The Cost of Downsizing in an Enterprise with Job Security

Abstract

This paper comprises a theoretical study of factors influencing the utility of organisational downsizing. Companies downsize in order to adapt to lower demand or as a means to improving efficiency, i e to improve their performance/cost ratio. With perfect information and no legal or ethical restrictions, management would remove employees with the lowest utility. This information is normally lacking and downsizing is instead based on a headcount or on total salary cost reduction. The efficiency of such measures will then be a function of the correlation between salary and utility. Different downsizing outcomes are calculated on the basis of different assumptions; some of these outcomes increase efficiency while others would probably lead to continued decline. Many companies are subject to legal restrictions such as Last In First Out tenure requirements. This leads on to an analysis of relationships among utility, salary and period of employment. Break‐even analyses are computed showing on what terms it would be worthwhilefor management to offer longterm employees early retirement.

Citation

MABON, H. (1996), "The Cost of Downsizing in an Enterprise with Job Security", Journal of Human Resource Costing & Accounting, Vol. 1 No. 1, pp. 35-62. https://doi.org/10.1108/eb029022