Robin’s Choice

This case details the choices faced by Robin Astrigo of Astrigo Holding Company, as he tries to cut costs.  It is an interesting article and gives insightful looks into all of the way that a manager could go about trying to cut payroll costs in a time of economic recession.  There are many different options laid out to him by his executive board.  I had never considered all of the different ways that managers might choose to lay off employees.  I had only ever considered that there would be the decision whether or not to have layoffs.  Once it was decided that layoffs would happen, I assumed that most companies already had a plan in place on how to do it.

The first method presented was “first in, first out”.  Under this program older employees would be let go.  This would be good because it would “trim dead wood” but it would be bad because of the pension plans Astrigo would have to pay.  Also, like many other possible layoff methods, it uses broad targeting and lays off people at random.  The next method was “rank and yank”.  Under this system employees were to be judged on the basis of the previous years performance reviews, after which the lowest scoring ten percent would be let go.  This system does have merit in that it is not just random firing, however after talking at such great lengths in this course about how unreliable performance evaluations are, this does not seem like a solid method either.  The third strategy was to fire all of the newest people.  This would eliminate the problem of paying pensions and severance packages, but would also eliminate the best young talent from the company.  Furthermore, is Astrigo got the reputation for firing younger employees, they could be severely hampered when competing for the top business school graduates.  It was also suggested that Astrigo should start selling off assets.  This plan would be very short sighted.  Firstly, it would do nothing to increase investor confidence (which is really why the stock price dropped so much in the first place).  Secondly, those assets might be hurting the bottom line during the current recession, but it is very possible they could turn into steady sources of revenue when the economy picks back up.  Selling them now may hurt Astrigo’s ability to hire back employees later when the market turns.  The final course of action presented to Robin was to have employees take a 50% pay cut and then finance all they were short on from a cash fund that Astrigo has sitting in the bank for liquidity purposes.

I think that the two solutions that make the most sense are the “first in, first out” policy, and the final policy where every employee takes a pay cut.  The only real reason that the former appeals to me is because it may cut bloated salaries.  This would be good, and it would also clear room for the new talent coming up through the ranks.  However, severance packages and pensions would be expensive for these people.  Also, the company would be eliminating all of their most experienced employees, and the wealth of knowledge that goes with them.  The other strategy, where everyone takes a pay cut, is probably the best solution.  First of all, it would show the employees that Astrigo is a firm that really values their workers.  Also, it is actually not bad to use cash during a recession.  During economic downturns, the interest rate is often lowered.  Because of this, the cash sitting in the bank is not growing at the rate it would in a normal economic climate.  Also, Robin is saving the money for acquiring an important asset, what asset is more important than the workers?  As long as Astrigo can keep from having a lot of short term liabilities, it would probably be smart for them to use some cash.  Other options that were not brought up were financing their deficit through either debt or the issuing of stock.  Although it is possible that taking on more debt in a recession is a bad idea (although interest rates are low).  All in all it is smart for Astrigo to go with the pay cut idea.  It may not be the perfect solution, but none of these are.  It is important for the employees and the shareholders to see everyone making sacrifices together, this is the only solution where that can happen.

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