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Bosses are using tougher performance reviews to cut workforce without layoffs because employees aren’t quitting

fizkes—Getty Images

Companies have announced plans to cut nearly 700,000 jobs from January to November of this year, according to a report from Challenger, Gray & Christmas. That’s a 115% spike from the same period last year. These layoffs, many of which are for white-collar roles, have led to a job market squeeze, pushing quit rates to pre-pandemic lows.

Talent is one of the largest expenses on a company’s balance sheet, but employers are not ignorant of the consequences of widespread layoffs, such as knowledge loss, heightened anxiety for remaining employees, and even the immediate financial cost of letting people go. As they look to trim financial fat, however, some employers are looking to performance reviews to separate high performers from low performers and identify where to invest time, money, and resources.

Organizations rely on a certain level of healthy attrition, says Thomson Reuters chief people officer Mary-Alice Vuicic. When employees quit, it allows bosses to bring in new talent with new skills or promote from within. The quit rate, which measures workers’ willingness to leave jobs, has remained unchanged at 2.3% for four consecutive months, according to the latest October data from the Bureau of Labor Statistics. Meanwhile, the number of job openings that month fell to 8.7 million from 9.6 million in September, signaling there are fewer jobs as people refuse to quit voluntarily. 

More often than not, budget cuts typically affect headcount or employee benefits, especially in the fourth quarter, says Stephan Scholl, CEO of benefits and human resource service provider Alight Solutions.

“There’s not one CEO I’ve talked to who isn’t looking at taking costs down across services,” he says, noting it’s been a stark pivot from earlier in the year when leaders were preoccupied with retaining talent.

“Corporate executives are really struggling with, how do we get to our end goals, which is to do more with less?” he says. “You’re starting to see more pressure on who are high performers and who are low performers.”

Spotify and Citigroup are among the more recent companies to announce deep job cuts as they pursue audacious financial goals. Both companies say their workforces have become bloated and redundant. But mass layoffs should be considered a last-resort tool for companies in dire straits, says Korn Ferry senior partner Tom McMullen, who co-leads the firm’s performance management practice.

A clandestine option that avoids the fanfare and widespread hit to company morale and employer branding is through performance reviews. Michael Schrage, a research fellow at the MIT Sloan School of Management’s initiative on the digital economy, says more organizations are looking at how to systematically identify underperforming employees and put them on performance improvement plans.

McMullen says using performance reviews to prune talent isn’t particularly expedient if a company wants to shrink costs quickly, however. Employees on a performance improvement plan typically receive a one- to three-month timeline to meet expectations. And while some workers will take it as a sign their time at the company may have run its course, others will continue to do enough to get by while the company invests time and money in their development, he says.

That may be why Block CEO Jack Dorsey laid out a plan in November to get rid of annual reviews and improvement plans in favor of constant evaluations and feedback throughout the year. The idea behind the change is that it allows the company, which consists of Square, CashApp, and Tidal, to pinpoint and fire employees who don’t meet expectations.

A few weeks prior to the change, Dorsey told staff he would cut roughly 10% of the company’s headcount. On Wednesday, he told staff the company would undergo significant layoffs.

Last year, Google followed a similar playbook, toughening its performance review system while asking managers to identify 6% of employees, or 10,000 people, whom they considered low performers. Two months later, CEO Sundar Pichai announced the company would cut about 12,000 jobs, noting that the company hired too many people to fuel growth that didn’t come.

Scholl says a perfect storm of low unemployment, the impact of the Great Resignation, and changes in people’s relationship with work have created push-pull tension of workers holding on to their jobs and employers clamoring for efficiencies. As a result, there’s pressure for leaders to double down on only retaining top performers.

It’s a strategy shared by Jack Welch, the former CEO of General Electric, who wrote in his 2001 book What I Learned Leading a Great Company and Great People, that every company has a bottom 10% of employees who don’t help efficiency and productivity and should be fired.

“If you start to treat your high performers better than your low performers, that’s a good way to guarantee natural attrition,” Scholl says.

This story was originally featured on Fortune.com

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