Leadership diversity

The right - and wrong - way to do layoffs

February 5, 2014: 11:18 AM ET

A 22-year study found that, when performance rather than rank is the criterion for cutting jobs, diversity in management soars.

Downsizing

FORTUNE -- At first glance, the link between layoffs and diversity may be far from clear. But a new study suggests the two are closely connected.

It turns out that, if you want more diversity (particularly more women and African-Americans) in the senior ranks, letting people go on the basis of their performance, not their position, is the way to go.

The study, which was published in the February issue of the American Sociological Review, also found that layoffs determined by job title have become more widespread. That means companies that occasionally lay off large numbers of employees are increasingly (and inadvertently) hamstringing their diversity efforts.

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Consider: The average employer in the 22-year study of 327 U.S. companies laid people off according to their position or their tenure with the company, rather than laying off those with the lowest performance evaluations. Using job title as the criterion cut women and African-Americans' share of management jobs in those companies by 20% to 25%. Moreover, employers who laid off employees according to their tenure with the organization ultimately reduced the number of women in senior roles by about 20%.

By contrast, when performance was the criterion, the number of women and African-Americans on the fast track to the top remained the same after the layoffs as before.

"Downsizing now is usually done in ways that hit managerial diversity the hardest," notes the study's author Alexandra Kalev, who teaches sociology and anthropology at the University of Tel Aviv. "If these trends continue, women and minorities will become increasingly rare in management jobs."

Why does predicating layoffs on performance have such a powerful effect? "It seems that the more individualized process of evaluating each worker on his or her merits, rather than using blanket criteria such as position or tenure, creates awareness and accountability among executives," Kalev says. "It motivates them to think more deeply about who they should keep during a downsizing."

Basing job cuts on performance "is not only good for managerial diversity," she adds. "It's also good for the future of the company overall, because only the best performers are kept."

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One more suggestion from the study's findings, for companies intent on giving diversity a boost: Use in-house lawyers, not legal help from outside.

"I was surprised by the fact that internal legal counsel made such a big difference" in diversity after a downsizing, Kalev says. The study showed that "in-house attorneys raised awareness of diversity issues among executives," which in turn caused them to apply "tools such as repositioning and retraining to maintain managerial diversity, while outside legal experts did not."

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