Analysis by Ethan Rouen and colleagues reveals the true factors behind leaders' choices during the ... [+]
by Lane Lambert
Soon after the COVID-19 pandemic was declared in March 2020, Harvard Business School professor Ethan Rouen walked through Harvard Square in Cambridge, Massachusetts, and was unsettled by the silence and emptiness in a spot that is typically bustling with people shopping and eating at restaurants.
“There was not a single person or car,” he recalls.
The eerily quiet scene was a jarring reminder that the pandemic was taking a huge toll on many businesses that saw sales and revenue figures abruptly plummet.
Rouen and two fellow researchers were inspired to put a pre-COVID study on hold and conduct an analysis to determine how companies were responding to the crisis. Were they retaining their staff and providing essential workers with extra pay, or were they cutting expenses through layoffs and furloughs?
As it turns out, the actions companies took during those first 90 days of the pandemic depended not only on their cash on hand, but how committed they were to their workers, according to the new working paper, “Financial Flexibility and Corporate Employment,” which Rouen co-authored with Stanford professor Rebecca Lester and University of Texas professor Braden Williams.
As the American economy slowly recovers from the pandemic, corporate leaders, policymakers, and researchers are trying to make sense of business reaction during the worst months of the crisis. Rouen’s study sheds light on the true factors behind the choices leaders make when survival is at stake.
Sales take a dive
The research team used data collected between March and May 2020 by the nonprofit JUST Capital to examine the actions of 354 large companies that collectively employ 27 million workers, representing 38 percent of the total workforce of publicly traded American companies. The team studied a wide range of industries, from manufacturing, wholesale, and retail to finance, insurance, and transportation, comparing 2020 data with the same period in 2019.
“It gave us a rare opportunity,” Rouen says. “Every decision would be affected by the pandemic, and we were collecting data as events were happening.”
Almost 70 percent of the companies in the study saw sales drop in the first three months of 2020. Even so, 25 percent raised their pay for essential workers. On the flip side, 28 percent laid off or furloughed workers.
By the end of April 2020, 15.9 million Americans were out of work, and the unemployment rate was 14.7 percent—a huge swing from the 50-year low of 3.6 percent just months earlier.
Which companies avoided layoffs?
Companies with more financial flexibility—that is, plenty of cash in the bank—were able to continue operating without making deep cuts, compared to companies with smaller cash reserves, the findings showed.
While some companies with high cash reserves expressed “a commitment to their workers and had good corporate governance,” Rouen says, others with similar levels of cash did not share these characteristics. Firms with strong financial positions that weren’t committed to their workforces were just as likely to lay off staff as companies with limited cash reserves.
The study also showed that layoffs and furloughs were less frequent for firms with “sticky costs”—those that are unable to reduce their expenses quickly when revenues decline, often because of sunk investments, such as worker training to create human capital. For these companies, the cost of rehiring and restoring operations after a layoff would be greater than the cost of maintaining the status quo during an economic downturn.
Amazon, for instance, fared well by having more net cash to begin with, plus the company saw sales increase during the pandemic. During the pandemic, Amazon hired as many new workers as all other Standard and Poor’s 500 companies combined. Online retailer Wayfair also prospered.
Where the axe fell
On the other hand, shopping malls and other brick-and-mortar stores continued to lose in-person business, accelerating a trend that began before the pandemic. For instance, the consumer electronics chain Best Buy struggled to attract sales, and the company ended up cutting costs through layoffs and furloughs.
Layoffs were more typical among companies that invest less in their workers, such as restaurants and fast-food chains. Companies with fewer sticky costs laid off workers at the same rate regardless of how much cash they had in reserve.
“There were clear winners and losers early on,” Rouen says. “It was heartbreaking to see companies that had these commitments to their employees, as they tried to keep them.”
Retaining employees, even in hard times
In May 2021, the US unemployment rate dropped to 5.8 percent, with 9.3 million women and men out of work.
The lasting effects for companies hurt most by the pandemic, including restaurants and bars, isn’t clear. As the economy recovers, companies that endured layoffs will need more time to rebuild their workforces—a problem many retailers and restaurants now face as they struggle to meet increased consumer demand with fewer employees.
While a healthy cash reserve will always be an advantage in “Black Swan” events like the pandemic, Rouen says companies should also see the value in retaining good employees during hard times. That’s especially important given that an increasingly knowledge-based economy will make talent tougher to replace.
Meanwhile, increased access to data about companies’ finances and worker treatment gives job seekers a new card to play.
“That’s going to inform employee decisions when the labor market is tight,” he says. “The data is becoming more and more available. It’s easy to find, and it will matter. Employees who have negotiating power will use that.”
