff is less painful than salary cuts of rest of labour force. And very likely when a given saving in cost is effected through salary cuts of highest paid staff negative effect on overall spending may be minimal.
3. Explore trade off between salary cuts and job security where jobs are contractual of(OR) effectively so. Let employees be assured of longer job security in return for forgoing of benefits for a fixed time
4. Where applicable load the compensation structure towards a higher commission/compensation based on sales/business increase without creating unhealthy competition ( through team based performance assessment as opposed to Individual performance).

Firms may think layoffs may save them resources but aggregate result may be opposite. Firstly layoffs will accelerate decline in spending for all firms defeating the very purpose of initiating trimming of workforce. Secondly fear of job losses could change saving/consumption behaviour adding to recessionary pressures. Thirdly layoff as last resort may add to company loyalty, productivity and brand image attracting better talent over time ( as opposed to ruthless employers)

Added and Edited:( nov 30)

• With reference to point 4 above, one of the options that could be explored is not just trade off between longer secure contracts and lower pay( for limited time) but also those willing to exit workforce through VRS.( except that better and experienced workers should not take VRS entirely)
• Lean economic season may be best time for encouraging skill upgradation.Under this conditions part of cost savings may be used for such purpose but such costs can easily be reduced further by sponsoring only part of employee's training cost remaining cost to be met by latter from his/her own pocket. This may( not necessarily will) differentiate more motivated/ambititious workers from the rest

Added ( dec 2)

• One other alternative that can be considered is reducing work hours for a limited time- an option that Tata Steel is considering overseas