Schwab's About-Face on Layoffs

The company that had instituted a raft of cost-cutting measures to avoid swinging the ax lets 13% of its workforce go

Et tu, Charles Schwab Corp.? The employee-friendly discount broker that had taken radical steps to avoid cutting staff as the economic downturn scrunched its profits now says it has no choice but to let some heads roll (see BW Online, 2/9/2001, "Alternatives to the Ax"). Up to 3,400 employees, or 13% of its workforce, to be exact, through reductions and attrition, as part of a plan to save $40 million to $45 million a quarter in pretax operating expenses by the third quarter.

Just a few months ago, the No. 1 U.S. Internet broker (SCH ) had shunned the ax-swinging ways of its corporate brethren, instead choosing alternative cost-cutting such as reducing the salaries of its top 750 executives. Both founder Charles Schwab and his co-CEO, Dave Pottruck, had taken a 50% pay cut. To aid in the penny-pinching effort, employees had been encouraged to take occasional Fridays off without pay. A Schwab spokeswoman says the moves had a "significant impact" but that the withering stock market and the related drop in trading volume required more drastic measures. "With the soft market persisting, we determined that we had to reduce our labor force," Jennifer Hallahan says.

Staffing professionals credit Schwab for at least trying to be more creative about belt-tightening than other large corporations, which began doling out pink slips as soon as the economy downshifted. But they also place some blame on Schwab -- and other companies that have issued mass layoffs -- for letting itself get into so much trouble in the first place.

RASH BEHAVIOR.  In general, companies tend to plan better for economic upturns than downturns, staffing pros say. Schwab grew by 6,200 employees, or nearly 31%, in 2000, Hallahan says, increasing its workforce to 26,300. "I think companies get a little rash and move quicker then they should [in an upturn] without a clear goal of what they want to achieve," says Dan Moynihan, a principal with Compensation Resources, a compensation-consulting firm in Upper Saddle River, N.J. "The attitude is, 'Let's get as many bodies as we can in,' and then the sector changes, and there isn't enough business to sustain the head count."

Another point to consider: Schwab, like other firms in similar positions, has to make sure the cuts it makes aren't too deep, or it may end up scrambling to fill slots when the market rebounds. "I think they're doing the right thing," says Erick Maronak, director of research at NewBridge Partners, an investment-management firm. "But they have to be careful that they don't later have to go out and compete at a higher market value for the same people."

On the brighter side, Moynihan says, Schwab appears to be doing the right thing when it comes to how it's treating its affected employees. The company is offering severance of 3 to 10 months of base salary, depending on salary size and tenure. Stock options, outplacement help, and cash to cover continuing insurance premiums also may be part of the mix. What's more, Schwab and his wife plan to set up a $10 million fund to offer tuition grants of up to $20,000 so affected employees can go back to school. Says Moynihan: "If you can spend a few extra dollars, that can really help soften the blow."